Welcome to Five Numbers Podcast and today we are talking about the third business growth multiplier which is Average Sale Value.
Remember the 5 Numbers of Expotential Business Growth are:
- Increasing the number of leads
- Increasing your conversion rate
- Increasing your average sale value
- Increasing your gross profit rate
- Increasing your Valuation Multiplier
Increasing one of these multiplier will increase your business linearly but increasing all of them even by small amounts will increase your business exponentially.
Remember that we don’t need 1 idea to achieve a 10% increase but 10 x 1% ideas to achieve the same result.
The focus is often to fixate how one person made millions from one idea (it makes a great and compelling story) but when you actually look at how the rest of the successful businesses made their millions it was from incremental improvements – the 10 x 1% ideas across the 5 multipliers.
It is a matter of understanding how these 5 numbers work in your business.
Sales value is simply your average invoice value and can be measured by the total sales divided by the number of invoices.
A simple starting point, that is easy to measure. Later on you can start to break it up further into division, locations, marketing channels, sales channels.
What you are looking for in the first instance is a benchmark, a point from which you can start improving.
So how can you measure sales value. It can be measured easily daily, weekly monthly, annually with little effort. Xero returns this information as part of its standard management report. Could be the numbe of sales on the till tapes.
Remember we are looking for incremental changes. It is not necessary for one big idea that will boost your sales value, but a combination of small 1% increases. These 1% increases are manageable, it could be one idea, that can be quickly or easily implemented.
Test different ideas some will work first go, some will not work and some will work after some tweaking.
As we are looking at small increases we do not have to commit massive resources to see if it works and threaten the business if it does not work out.
Test measure, scale.
So how can we increase the sales value.
The easiest way Is just to increase prices. Most businesses could increase prices by 10% right now and it would have no effect on volume. If you have a business with a 30% gross profit you could raise prices by 10% and you would require a 25% fall in volume before your profit was worse off.
If you have 30% gross profit rate, a 10% increase in prices will raise gross profit rate by 21% to 36%. A 5% increase in prices will raise gross profit rate by 9%.
But let’s say you have some reluctance in raising prices.
Could you charge more for your goods and services if:
- You were the expert in your field. Buyers perceived that you had more skill and knowledge in your industry and anybody else and the risk of buying from you was less. They would be prepared to pay more from the expert.
- Better value proposition that your competitors. Your value proposition targeted exactly their problems and fears and offered a compelling solution to their problem. Could you charge more? Absolutely
- Targeted down to a niche rather than being generalist
- Finely tuned offer and value proposition would also increase your conversion rate – could increase 2 multipliers conversion rate and average sale value in one go.
- Trusted more than your competitors
- testimonials and reviews from satisfied customers
- Reduced the risk by offering a guarantee
- Money back guarantee, 90 day return
- Offered better service and were genuinely interested in helping your customers and clients.
- Offered more value. Your product or service offered extra bonuses like training, support, workshops, online courses, referral or discount vouchers for other services.
Can you increase the average invoice value by encouraging your customers and clients to buy more each time.
You will see this all the time: McDonald’s – would you like fries with that?, amazon – people also bought,
Apple – computers plus warranties, software, accessories.
What could you add?
Restaurants – wine desserts, coffee
Lawyers – property conveyancing plus a will.
Additional services: maintenance plan, additional warranty or guarantee, membership to exclusive group or network, seminars, workshops, consultancy.
Are you leaving money on the table.
Are your customers prepared to pay more but you are not giving them the opportunity.
80/20 marketing by Perry Marshall.
Perry Marshall looks at the numbers behind the 80/20 Pareto principle – basically 20% of your customers will provide you with 80% of your income. We see this apply to businesses all the time. 20% of your activities will generate 80% of your leads or income. Perry takes it a step further and found that 20% of the 20% applies as well so 4% of your customers will generate 64% of your income.
If that same principle is applied to your business.
If you had 1,000 people paying $100 then 11 people would be prepared to spend $1,000 with you. Even though you only had a $100 product, a proportion would be prepared to spend much more with you if they had the chance.
Can you have a low, mid and high price product offering.
We see this all the time:
- Membership to forum plus high level mastermind plus one on one coaching
- Basic model car, luxury model and highly tuned version
Which bottle of wine do you order at a restaurant – the cheapest one or the second cheapest or the most expensive. The most popular wine on most wine lists is the second cheapest price. Restaurant owners who know this may price their wine list to have the greatest profit wine to be second cheapest.
Some people will buy the most expensive bottle – celebration, showing off, enjoy it more (wine being important to them) or that is what they do.
Can you bundle up a group of products and services to create a higher priced version.
If you only have a small number of products or service offerings, can you link up with another provider to offer a new higher priced product.
Are you providing upsell options for clients?
Have you bought a domain name where they ask you would you like hosting, email addresses, longer periods, masking ownership?
Buying a car where they upsell you to the better stereo, leather seats, special colour, bigger engine.
You may have acquired the customer in a particular market. What other things do those customers want or need or use?
Maintaining the car example – finance, insurance, clothes
Focus For This Episode
The interesting thing is that many business owners focus on the negative comments from their worst customers – you are too expensive, I cannot afford that rather focus on the their best clients that generate them all their money.
Many customers will focus on price because that is their only frame of reference with which to negotiate or understand the product. Can you educate them on the key benefits of what you are offering and how it will help them.
So the task for this episode to think about how you can increase the average sale value by:
- increasing your prices
- Getting people to buy more from you each time via upsell, cross sells or new higher priced products and services.
To help you get in the right frame for this, it is not your worst customers who are going to buy more – it is your best customers those you already spend the most with you.
So look at your top 20% of customers:
- What did they buy?
- What are their common characteristics, demographics
- Where did they come from referral source etc.
- Why did they buy from you?
In the next episode, we will discuss the 4th business growth multiplier which is your Gross Profit Rate