Small businesses have three ways to grow:
- Increase the average order value,
- Attract new customers, and
- Increase the frequency of customer visits.
Small business owners have to pursue these growth strategies while balancing their time, energy and resources. Because no-one has unlimited time, energy and resources, it means that entrepreneurs must choose the growth areas with the biggest impact. The best bang for your buck. All while then making sure that you allocate the right amount of resources to that area.
So, if you had to rank and prioritise each of these growth strategies, which is the most logical strategy to focus your time on?
Growing a local coffee shop
Let's say you run a local coffee shop. The typical customer visits twice a month and your average order value is $10 per visit. Let's also say that you are targeting a 50% revenue increase from your growth efforts. What are your options?
Option 1: Increase the average order value
You could try to increase your average order value to $15 and hope that customers will still come in as often as they did before. To achieve this you can:
- Successfully encourage all your customers to buy 50% more items,
- Charge a 50% higher price on average across all items, or
- Both sell your customers more items AND charge a higher price.
You might be able to pull this off, but I would not want to bet on it.
Most coffee business owners believe their customers have a certain amount they are comfortable spending in any given situation. Pressure from service staff or owners to increase expenditure could just result in lower customer visits.
We do believe that price is an overlooked growth lever, however raising the average order value by 50% across all customers is not likely to work as well.
Option 2: Attract new customers
You could invest heavily in sales and marketing to attract new customers.
However, sales and marketing can also be expensive. Every cost you add raises the sales required to net out a 50% increase. You don’t want to spend $1 on promotions to earn $1 in new revenue. That leaves you in the same position.
So you would have to believe that for every $1 you spend on sales and marketing, you’ll get back a significantly better return from new customers and the revenue they bring. Besides, the odds of coming up with a campaign for a coffee shop that would produce a consistent 50% sales increase are also pretty slim.
When it comes to a growth strategy to increase revenue by 50%, we do not believe that increasing your promotion efforts and budget is the best answer.
Option 3: Increase the frequency of customer visits
What are the odds that you could treat your customers in such a way that instead of coming in twice a month, they would come in three times a month?
Pretty good, I'll bet.
Just one more visit a month would provide that 50% sales increase. Without any increase in the average order value, without any increase in sales and marketing expenses, and without any increased pressure on the customer or your staff.
If you can give your customers such a good experience that they come to you instead of your competition, you cannot help but increase your volume. A 50% sales increase seems impossible, but getting customers to come back one more time a month seems pretty reasonable.
And it is.
After all most coffee drinkers consume 3 cups per day so your customers are drinking coffee somewhere, why shouldn't it be with your coffee shop?
Customer loyalty is the best growth strategy
Focus on delighting customers.
The safest way to achieve sales growth is to have your customers return more often. In this mode, your goal is to delight your customers, win their trust and earn their loyalty rather than simply trying to increase the average sale.
The added benefit is that when new customers do come in, because of your high level of service and delightful experience, they are much more likely to turn into loyal customers that visit frequently in the future. And your long-term revenue will be much healthier for it.
That being said, there are always exceptions:
- There is no one-size-fits-all answer to growth. This does not apply to all businesses blanketly. The loyalty priority is for businesses that have returning customers, and doesn’t apply to businesses that sell one-off goods or services, who are better off focusing on the other two strategies.
- Higher average order value, new customers attracted through sales and marketing efforts and increased frequency of customer visits are not incompatible. It is possible to build both repeat patronage, attract new customers and increase the average order value.
If a customer wants to spend more money with you and increase their average order value, take it with a smile! However, if you have limited time, energy and resources like most small business owners, I feel strongly that the one place you can’t go wrong in spending it is on increasing the loyalty of existing customers and trying to increase the frequency of their visits.
Placing your focus on delighting customers is always good business.
For most businesses all three ways to grow are possible, and it is about time we all stopped having such a fixation on how much our customers spend on each visit and getting new customers, and started putting energy toward increasing the number of times that customers visit.
Success in building the average order value will not necessarily sustain long term sales growth. On the other hand, it is likely that success in building customer loyalty and repeat patronage will always increase total revenue and sustain it over the long term.
Here are some questions for you to ponder and consider:
- What growth ambitions do you have for your business?
- What growth strategies are the current focus of your business?
- What are you currently doing to encourage customer loyalty and increase the frequency of customer visits?
- What new measures could you put in place to delight customers on every visit and encourage customer loyalty?
- How do you measure customer loyalty and frequency of customer visits?
I hope you, and your customers, have a delightful day.
Before you go...
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