Many small businesses use the splatter approach to marketing and growth. They throw together some advertisements for the paper, or perhaps for radio. They prepare some flashy brochures and mail them to all the potential customers in town. They take out a big ad in the yellow pages of the phone book. Then they cross their fingers and hope that business floods in the door.
Many of you out there have probably tried this approach in the past, and, chances are, it wasn’t very successful. There are several reasons why this approach doesn’t work. It’s far more expensive to attract new customers than it is to keep current customers. And, until you improve the way new customers are handled in your business, you may simply have more people deciding not to buy from you.
Someone once said, “I know I’m wasting half of my advertising money. I’m just not sure which half”.
Let’s take a look at the different ways you can grow your business.
The Three Methods of Business Growth
There are only three ways to grow your business. Any growth strategy you can think of falls into one of these three categories.
1. Attract New Customers
This is the obvious one. Get new people in the door to buy your product or service. You can do this by either enticing customers away from your competitors or creating new demand that these customers have never satisfied before. This is the type of strategy that advertising supports.
2. Sell Them More
Another way to grow your business is to sell more to your current customers. This is a key strategy of companies like McDonald’s, “Would you like fries with that?” and amazon.com, “If you liked that, you will love this”. These customers already know you and like what you have to offer. Chances are, they will like more of what you have to offer. This is also known as upselling.
3. Sell to Them More Often
The second strategy focused on selling them more every time they buy from you. This strategy focuses on having them buy from you more often.
You can see that these three methods encompass all business growth strategies imaginable. However, many small business owners concentrate only on the first strategy, getting new customers. This can be dangerous for a number of reasons. First, as we mentioned earlier, it is expensive to market to new customers. This is where the advertising budget goes. Second, new customers are not yet loyal to you. It takes time to build relationships with customers. Third, it’s hard to market to a cold audience. You are trying to peddle your wares to people who do not know you or your business practices. It is a leap of faith on their part to buy from you.
Smart companies focus on the customers they already have. These are the customers who have purchased from you before, know what you have to offer and like it. They know you, your business practices, and your premises. Buying from you is comfortable and familiar to them. Why not ensure that you are getting the most from these customers?
The Concept of Leverage
The great thing about understanding the numbers behind your business growth strategy is that it gives you power that you wouldn’t otherwise have. Making even small incremental changes in each of the three growth area provides you with leverage. This means that the numerical result of all of the changes is greater than the sum of the individual pieces. Let’s look at an example:
We currently have 1000 customers. On average, each customer spends $175 each time they buy from us. Our customers buy from us on average twice annually. What are our current revenues?
1,000 customers X $175 X 2 = $350,000
What would happen if we put strategies in place to make small changes in the number of customers, the average amount of each sale and the number of times they buy from us?
Let’s say we’re aiming for only a 5% increase in the customer base, a 10% increase in the amount of the average transaction, and we will attract them three times a year instead of two. What’s the impact on our bottom line?
|
Year 1
|
Year 2
|
|
| Customer base: |
1,000
|
1,050
|
| Average transaction: |
$175.00
|
$192.50
|
| # of visits: |
2
|
3
|
Our new annual revenue would be:
1,050 customers X $192.50 X 3 = $606,375
That’s a 73% increase in bottom line revenue from small changes in each of the three areas of business growth. We haven’t doubled our customer base. We haven’t doubled our prices. We’ve simply made small incremental changes in each area that add up to a leveraged result.
For more information on tracking business growth and setting up a monthly operating plan, check out Financial Management 101, the second book in the Numbers 101 for Small Business series.
Angie Mohr is a chartered accountant and certified management accountant. She can be heard regularly on radio with Small Business Survival Tips. Mohr is also a business columnist for a large daily newspaper and has written many articles for business magazines.