Crunch the numbers

Well, it is baseball time so Spring sales can't be far behind. Just as you shouldn't panic if your home team gets off to a rocky start (Sox are 3-4, Yankees 3-3), you shouldn't panic at the sluggish start in the first couple of weekends in the green industry. OK, so what does that have to do with baseball? It's all about the numbers. My fascination with baseball began with a statistics game called Strat-O-matic. The game was based on the statistic averages from the previous season. Your skill involved understanding match ups and setting your lineup and pitching accordingly. With a roll of the dice the game began. Based on the information you had, you formed a game strategy. You had to adjust for the opposing pitcher, know who the top hitters were and understand the opportunities from one game to the next.

So it goes with retail this Spring. Match ups are tough as green retailers are going to faced with competition from higher food costs, gas costs are through the roof and the housing market is in deep doo doo (technical term from Alan Greenspan). Now more than ever you will have to play the odds. For me that has always revolved around making the most of your existing customer base. That is where the rubber meets the road, and consequently, where you will get the best return on your dollar.

To revisit a favorite formula we will take the way back machine to 1998 (or around there...). Most of my talks at industry events revolved around understanding the critical dollars per transaction, or average sale. Getting a handle on this key number should be the number one priority. The only way you can plan for growth is to create a way to make things happen consistently from one day to the next. Sort of like a baseball manager knowing you are not going to win all 162 games, but if you manage the basics you will win more than you lose.

You see it really isn't about hitting home runs all the time, but rather getting on base, moving the runner along and timely hitting. In retail that means getting customers into the store, selling them more, and getting them to come back. While it is fairly generic, lets see what happens when you 'crunch the numbers'.

Here's the formula --

1) take your total sales for the year and divide by the average sale - in our example we will use $1 million in sales with a $40 average ticket (highs and lows equal out over the long haul).

2) from there we can determine how many customer visits we had. we take the total transactions - in our case 25,000, and we divide that number by the average that any one customer shops your store in a single year. We will use a theoretical number in this exercise, but if you have a POS system you won't have to. When I surveyed retailers years ago it came out to around 2.875, or 8695(.65). We'll round up to 8700.

3) the 8700 represents your potential 'core customers'. In an 80/20 formula (80% of your sales will come from your top 20% customers) these 'core customers' are the ones to concentrate on.

4) next, we multiply the 'core customers' by your average sale. In this case 8700 X $40 equals $348,000 (based on a single transaction). If we multiply the $40 times the 2.875 then the customer is worth around $115.00 over the calendar year.

5) the goal then, is to increase the dollars per customer. The simple way to do that is to increase the average sale and improve the amount of times they shop in a year. When you apply the numbers to this it looks something like this: 8700 X $45 (just $5 more per transaction) you come up with 391,500, or an increase of around 11%. If you get them back 3 times (up from 2.875), the customer is now worth $135 per visit - around 15%.

6) put those two together and you end up with 8700 X 45 = 391,500 X 3 = 1,174,500, or an increase of around 12%. Of course these numbers are purely speculative, but the numbers don't lie.

Again, it isn't about knocking them out of the park, but rather the day to day attention to great customer service, promotions designed to increase the average sale and a mechanism to communicate with your core customers on a regular basis. With a customer acquisition cost that is roughly 26 times the cost of retention, shouldn't you be paying attention to your best customers?

Now your results may vary, but even if it took you a couple of years to realize such increases, wouldn't it be worth it?