More Reasons You Should Increase Your Average Order Value
It’s helpful to remember each dollar you earn has “earmarks” on it, although these earmarks are different from the kind they attach to spending bills in government.
One legitimate “claim” to your money, when you make a sale, is the amount it will cost you to make another sale happen. Your business can only stay open and scale when you have a solid foundation of steady income.
So if your main offer grosses “X amount” in revenue, you obviously need to subtract profit, taxes and expenses, as I covered in a recent podcast interview with Mike Michalowicz. But you also need to consider the costs of acquiring new customers.
Why Build CAC Into Your Revenue Model?
The money you invest to get more people into your funnel is going to come from somewhere, and you’d better not be borrowing it or spending money you’re going to owe to the government!
But even if you’re aiming to do this the right way, you may feel tempted to give up hope, because your revenue doesn’t support paid advertising. This is the reason we encourage clients to become prolific in creating content that can be packaged and cross-sold or upsold. We covered that in last week’s blog.
The two biggest levers you can pull in your business to increase cash flow are price and volume. Depending on what you sell, prices may have to go up incrementally over time, as little as one percent if necessary. But they should go up.
If you currently charge $47/month for a membership site, it might be too early to shoot straight to $197. But you could probably get away with $67, and an extra $20 per customer can net you a healthful increase on ad spend.
Volume, meanwhile, can increase easily. As you develop new products, versions or upsell items, you can spike your average cart value. Just remember, volume increases work when the additional items you offer are congruent with your main offer.
How to Understand Acquisition Costs in 2020
- Number of Customers. You have to know how many customers individually spent money with you during a certain period.
- Sales/Marketing Budget. How much you spent on marketing, advertising and sales combined. You divide that figure by your number of customers.
So, if you gain 50 new customers and your sales/marketing budget is $5000, that means you spend an average of $100 to acquire a new customer.
Is that worth it? Does this mean you need to raise prices or volume, or can you do a better job of containing costs? It’s hard to tell early on, but I recommend taking time to study Customer Lifetime Value.
We don’t have time or space to get into it here, but if you’ve ever heard of “The Law of Diminishing Returns,” you’ll see what I mean. The longer your revenue remains stagnant, the less valuable it is.
Suppose you escalated the volume of what you offer and raised your prices 1-2 percent, so your average cart value grew from $400 to $700? It wouldn’t be very long before you could substantially increase your marketing and sales budget.
To use an example I’ve cited earlier, it’s obviously preferable to make $1 million in a day rather than $25k per year for 40 years. Why? Because of the speed at which you acquire it, and what you can do with it when it’s in your hands, versus waiting for it.
A surge like this in revenue from each customer gives you the speed to outrun gradual increases in the cost of finding new clients. If your ad spend rate remains stable, it only stands to reason that you can make more impressions, on more prospects, more often.
That’s what makes it so important for you to learn upsells and cross-sells, like we covered in last week’s blog. Adding congruent offers that help people get more of what they’ve already purchased, or get results faster, or automate a process gets you to your sales goals faster.
Whatever you choose to do, be willing to raise prices and add volume, before whipping out the scissors. Topline growth isn’t everything in business, but it does need to happen regularly, especially during good economic times. You’ll want a cushion for when the economy tanks.
This is the “secret,” when you observe world-class digital marketers do what they do. They’ve engineered their numbers so their “revenue per customer” keeps growing. If you average $400 per transaction, and they average $1,100, how many more ads can they run?
At every level of business, it’s important to keep proper perspective on the numbers. You don’t want to discard them completely, just put them in their proper place. They’ll always play an influential role in decisions you make, even if you choose to completely ignore them.