Pricing your embroidery for a profit is a skill that must be developed early on as you establish your decorated apparel business. Far too many embroiderers pull a figure out of the air hoping it will cover their costs, which it often does not.FULL STORY
Build Your Business: Management
What’s Your Customer Worth?
It seems some decorators have a love-hate relationship with their customers. They love getting the orders and collecting the checks, but they hate the process of finding customers, qualifying them and working through the order process. It seems there are too many interruptions and questions; and too much non-productive time spent. Couple this with the perceived (and actual) lack of customer loyalty to the business and it’s no wonder this is a sensitive spot for small- to medium-sized operators.
This month, I would like to spend some time putting the customer’s value into perspective. If you’re self-employed, your customer is your boss. He ultimately is responsible for your paycheck. If you own a business, the customer is the engine that drives profits and cash flow.
The difference between being self-employed and being a business owner is simple. You’re self-employed if you stop working and your income stops. Business owners don’t actually have to work in the business to receive their compensation. Most decorators fall into the former category and a few are transitioning into the business owner category.
There’s another important reason to know the value of each customer. In the digital marketing world, customer value determines how much you can afford to spend on advertising to acquire a new customer. There are three ways to grow your business, and adding new customers is one of them. It also is the most expensive and time-consuming way to grow. As such, we want to speed up the process and reduce the cost. Ideally we would like it to be free, but that isn’t going to happen. There’s always cost associated with bringing in a new client.
DETERMINING CUSTOMER VALUE
Let’s start with an easy procedure for determining average annual customer value. Simply take your annual gross sales and divide by the number of customers you have done business with in the past year. For example, you have annual sales of $200,000 done with 350 customers. Thus, the average annual customer value of one customer is $571.43.
One year was chosen as the lifetime value of a customer because many accounts will only order from you once per year. Most will order about once every nine months or so, and some more frequently. If you want to go deeper, print a “Sales by Customer Report” from your bookkeeping software. If you can, sort for delivery from highest value to lowest.
It will quickly indicate your biggest customers, how often they order from you and the annual revenue you receive from them. You will see that a few of your customers account for a big chunk of your annual sales and they will have been with you for multiple years. These are the “gold accounts.”
For the customers who have made multiple purchases, divide the number of jobs into the annual amount spent to get the average order size from these customers. Compare their average order size to the average annual order size from the first calculation. The second calculation is to compare their annual order size during the total time you have been doing business with them. You are looking for increasing year-over-year average orders. If they are erratic or declining, you may be at risk of losing the client.
There are two objectives here. The first is to increase both the frequency and the value of each order for your existing customers. This is about optimization. You can sell more and sell at a higher price. A good example of this would be to add additional garment styles, or items complementary to the sale. If you were selling to a 10K running event, you might suggest adding sports water bottles for the top five finishers in both men’s and women’s age categories, or perhaps tech T-shirts for the top finishers. Or suggest printed goodie bags for each preregistered runner. Both are good margin items that don’t require much work on your part.
Without getting too far off track, the real goal of this is to determine how much you can afford to spend on a new customer. These front-end incentives can range from free artwork or screens, order discounts, referral fees or any number of other creative enticements to get the order and prove your worth to the customer.
New customers like to have a reason for doing business with you. One of the most effective methods for establishing this is to create a “New Customer Package.” This includes multiple incentives on the first order. Don’t be afraid to get creative, as there are many things that have perceived value that do not cost you much money. Some of them are just so simple, but no one thinks of them — things like boxing delivered shirts by single size, or by classroom if it is a school job. A tiny amount of additional effort can have big value to a new customer who is looking to reduce the amount of time spent on his project.
Here is the really important part of acquiring new customers that has been proven repeatedly across all industries, not just our own: In every instance, the market leader in any given business is the one with the most customers and the one with the highest average customer value compared to its competitors. Simply put, more customers are doing a higher level of business in its market.
Fortunately, digital marketing is making this happen much faster and more effectively than conventional methods. One of the things we discovered over time is that our best customers increase their business with us as we prove ourselves to them. This makes sense on the most basic level. The process making a customer become a client.
CUSTOMERS VERSUS CLIENTS
A customer is what we get at the beginning of the process. They typically purchase products or services on price and have very little loyalty or connection to us. Clients put themselves under our protection. Doctors, lawyers, accountants, engineers, etc., typically have clients. What makes a client different from a customer is the absolute trust they place in their service providers. This also is one of the reasons that those providing services to clients typically charge much higher fees than they do to someone shopping on price alone.
Our experience has been that customers enter their engagement with use at a value of 1x. This means that whatever the order size is, it represents the starting point. Suppose a new customer comes in with an initial order of $200. This is the starting point. With a carefully planned growth model, this value will increase over time on four distinct levels. They are 1x, 4x, 10x and 100x.
In our example, the progression of annual orders would be $200, $800, $2000, $20,000. You may not achieve this in four years. It may be a shorter or longer period of time. Only a small percentage of your clients will reach 100x their original orders, but a significant number will reach 10x. The greater your service reputation and performance increase, the higher the starting value for new clients will be and the faster they will ascend to the 10x and 100x levels.
This is where it gets really interesting and where nearly all decorators miss the point. Your focus needs to be on lifetime customer value, not the value of the initial order. By taking the long view, you massively increase your profit potential of each customer you take on as you migrate them to the ultimate client level (100x.).
Think of the Columbia Record & Tape Club. They offered an incredible deal of 11 albums for $1, plus shipping and handling. This was when albums were retailing for $8-$10 each. On the surface, it looked like a ridiculous offer. How could they make any money? The answer is that their hard cost to make and package the albums were 15%-20% of the retail selling price. The rest was margin. They were willing to break even or lose money on the initial order because customers were agreeing to a continuity program. If you joined the Columbia Record & Tape Club, you would agree to purchase at least eight selections of your choice at regular club prices over the course of three years.
For parent company Columbia House to break even on the first order, they were guaranteeing future sales of $96-$120, with costs of about $10. It worked amazingly well for Columbia House, Time-Life, Harry & David, and many other companies, for CDs, DVDs, videos and other products. They realized early on that with a carefully designed sales model built on trust and performance, it really didn’t matter whether customers’ initial orders made a profit. They were after the multiple sales and long-term relationship with their customer base.
This concept is a starting point. My hope is that you will start looking beyond the order that walks through your door. Start planning how you’re going to grow that relationship and incorporate additional features, complementary items and added services to enhance the use of your products. In future articles, I’ll show you how to use the lifetime customer value with online advertising to create guaranteed sales that always generate more than your advertising costs. For every dollar I invest, my personal minimum return is 10x. This means for every advertising dollar, it generates a minimum of $10 in new sales. This is the minimum. It is not uncommon to have 20x, 30x, or even 50x or more return, depending on what is being promoted and marketed.
Stay tuned for future articles; there’s lots more fun stuff to come!
Mark A. Coudray is a respected and well-known industry innovator and strategist. His works have been published in more than 400 papers, columns, features and articles in every major publication in the United States and abroad. Coudray has been an active member of the Academy of Screen Printing and Digital Technology since 1989, and has written for Impressions since 1978. For more information or to contact Mark, email him at email@example.com.
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