Sales = Customers × Spend. Open that one line up and you have five numbers that describe how your customers behave.
Start simple and keep simple.
This is where I start when an owner asks what they can do to understand their customers. It is one line of arithmetic, and it works the same for a $2m shop as it does for a large chain.
4 minutes 41 seconds, no sound. The numbers are illustrative. Open the slide deck to step through it at your own pace.
Retained customers bought from you the year before as well. Retained is a ratio of the prior year's customers. Acquired customers bought for the first time this year.
| Number | Where it comes from | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
|---|---|---|---|---|---|---|
| Average price | Up 3% a year with inflation | $23.00 | $23.69 | $24.40 | $25.13 | $25.89 |
| Items per basket | Up 1.1% a year | 3.70 | 3.74 | 3.78 | 3.82 | 3.87 |
| Average sale | Price × items | $85.10 | $88.60 | $92.23 | $96.00 | $100.19 |
| Visits a year | Up 1.6% a year | 3.20 | 3.25 | 3.30 | 3.36 | 3.41 |
| Spend | Average sale × visits | $272 | $288 | $304 | $323 | $342 |
| Customers | Up 4% a year | 7,350 | 7,644 | 7,950 | 8,268 | 8,598 |
| Retained | 40% of last year's customers | 2,940 | 2,940 | 3,058 | 3,180 | 3,307 |
| Acquired | The rest | 4,410 | 4,704 | 4,892 | 5,088 | 5,291 |
| Sales | Customers × spend | $2.00m | $2.20m | $2.42m | $2.67m | $2.94m |
| Marketing cost | 7% of sales | $140k | $154k | $169k | $187k | $206k |
| Spent on acquisition | Five-sixths of marketing | $117k | $128k | $141k | $156k | $171k |
| Spent on retention | One-sixth of marketing | $23k | $26k | $28k | $31k | $34k |
| Cost per acquired customer | Acquisition ÷ acquired | $26.48 | $27.30 | $28.85 | $30.57 | $32.39 |
| Cost per retained customer | Retention ÷ retained | $7.94 | $8.73 | $9.23 | $9.78 | $10.36 |
| Sales less marketing cost | $1.86m | $2.05m | $2.25m | $2.48m | $2.73m |
Year one is the shop today. Each later year targets 10% more sales, spread across the formula: 4% more customers, 1.6% more visits, 1.1% more items in the basket, and the average price up 3% with inflation. Retention holds at 40%.
Marketing is 7% of sales. Five-sixths of it goes on acquiring customers and one-sixth on retaining them. In year one that is $26 for each customer acquired and $8 for each one retained.
These numbers are illustrative. They are not any client's figures.
It costs this shop $26 to acquire a customer and $8 to retain one, and both spend the same $272. Acquiring a customer costs 3.3 times as much as keeping one.
At 40% retention, 4,410 of the 7,350 customers do not come back each year. Replacing them takes $117k, five-sixths of the marketing budget, before the shop has grown by one customer. That is the cost of churn.
The table follows the 4,410 customers acquired in year one. Each year 40% of them come back, and each one retained costs what the table above shows for that year.
| Year | Still buying | Sales | Cost per customer | Marketing cost | Running total, sales less cost | Per customer acquired |
|---|---|---|---|---|---|---|
| 1 | 4,410 | $1.20m | $26.48 | $117k | $1.08m | $246 |
| 2 | 1,764 | $508k | $8.73 | $15k | $1.58m | $358 |
| 3 | 706 | $215k | $9.23 | $7k | $1.79m | $405 |
| 4 | 282 | $91k | $9.78 | $3k | $1.87m | $425 |
| 5 | 113 | $39k | $10.36 | $1k | $1.91m | $433 |
Of the 4,410 acquired, 2,646 buy for one year and do not come back. About $70k of the $117k spent acquiring them went on customers who stayed one year.
The ones who stay are where the value builds. Each customer acquired has earned $246 after year one and $433 by year five, and the retained ones cost $8 a year to keep. That running total is the customer lifetime value, counted here as sales less marketing cost.
These are sales less marketing costs. They are not profit: the cost of the goods still has to come out.
The same model, run at three retention rates for a shop holding 7,350 customers:
| Retention | Retained each year | To acquire each year | Marketing cost a year | Five-year value per customer acquired |
|---|---|---|---|---|
| 30% | 2,205 | 5,145 | $154k | $367 |
| 40% | 2,940 | 4,410 | $140k | $433 |
| 50% | 3,675 | 3,675 | $126k | $519 |
Lift retention from 40% to 50% and the shop holds the same 7,350 customers for $14k less each year, because 735 of them cost $8 to retain where they used to cost $26 to acquire. Each point of retention gained saves about $1,400 a year. Each customer acquired is worth $519 over five years in place of $433.
All from acquisition. At the same spend, $2.2m takes 8,090 customers. You retain 2,940, so you have to acquire 5,150. That is 17% more than last year, and it is the expensive way.
Spread across the formula. Ask for 4% more customers, which is 7% more acquired. One customer in eight comes in once more this year. One more item goes in every fourteenth basket. There is no price rise. Each customer spends $288 a year, and the line balances at $2.2m.
| Start from | The question | What it is for |
|---|---|---|
| Customers | How many customers buy in store, online, or both? | Setting what you spend on each channel |
| Retained | How does the retention rate differ by channel and by store? | Keeping customers and winning new ones |
| Visits a year | How many bought once, twice, or three times and more, and what did each group spend? | Keeping customers and winning new ones |
| Items per basket | How do one-item baskets compare with the rest? | Testing ways to add one more item |
| Spend | How many buy from each part of your range, and how many from more than one? | More visits and bigger baskets |
At one large retailer, this drill-down showed that half the customers bought once in the year. What it found, and what changed.
Let's get together and figure out the value of your customers. Start with the free 45-minute chat.
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