Once you’ve identified your most profitable demographics, you can target your marketing and product selection
What’s the best way to increase sales and profits? Sell more to your “best” types of customers!
Today, it is not enough to have profitable products. Instead, retailers must find — and nurture — their most profitable customers.
The 80/20 rule of thumb is no doubt at work in your store: 80% of the volume is generated by 20% of the customers (of course, these percentages are not exact, but you see the point).
The more you know about that 20%, the better you will become at focusing your operation — buying, displays, advertising, special events, etc. — on the preferences of your “best customer.”
Your point-of-sale system may tell you what products are selling. Your customer relationship program may tell you who is buying. But we’ve developed a three-step process that stores can use to answer the essential question of “Who’s buying what’s selling?”
The goal is to identify the general characteristics of your best customer. Once you know these characteristics, you can seek out more like them. Think of it as cloning your best customer.
Step 1: What’s Selling Now?
Conducting an effective sales analysis can be very revealing. Looking at sales from a variety of productivity measures can provide new insights. Consider information such as total sales volume, total number of transactions (this is very important!), volume and transactions by category and items per transaction.
By displaying this information on a spreadsheet month by month, you can quickly see your store’s seasonality and how those seasons might not be the same for all product categories.
The sales analysis helps you pinpoint opportunities and weaknesses.
For example, if your sales trend is up, is it because you are having more transactions? Or higher average sales?
If the average sale is higher, is that because customers are buying more expensive items? Or a greater number of items at each transaction?
Step 2: “Who’s Buying What’s Selling?”
The importance of this step cannot be emphasized enough: It’s not enough to know what’s selling; you must know who’s buying what you are selling!
The easiest way to do this is to capture customer information at the point of sale, so you can link customer data with transaction data (item purchased, price, SKU, date, time, etc.). And it doesn’t take an elaborate “customer relationship management” program and staff to do this.
For example, by programming a seven-digit field into your register, you can collect three key pieces of non-invasive information about each customer: ZIP code (five digits), gender (one digit) and age category (one digit). Instruct salespeople to “guesstimate” customer’s age as they ring up sales.
This method of gathering information is low-cost and unobtrusive, and while designating age categories won’t be 100% accurate, they will usually balance out and they’ll always be revealing.
Here are two examples of the types of findings you can develop through this point-of-sale data capture. Notice how readily this information can be put to effective, practical use. The “best customers” — that is those customers you want more of — quickly stand out from the rest of the pack. This enables you to focus limited time and resources where they can serve you the most — on your best customers.
Example A: Age Groupings
In this example, the client wanted to know which of three particular age groups was buying full-price goods and which age groups were “cherry-picking” the clearance tables. Table A shows generally what they found.
The 35-and-older age group was predominately buying full-price and/or first markdown goods; the 18-to-24-year-olds, however, were very price driven.
Knowing this leads to a whole series of management decisions and opportunities.
– Targeting your advertising at age 35-and-older households (reached via direct mail, zoned newspaper inserts, selected radio formats, selected TV shows, etc.).
– Not spending ad money on the younger “price hounds.”
– Focusing your advertising message on benefits important to your best customers.
– Influencing what music you play, what hours you are open, how you staff, etc.
– Choosing where and how to do “outreach” advertising to appeal to and bring in more of your best customers.
Example B: ZIP Codes
This next example illustrates differences in shopping behaviors that can be linked to the customer’s ZIP code. That, in turn, allows you to learn even more about your customers through additional research (using free — yes, free! — information at the public library).
Table B shows some major differences among shoppers when we analyze transactions by ZIP codes.
– The folks who live in ZIP code XX212 produce the highest average sale and the highest units per transaction. But these customers buy the fewest items at full price.
– A visit to the library to check out the census data on the XX212 ZIP code reveals these findings: this ZIP has fewer home owners and more renters than other ZIPs in the area, and it also has many elderly women (widows, perhaps, on fixed incomes?).
– But, look what we found about XX106: The average sale is close to the store overall, yet — these folks buy very few markdowns. Who are they, anyway? A check of the census data suggests highly educated, professional/managerial jobs, high incidence of early-30s in age and small household sizes.
These are the SINKs and DINKs — (single-income, no kids or dual-income, no kids) —people who are pressed for time, but have good incomes and are able to spend money on themselves.
Step 3: Tying It All Together
There is enormous value in understanding your best customer categories, because it provides a fundamental framework for your management decisions.
It helps answer the question, “Why?” — Why this merchandise, this price, this look to the store?
All these questions can be answered more consistently and efficiently by using your best customer as a foundation.
Treat your best customers as the valuable assets they are to your store. Today, it is not enough to have profitable products. Instead, retailers must find — and nurture — their most profitable customers.
Patricia M. Johnson and Richard F. Outcalt are certified management consultants and co-founders of The Retail Owners Institute. They are strategists for retailers, workshop presenters and publishers of a free and popular newsletter for store owners and managers. Sign up for The ROI News for free at RetailOwner.com. They can be reached at 206-623-3973.