What Are The Acres Of Diamonds In Your Business?
Here’s a story with a message for all business owners titled, Acres of Diamonds.
The story is based on the true story of an African farmer in the late 1800’s who heard tales about other farmers who had made millions by discovering diamond mines. Diamonds were already discovered in abundance on the African continent and the gems were attracting huge prices which inspired the toiling farmer to sell his farm and go prospecting for diamonds.
After he sold his farm he spent the rest of his life wandering the African continent searching for those elusive diamonds. Unfortunately, he had no success and he ended up penniless and sadly out of despondency, threw himself into a river and drowned. Meanwhile, the man who bought his farm happened to be crossing a small stream on the property one day and a bright flash of blue and red light caught his eye from the bottom of the stream. He bent down and picked up the stone that was about the size of a hen’s egg. He took it home and put it on his mantelpiece because of its features.
Well … Several weeks later a visitor to his farm noticed the stone and had a close look at it and nearly fainted. He asked the farmer if he knew what he had found. When the farmer said, no, he thought it was just a piece of crystal, the visitor told him he had found one of the largest diamonds ever discovered. The farmer had trouble believing it because he told the man that his creek was full of such stones, not all as large as the one on the mantel, but sprinkled generously throughout the creek bottom.
The farm turned out to be the Kimberley Diamond Mine, the richest diamond mine the world has ever known. The Kimberley Diamond mine has produced some of the world’s finest diamonds, with the largest stone cut to 45 carats! Ironically, the original farmer was literally standing on ‘Acres of Diamonds’ until he sold his farm.
So, how does this relate to your business?
Well, many business owners are sitting on their own ‘Acres Of Diamonds’ but don’t know how to mine them. Of course, these diamonds are your existing customers and too often we see business owners chasing new customers at the expense of their existing customers. This is despite the fact that research from Bain & Company tells us it can cost up to 6 times more to win a new customer than it does to have an existing customer come back and buy from you again. Remember, you have invested time and money to acquire that customer for the first sale but every additional sale involves minimal if any cost. The research also indicates that repeat purchasers spend more and generate larger transactions.
THE LIFETIME VALUE OF A CUSTOMER
Let’s face it, most business owners focus their marketing, advertisements and offers on winning new customers. Ironically, after doing the hard work and winning the customer they often ignore them by failing to cross-sell or up-sell which can increase the average order value of each sale. Basically, they don’t understand a very important concept called the ‘lifetime value of a customer’. Basically it’s a simple way of calculating the net profit your business will make from any given customer. It is an important metric for determining how much money a business should spend on acquiring new customers.
It’s a simple formula:
Average Order Value x Number of Repeat Sales Per Annum x Average Retention Time x Profit Margin Per Transaction.
So, if you’re a hairdresser and your clients on average spend $100 on a haircut and they come to you 8 times per annum and you keep them for 3 years (on average) and your profit margin is 50%, then the lifetime value of a customer is $100 x 8 x 3 x 50% = $1200. If you run a coffee shop and your customers on average spend $5.50 on each transaction and they come to you three times a week for 40 weeks of the year and you keep them as a customer for 4 years (on average) and your profit margin is 75%, then the lifetime value of a customer is $5.50 x 3 x 40 x 4 x 75% = $1,980.
There are a number of morals to this story. Firstly, you need to know what the lifetime value of a customer is to your business and how you can retain them for longer. Secondly, don’t ignore your existing customers because in many cases they’re really the most valuable asset of your business.
To further illustrate this point we know a lot of carpenters, electricians and plumbers who continually chase new customers. They forget to build their database of customers and hope their existing customers will remember them next time they need their trade services. Unfortunately, consumer behaviour has changed and courtesy of Google and smart phones the fridge magnet you gave a customer 4 years ago is not going to ‘stick’ in this digital age. You need to enter the customer’s details into a database and then send them a regular newsletter or service reminder notice. Given you probably emailed them the quote or invoice for the job you already have their contact information. These people have bought from you before, hopefully had a positive experience and simply need to be nurtured so they come back and buy again. It’s just bad business to ignore an existing source of revenue that’s right under your nose and your simple communication is designed to keep your business top of mind.
There’s a final moral to this story. A lot of trade type businesses ‘die’ when the tradie finally hangs up their tools and retires. After decades of hard work they don’t sell their business. Without an up to date customer database they really have nothing to sell. On the other hand, if you have a database of customers and you regularly communicate with them, then you definitely have a saleable asset. Even better, if you identify your best customers who keep coming back and giving you referrals, then you can tailor your marketing to them and ultimately get paid for your ‘acres of diamonds’.
Click HERE to download the full edition of The Business Accelerator Magazine for June 2016
Other articles in this edition:
- 2016 Federal Budget Highlights
- Personal Taxation
- Reductions In Corporate Tax Rate
- Access To Small Business Tax Concessions
- Increasing The Small Business Income Tax Offset (SBITO)
- Superannuation Changes
- Medicare Levy Low Income Thresholds for 2015/16
- Applying GST To Low Value Imported Goods
- Amendments To Division 7A
- Youth Employment Package - Bonuses For Hiring Young People & Interns
- SuperStream Deadline - 30th June
- Claiming Work Related Travel Expenses
- Starting A Business - Do The Numbers Stack Up?
IMPORTANT DISCLAIMER:This newsletter is issued as a guide to clients and for their private information. This newsletter does not constitute advice. Clients should not act solely on the basis of the material contained in this newsletter. Items herein are general comments only and do not convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of these areas.