By Eric Grimstead
For The Bellingham Business Journal
When it comes to growing a retail business there really are only three ways to grow.
- Increase the number of customers you serve.
- Increase the average transaction value.
- Increase the frequency of customer visits.
Is one of these three ways to grow any better than the others? I would argue yes. But it depends—
First, it is helpful to engage in a little analysis and self-reflection. Because knowing why you want to grow and which way you intend to grow helps you focus on the variables you can change.
Know that all growth requires change. And with change comes some degree of stress.
So let’s look at the three ways to grow and some of the changes that may be required.
Growth by number of customers served
This is often the most difficult, and expensive, of the three. Think advertising. Here at the Small Business Development Center clients will often ask us, “Where should I spend money to advertise my business?” That is a loaded question. Before we start building a marketing plan and allocating budget dollars to advertising, we like to educate clients about a couple of key metrics that any business owner should know, the lifetime value of a customer and allowable cost to acquire a customer.
Let’s say you own a restaurant and the average sale, or ticket, is $50. Your average customer visits your restaurant six times per year. And they are likely to keep visiting as long as they continue to live in the area and you keep serving up delicious food with great service. Since homeowners sell on average every 7-10 years let’s start there, and be conservative at that.
$50 per ticket x 6 visits per year x 7 years = $2,100
If you knew that every time you minted a new customer your business would be accruing $2,100 of sales revenue, how much would you invest to get that new customer in the door the first time?
Once you know your allowable cost to acquire a new customer you can then hold your advertising dollars accountable. If you choose this route for growth, know that additional spending is going to be needed. Because there is always a cost to growing customers. There’s no free lunch.
Growing the average transaction value
From our restaurant example above, this may be as easy as training your staff on the fine art of suggestive up-selling. If you can get more customers opting for drinks, appetizers or desserts your ticket value goes up. Now this may not put a ton of strain on your business financially but it does require focused effort in the form of staff training.
If you own a shoe store and all you stock is shoes you can reasonably predict how much inventory to carry. However, if you decide to add socks, insoles, shoe laces and leather conditioners as point-of-sale upsell items you now may have to increase your inventory purchasing capacity.
Once you start changing your merchandise mix with new categories that are logical extensions for your type of customers there will be economic impacts. Your balance sheet will grow as you have more inventory on hand. What will the off-set be? Because remember – balance sheets have to balance! Will you have more debt in the form of vendor financing? Or will your cash on hand go down? There will be impacts to your P&L as well. While vendors may promise to support your efforts to sell their products, beware of the hidden costs of taking on too much inventory.
Increasing the frequency of customer visits
In today’s hyper-connected world this should be easier than ever before. However, modern technology is the double-edged sword. You have countless options to connect with your fans via social media platforms but at the same time that means that you are competing for your customers’ attention with lots of others.
Back to our restaurant example. If you had the email address, the home mailing address, the mobile phone number (and permission to send text offers) for all of your customers do you think that by reaching out to them directly inviting them back to your restaurant that you could increase the average visit count from six times per year to seven? If you did just that, you could increase your revenues by 17 percent.
There are literally hundreds of tactics that can be used under these three ways to grow a business. If you would like some help figuring out how to grow smart the SBDC is here to help.
Eric Grimstead is a Certified Business Advisor with the Small Business Development Center at Western Washington University. The WWU SBDC provides no-cost business counseling services to Whatcom County businesses.