Great ways to grow: the three plus one tool
A little improvement in the way your customers behave can significantly affect your bottom line
It’s incredible how small changes in your business can have a big impact on performance. Consider the ‘3+1’ tool. It’s a real business basic, yet I’m always amazed at its power. There are three levers that you can manipulate to grow your business: get new customers; get those customers to buy more (increased average order value); and get customers to buy more often (increased order frequency). Combining these makes for impressive results.
1. Get new customers
This always seems like the obvious way to grow your business, but it is also very expensive. Research suggests that it is between seven and 20 times more costly to sell to a new customer than an existing one.
2. Get customers to buy more
If you can, sell more to existing customers – or ‘upsell’. Is there any way that you can get people to buy additional items when they are purchasing from you?
3 . Get customers to buy more frequently
Can you get customers into your store or onto your website more often? Clearly, if you offer a one-off purchase (like funerals) or occasional purchases (like divorces) this is not so easy.
The impact each levers
The dramatic, and unrealistic, approach to growing your business is to see the impact of doubling all three levers – 1,000 customers spending £100 per transaction, 10 times a year would become 2,000 customers spending £200 per transaction, 20 times a year. That would give an eightfold increase in turnover.
But for most businesses, you should be able to increase the number of customers, average transaction value and sales volume per year by, say, 5%. The impact of these relatively small changes is still pretty dramatic. A small office stationery business, for example, that adds just 5% to each of the three levers, could go from:
… 1,000 customers
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… With an average transaction value of £100 from
… 10 sales per customer per year
… Turning over £1,000,000 (1,000 x £100 x 10)
To a company with…
… 1,050 customers
… With an average transaction value of £105 from
… 10.5 sales per customer per year
… Turning over £1,157,625
This is a 16% rise in turnover. When we worked through this example to find the result on profit, we saw that the three 5% changes resulted in a massive 43% increase in net profit.
…and the ‘+1’
This is the factor people always seem to forget about. It is the customers that leave us – the ‘customer attrition rate’. The statistics are simply amazing. If 5% of customers leave us because they die, a further 5% of customers leave us because they ‘die gracefully’ – they move on, the business closes down, they go into partnerships, etc. Another 5% of customers leave us because of our bad service. Most importantly, 65% of customers leave us because they feel that we don’t care, and move on to someone who does.
If you haven’t done a customer survey recently, how do you know what your customers think? Some may be thinking of moving on. So, as well as considering the three levers, make sure you stay close to your customers.
Robert Craven is an entrepreneur, businessman and author who has run Mastermind Groups and action-centred learning with Warwick Business School, Business Growth Programme and London’s Accelerated Growth Programme among others. His latest book is Grow Your Service Firm . He is managing director of The Directors’ Centre.