Customer Replenishment and the Revenue Treadmill
One of the tools I used years ago while in the magazine industry was a replenishment model. The basic premise is that most if not all customers eventually leave your company and you need to replace them. You need to replenish your stock of customers in order to stay in business. This means acquisition of new customers and in the simplest terms, you need to replace as many customers as you lose in order to stay flat and have no growth. Yes, there are variations in this modeling exercise, but the basic idea is sound. If a customer worth $100 per year leaves then you need a new customer that is worth that same $100. Variations such as duration (e.g. am I measuring days, weeks, months or years), order value, order frequency, conversion rate, life-time-value, retention rates, etc. all make this more interesting, but let’s keep it simple for now.
The chart below gives a visual in order to make it easy to understand how many new customers are needed in order to maintain flat line revenue. In this chart each block represents 100 customers, each making one purchase at the same value per order. And on the bottom, it’s labeled Days / Weeks / Months / Years. Let’s call this Loyalty Duration.
In the course of my career I’ve seen meaningful Loyalty Durations measured at 7 days (FOREX), 90 days (computer equipment), 12 months (magazine publishing) and multiple years (industrial hand tools). The trick is know where those key measurement points are and to build your customer acquisition targets and activities around those milestones.
Clearly if you maintain the same quantity of customers and increase the value of each customer purchase (average order size), let’s say from $100 to $150; or by increasing the frequency and number of purchases then you can increase revenue without needing to acquire a greater quantity of customers. Some companies simply have capacity constraints and if increasing revenue is the objective then it must occur through means other than by bringing in more customers.
So, let’s put a brand face on this discussion and see where it leads us:
Crumbl is a company I have talked about in the past. They make gourmet cookies and a few other things. However, the core business is cookies. In looking at the replenishment model, how many customers does Crumbl need to replace every day / week / month or year?
One person can only eat so many cookies and it’s not likely that the same person will consume the same amount every week, 52 weeks of the year, year after year after year. A clearly defined Replenishment Model could be very useful to Crumbl and each Franchisee that is working to grow their business, or simply keep it afloat.
Taking a longer view, how many cookies is each customer worth on an annual basis? If the Loyalty Duration is one year, then that’s much easier to wrap our head around and manage to. Birthdays, Anniversary’s, Company parties, gifts to neighbors, etc. All of a sudden it’s pretty straight forward to manage replenishment and growth targets given the type of product, loyalty duration and lifestyle events that could drive cookie purchases.
Let’s take this a step further. If Replenishment Models are visible and available on each of the 1,000 stores Crumbl has in place it would be pretty easy to see how the relationship between Franchise locations and population density correlates to franchise success. Demographics could be overlaid and additional layers of understanding would be applied. Household income (I.e. disposable income) could become a meaningful factor in site selection or maybe even industry concentration. Tech heavy Silicon Valley may offer a very different response to Crumbl than say the Navy heavy areas of Norfolk, VA.
Visibility to a Replenishment Model might also be very useful to the Crumbl Franchise Business Consultants operating at Crumbl headquarters. If there job is to consult with and coach Franchise owners to grow their business, wouldn’t it be nice to see exactly how many customers need to be replaced every day / week / month and year?
Replenishment Models are a wonderful tool and they can be used to strategically correlate marketing spend and customer contact. Consider how useful text messaging could be when it is mapped to a well defined customer lifecycle model (e.g. Acquisition, Conversion, Retention), overlaid with details of the customer journey (e.g. first time purchase, frequency of purchases, lifestyle event purchases) and executed with automation and personalization for each customer. My bet is that response rates would be highly predictable and in turn so would revenue projections.
Replenishment Models can be applied to many different industries. It is not limited to high frequency, transactional driven companies. You’ll recall my initial experience was in the magazine world. One purchase per year was common but so were two and three year subscriptions. Three year subscriptions created stability and predictability of revenue. Trial subs demanded high churn rates and constant acquisition efforts. The points is, we knew what had to be done in order to maintain and grow.
The premise of the model is sound. How many customers (or orders), do you need to replace each year? If you have the answer then you likely have a pretty good handle on your revenue projections and your marketing spend. If not, we highly recommend implementing a clearly defined Replenishment Model.
Your thoughts? Text me now: 206-312-2129