Your sales revenue is not one number, it’s actually made up of four variables and you can increase each variable to grow your business.
If you put your sales revenue into a formula or equation, it looks like this:
Number of customers x purchase frequency x items purchased per visit x unit price of each item = your sales revenue
Why do you need to think about your sales revenue this way? Because to grow your sales revenues, all you need to do is get one of the four variables to increase.
Think about it, get more customers and increase sales revenue (assuming new customers buy the same as existing customers, of course).
This is why we think of these variables as “levers” for growth:
1. Number of customers
2. Frequency of customer visits
3. Items purchased per visit
4. Price of each item
The question you need to answer is which lever is the right one to go after. There is no point trying to increase a lever that cannot be increased.
For example, we estimate everyone in Australia has been to McDonalds. There are no more “new” customers for McDonalds. What McDonalds can do to grow is increase the purchase frequency (visit frequency) of their existing customers. There are 8.9 million households in Australia, one extra visit per year at (say) $10 a visit is an extra $89 million in sales revenues…for one extra visit a year! Levers indeed!
How do you determine which lever is the right one to focus on for your business? Simply measure each lever for your business and compare against what the lever should be.
For example, let’s say you’re running a small supermarket in a country town. Well, you know the population of the town and you can count the customers coming through the doors. You can work out the gap (if any) in customer numbers.
You also know how often your customers come, either by count, survey or from your POS data. You know that Australian shoppers visit small supermarkets 2-3 times per week. You can work out the gap (if any) in purchase frequency.
You know how many items customers buy per visit, again from your POS data. You can work out what they’re buying and compare to what they should be buying. Example – if you sell a lot of soft drink but proportionally not as much chips or chocolates, you have a gap, these items are often bought together. Analyse what’s in your customer’s basket and compare to what should be in it!
And finally, you know what price people are paying. This is a little trickier, you need to make sure you range items in the same segment that are priced higher and offer better value. Think chocolate, having Cadbury in your small supermarket is smart as they’re the market leader, but having Lindt premium chocolate as well is even smarter as it is a better chocolate, it’s priced higher and it adds value to your customer through quality.
Whichever lever has the greatest “gap” is the one you will go after to grow your business.
So, stop thinking about sales revenue as “one number” – break your revenue open into the four “levers.” Once you can “see” inside your sales revenue, growing your business suddenly becomes a lot easier.
Michael Stafford Founder, 6seed.com.au