I recently read about a software company that had an average user value of $200 per month – a rather reasonable recurring income when you have more than 50,000 paying customers!
Curious, I researched another competing software company in the same sector, that had a like-for-like average user value of $35 per month on a few thousand paying users. Why did one company have an average customer value per month so much higher than the other?
The software company with the higher average user value had specifically targeted customers that were going to have more users of the software on average than the competitor product.
For example, companies or schools rather than individuals. More users meant a higher average value per paying customer.
If the software company with the average value of $35 can work out how to grow their average customer size, they will likely be on the road to growing their profitability, assuming they are able to maintain and retain their current customers.
You definitely don’t want to be a company that is winning new customers and losing existing customers just as fast.
This example reminds me of a definite key to being successful in business: actively consider which customers offer you the most scope commercially. Who is going to spend the most on your products or services? Who will find real value in what you offer? Most companies I come across have a machine-gun approach in trying to win new customers, happily targeting anyone and everyone. If you have a plan, you will be so much more successful in winning (and keeping) the best sort of customer for you. Not all customers are alike and some are definitely more profitable than others.
Part of identifying which customers are going to be the most profitable for you will be found by looking at the metrics of your average customer spend and their regularity of buying.
You can run a few basic figures yourself and work out what is happening with the customers in your business. I remember an example of a successful café who had started getting healthy sales increases again – it looked good on the bottom line but when we looked more closely we saw 90 per cent of the sales increases came from their price rises a few months earlier.
Only 10 per cent came from extra foot traffic in the café (which is a far more sustainable strategy for business growth).
Through working out exactly why they were getting sales increases, the owner knew that they needed a more proactive approach to winning new customers as the impact of price rises would not keep sales growing forever. The owner was now aware that their sales increases weren’t a long-term sure thing and they could be more precise in identifying the right strategies for their cafe business (need more customers and what are the best ways to achieve this!).
Another example was a business owner who was freaking out as their sales had declined 10 per cent (after strong growth in the previous year). After several days of being worried, the business owner broke their sales down into “product category” sales movements and they stopped being so worried. They could see that 4 of their 5 main product categories had good to great growth but one category that was a decent part of the business had dropped by 50 per cent. Once they knew this, whilst concerned about the area that had dropped, they were happy as now they knew that this part of their business needed some focus and hand on heart they said they had not focused on it very much and it was very easy to fix the sales slide (which they did over the next few months). Information is power.
I often see businesses that haven’t put enough time into really understanding the metrics around their customers and their sales.
Once we look at that in more depth it can be very business changing. Do you know which of your customers are truly your most profitable? If you do, how can you use this knowledge to grow your business? How good are you at measuring your most important sales KPIs. When did you last critique the sales KPIs you report – what are you not reporting that you should be and what are you reporting that is a waste if time?
Knowing this true information on why your sales are trending the way they are will be so impactful on you choosing the right strategies for your business and its profit growth.
(This article originally appeared in the Sunday Star Times and Stuff.co.nz on Feb 14, 2017)
Zac de Silva is an award winning business coach who owns www.businesschanging.com as well as being the co-founder of the Nurture Change Business Retreat in Fiji. If you like the questions that Zac poses, check out www.accme.co which will get you thinking on how to run a better business.