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How Much Would You Pay?

Have you ever walked through a store, saw a display, and thought, “Wow! Someone would actually pay that much for that?” Of course you have. We all have. It is the internal pricing game we all play called …

“How Much Would You Pay?”

Unless you’re the only option in town, pricing is a game of finding that sweet spot in price that matches the answer most people would pay for your product or service. The better you determine that price, the better your sales and profits.

And before you think that lowering the price is the only way to go, remember that some people will look at a really low price and think, “What must be wrong with it?” You can cheapen the perception of your products or services by pricing them too low.

I knew a guy who sang at events. He was getting tired of the gigs. He asked me if I thought it was smart of him to double his price so that he would get fewer gigs and still make around the same amount of money. I told him to expect the opposite to happen. I was right.

His bookings doubled with the doubling of his price because people figured if he charged that much he must be really good. In other words, his earlier price was too low. Fortunately, the extra bookings along with the higher price re-energized his career.

I call this concept Perceived Worth. It is something we all do when shopping. We look at an item and determine its Perceived Worth (PW). Then we look at the price. If the price equals the PW and we’re in the market to buy it, we place it in the cart. If it is too high or too low, we hesitate. We won’t make the purchase until we can justify the price discrepancy.

If we don’t need the product, our PW for that item is zero, and we move on, but we’ll still play the Pricing Game to see if what we would expect to pay matches the price.

I NEED YOUR HELP

I tell you this because I would like your help on the PW of a service I have been asked to perform.

You may recall a couple weeks ago I gave you five Self-Diagnosis Tools to help you take a critical look at your business. Those tools were:

I was asked what it would cost to hire me to come to a business for three days to perform those five diagnostics.

I would like to know what you think the Perceived Worth would be to have someone like me do a complete diagnostic evaluation of your business using those five criteria.

I would visit your business for three days. I would need access to your financials (Balance Sheet and Profit & Loss plus your Average Inventory at Cost). I would need to see what Advertising you have done (and any contracts you’ve signed for advertising). And I would need a couple hours of your time over the three days to answer questions here and there.

At the end I would write up an evaluation showing where you were doing well, where you needed attention, and recommendations for what to work on next, including a priority of where to put your resources first.

Two Questions:

  • What would you EXPECT to pay for such a service?
  • What would you be WILLING to pay for such a service?

I am curious to see your responses. You may send them to me via email or PM, leave a comment on this blog, or comment on Twitter, LinkedIn, or Facebook.

-Phil Wrzesinski
www.PhilsForum.com

PS Even if you don’t own a business I am curious to see your response. I am trying to gauge whether there is a viable market for this service or not. I’d love to know what people perceive such a service to be worth. There are no wrong answers.

Self-Diagnosis Tool #5 – Marketing & Advertising

My favorite class segment in the Jackson Retail Success Academy was always the Marketing and Advertising Segment. One portion of that segment was dedicated to Media, Myths, and Money. We would discuss all the various forms of media and how/when to use them properly. We also discussed several myths about advertising. One of the biggest myths was this …

Advertising will fix your business.

No it won’t.

If your customer service sucks, advertising will only draw in more people to find that out and tell their friends to beware.

If your product selection sucks, advertising will only find you more disappointed and empty-handed customers.

If your market isn’t big enough to support your business, advertising will only drain your coffers faster, and hasten your demise.

That is why, of all the Diagnosis Tools, this one is last.

Abandoned Boat on the Pond by the House

Think of your business like a boat. Your Core Values are the hull and body of the boat. Your Market Potential is the size of the body of water. Customer Service is the driver of the boat. Inventory is the engine/oars. Advertising is the launching of the boat. Would you launch if you knew you had a leak, didn’t have a driver, or had an engine not working? Of course not.

You need to make sure your boat is rock solid and ready to go before you launch. (Check out Tool #1 Core Values, Tool #2 Market Potential, Tool #3 Customer Service, and Tool #4 Inventory Management if you think your boat has even the tiniest of leaks.)

Advertising will not fix your business, it will only speed up what was going to happen anyway. If your boat is leaking, advertising will just sink you faster.

DEFINE THE TERMS

First, let’s understand the difference between “Marketing” and “Advertising”. Marketing is everything you do to attract customers to your store. Advertising is a subset of Marketing. It is the paid marketing you do through a form of media.

MARKETING

Marketing includes your building, your signage, your front door, the “Open” sign on your building, the events, activities, and classes you hold inside and outside your building, the networking you do by joining clubs and being involved in your community, the free publicity your garner, etc.

One of the first steps in this self-diagnosis is to list all of the ways outside of Advertising that you are Marketing your store. For some ideas of different things you can do, check out the FREE eBook Main Street Marketing on a Shoestring Budget.

You should have a healthy list of ways you are marketing your business outside the realm of traditional advertising. Fortunately most of these ways cost more time than money. If you don’t have enough customers—the whole reason you’re marketing your business—then you should have the time.

Once you have that list, see which Core Values are evident in each activity. All of your Marketing efforts must be aligned with your Core Values to be most effective. If there is anything you are doing that doesn’t speak to your values, change it or drop it for something else.

ADVERTISING

The next thing to do is to look at your paid advertising through the same lens as your other Marketing efforts. Pull out all of the ads you ran last year. Look closely at the message you sent. Ask yourself these six questions …

  • Does it look or sound like an ad? Chances are good that it does. Did you know our brains are hard-wired to ignore advertising? Maybe you should create something that doesn’t look or sound like an ad to keep from being ignored.
  • Does it tell a story? Stories are more interesting, get people to pay attention, and are more memorable than facts and figures. Your ad needs to tell a story if you want it to work best.
  • Does it make only one point? The person seeing or hearing your ad will only remember one point at best, so only give her only one point to remember.
  • Does it speak to the heart? Emotions always trump logic. Always. What emotion does your ad invoke?
  • Does it speak to your tribe? Does it align with your Core Values? If you want to attract better customers, speak more directly to those people who share your values and ignore everyone else.
  • Does it make your customer the star? Ads about you will be ignored. Ads about your customer and what you can do to help her will gain her attention.

The message is more important than the media. Here is another big myth in Advertising …

You must reach the right people.

Nope, nope, nope, nope, nope. You can reach all the right people but if you don’t say the right thing, all is for naught. Also, everyone you reach is potentially the right person because even if they aren’t your customer, they know someone who is your customer.

It isn’t who you reach that matters. It is what you say to the people you reach.

Get the message right and everything else will follow.

(Note: to help you choose the right media for your business, go to the Advertising Media Reference Guide and check out your options.)

BUDGET

The last thing to check is your budget. How much should you spend on Marketing? Notice how I said Marketing, not Advertising? Part of your Marketing is your location. If you spend a lot in rent to be in a high-traffic area, you don’t have to advertise as much as the guy under the bridge on the wrong side of the tracks. The Cinnabon store at the airport doesn’t spend a penny on Advertising. He just bought a fan to blow that cinnamony goodness out into the terminal. That’s his Marketing Budget.

There are many formulas for calculating a budget. The one I like best came from Roy H. Williams, aka The Wizard of Ads. He suggests you take 10-12% of your Gross Sales as your “Total Exposure” budget. Then multiply that by your Percent Markup (this is different than Profit Margin – the formula looks like this Percent Markup = (Gross Sales – COGS)/COGS) to adjust for your pricing and profit. Then subtract your rent from that number to find out what you should spend on Advertising.

For many businesses, however, that leaves a budget close to zero as rent is often 10-12% of your budget.

I will tell you to push that upper limit to 15% of Gross Sales, but only if you can find that money without taking it out of Payroll. If push comes to shove, Great Customer Service is always more important than Advertising. It is what drives your boat. You can still get across the lake from a bad launch if you have a strong rower and good oars.

-Phil Wrzesinski
www.PhilsForum.com

PS There you go … Five tools for evaluating your business to see where you need to improve as you sail into 2019. Take a critical look at all five in the porper order and you’ll find your silver bullet for success. If you don’t think you can be those critical eyes because you are too busy trying to drive the boat yourself, call me. I’ll come do an analysis of your boat using all the criteria in these five Tools and show you where the boat needs work.

Self-Diagnosis Tool #4 – Inventory Management

I used to like math. It lost me when it added the timber industry into the equation (logs and natural logs and all that calculus stuff). I got jaded because I could never figure out how to derive those trees into the answer the professor wanted.

I found, however, all that algebra I had to learn to get to calculus has actually been quite useful.

Today we’re going to put it to use to diagnose how well you are Managing your Inventory. Fortunately it is simple algebra, stuff your POS system might already do for you, and stuff you can easily program into an Excel spreadsheet once and not have to do it all the time.

Stick with me, because the numbers are fascinating.

First, here is the list of numbers we’re going to calculate:

  • Profit Margin
  • Turn Ratio
  • Gross Margin Return on Inventory (GMROI)
  • Accounts-Payable-to-Inventory Ratio
  • Current Ratio
  • Cash-to-Current Ratio

Here are the numbers we need to find from our reports to calculate the above numbers.

  • Gross Sales – This can be found on your year-end Profit & Loss Statement (also called an Income Statement)
  • Cost of Goods Sold (COGS) – This can be found on your year-end Profit & Loss Statement
  • Total Current Assets – This can be found on your year-end Balance Sheet
  • Total Current Liabilities – This can be found on your year-end Balance Sheet
  • Cash on Hand – This can be found on your year-end Balance Sheet
  • Accounts Payable – The money you owe to your vendors. This can be found on your year-end Balance Sheet
  • Current Inventory at Cost – This can be found on your year-end Balance Sheet
  • Average Inventory at Cost – You will likely have to calculate this unless your POS system has a report that will give you this number. Take your Current Inventory from each monthly Balance Sheet, add those twelve numbers together and divide by twelve.

Go get those numbers. I’ll wait.

PROFIT MARGIN

Profit Margin is your profit as a percentage of the retail price. The formula looks like this:

Profit Margin = (Gross Sales—COGS)/Gross Sales

Do this math and your results will likely be between 45% and 55%. That is a typical range for an indie retailer.

Obviously the higher the number, the better. If you are at or above the higher end of this range, good for you! There might be some room to push that margin a little higher, but for the most part, that area of your business is in good shape.

If your number is at the lower end of that range—and your rent/mortgage costs for your building are at 10% or higher of your Gross Sales—then we need to seriously look at how to raise that Profit Margin. Otherwise you won’t have enough money to properly pay for things like Payroll and Marketing.

I developed a simple, intuitive, easy way for any retailer to be able to raise their prices in the right way—one that doesn’t kill sales, but actually maximizes them. Most stores who adopt this pricing strategy see both increased Profit Margin and increased unit sales at the same time. Download the FREE Pricing for Profit eBook and see where and how to raise those margins.

TURN RATIO

Turn Ratio is simply a number that tells you how often you turn over your entire inventory in a calendar year. To do this calculation, you only need two numbers. The formula looks like this:

Turn Ratio = COGS/Average Inventory at Cost

The range for this number varies quite widely from 2.0 to 8.0. If you are a seasonal business such as a toy store, a garden center, or a gift shop in a summer tourist town, your number is often quite lower (2.0 to 5.0). If you are a store without a true season such as a pet store or baby goods store, your number will likely be higher (3.5 to 6.0). If you are a commodities store (i.e. grocery) your number will be much higher (5.0 to 8.0).

This is a tricky number to use by itself for diagnosing your business health. For instance, just being at the high end doesn’t necessarily mean you’re doing well. You might be losing potential sales because your inventory is too light. One misplaced order or one vendor who is out-of-stock could cripple your next month’s sales. Being at the lower end of your range isn’t necessarily bad, either, if you are able to get favorable terms from your vendors.

Often we’ll look at this number in conjunction with another number. For instance, if your Profit Margin is low, you can offset that by turning over your inventory faster (make it up with volume).

GROSS MARGIN RETURN ON INVENTORY

One number often used in conjunction with Turn Ratio is GMROI. GMROI tells you how much money you made for each dollar you invested in inventory. The formula is:

GMROI = (Gross Sales x Profit Margin)/Average Inventory at Cost

A typical indie retailer is likely going to have a GMROI between 200% and 400% meaning for every dollar you invested in inventory, you made $2 to $4 in return.

One reason we look at this in conjunction with Turn Ratio is because of Profit Margin. If your Profit Margin is really high, that lowers your Turn Ratio, but increases your GMROI. So if GMROI and Profit Margin are healthy, we know your Inventory is probably okay, even if your Turn Ratio is a little low. But if GMROI and Turn Ratio are both low, something needs to change.

There are only three ways to affect GMROI:

  • Increase Gross Sales (without decreasing prices – you might want to revisit Self-Diagnosis Tool #3 Customer Service)
  • Increase Profit Margin (see above)
  • Decrease Average Inventory at Cost (see “Dead Weight” below)

ACCOUNTS-PAYABLE-TO-INVENTORY RATIO

(Also called “Payables-to-Inventory Ratio”)

This is an interesting number to throw into the mix because it tells you how much of your inventory is already paid for, and how much is being financed by your vendors. The formula looks like this:

AP-to-Inventory Ratio = Accounts Payable/Current Inventory

A typical indie retailer will likely have an AP-to-Inventory Ratio between 20-35%. The higher this number, the more favorable the terms you are getting from your vendors. Being at the lower end of this ratio means either you have unfavorable terms (or no terms at all—common in certain food service industries) or too much dead weight in your inventory. If your vendors are all offering Net 30 or better terms and your Ratio is low, then it is definitely dead weight in your inventory.

One interesting phenomenon this number helps point out is when terms are incredibly favorable. For instance, some of my vendors would offer me December Dating. I could stock up heavily in January and not pay until December 1st. The upside was getting my large store stocked quickly and thoroughly. The downside is that my Average Inventory at Cost would be extremely high, putting me at the lower end of the range for both Turn Ratio and GMROI. But my AP-to-Inventory Ratio would be outstanding!

(Note: if your industry does not offer terms, you need a higher Profit Margin and Turn Ratio to offset this.)

CURRENT RATIO

This number comes straight off your Balance Sheet. The Ratio shows whether you have enough Current Assets to pay off all your Current Liabilities. The formula looks like this:

Current Ratio = Current Assets/Current Liabilities

Depending on when you do this calculation, your number will vary. If you are a 4th Quarter store and you run this number on January 1st, you’ll likely have a Current Ratio in the 2.5 to 3.5 range. other times of year it might be down around 1.5.

Most banks use that 1.5 as the bellweather mark. You need to be there or higher to be considered healthy.  Anything below 1.5 is too low because even the banks realize you won’t be able to liquidate everything in a pinch.

This number by itself is only part of the Inventory Management analysis.

(Note: if your Current Ratio is too low, you can look at a couple options to make it better. First, raise your prices and sell more goods to pay off those Liabilities. Your Current Assets include your inventory at cost, not at retail. Second, look into a long-term loan to pay off some of those Current Liabilities.)

CASH-TO-CURRENT LIABILITIES RATIO

Your Current Assets include two numbers—Cash and Inventory. This Ratio is similar to the previous one, but only looks at your Cash in relation to Current Liabilities. The formula looks like this:

Cash-to-Current Liabilities Ratio = Cash/Current Liabilities

Again, this number varies widely depending on time of year. If you just finished a successful Christmas season and are loaded with cash, your Ratio might in the 70-80% range. If you ran that same number on December 1st when your Inventory and Current Liabilities were at their highest, that number could be 10-20%.

Think of those two ranges as goals to shoot for depending on the time of year and your season. (Note: if you are in an industry without a “season” you’ll likely always be closer to the 20% mark and that’s okay.)

The key to this number is to look at it in conjunction with the Current Ratio. If your Current Ratio is good but your Cash-to-Current isn’t, then you have too much inventory. If your Current Ratio is bad, but your Cash-to-Current is good, then you don’t have enough inventory.

If both are bad, we have some serious work to do.

IDENTIFY THE “DEAD WEIGHT” AND THE “MUST-HAVES”

All of that math is done to help you understand whether your inventory is in balance or not. Retail is a balancing game. If you have too much inventory, you don’t have enough cash. Without cash you cannot pay your people to sell your excessive inventory. If you have too much cash, you might not have enough inventory to make the sales you need to continue your growth and keep your customers happy.

Most inventory problems happen when you are unable to manage the two ends of the inventory spectrum—the fastest and slowest moving products.

DEAD WEIGHT

Your “dead weight” in your inventory is the stuff that isn’t moving. You’ve paid for it, but it isn’t making you any money. It just sits on the shelf and sucks the life out of you. You have to find it and turn it into cash as quickly as possible.

Think of it this way …

If you spend $60 on a product and put it on your shelf, that space on your shelf has now cost you $60. That shelf space needs to make you money. Right now, however, it is costing you. The hope is that you’ll sell the product for $120 and make $60 for that shelf space, but the longer it sits, the more you stay in the red. Once you realize that item isn’t going to sell, mark it down to $60 and get back to even. Then find something else to put in its place that will sell and make you money.

You need a system for identifying these slow movers. I used the following criteria:

  • Didn’t sell through by Christmas
  • Hasn’t sold in 3 Months
  • Damaged box
  • Old style packaging
  • Don’t like it
  • Have a better version coming

That was the stuff I needed to move out. Every year in May and June my team and I would pull all these items off the shelf, mark them half-price, and then have a HUGE sale on the third Thursday in July. Turn it into cash.

Whatever system you choose to use, make sure you have one that identifies the dead weight and turns it into cash quickly.

MUST-HAVES

The other end of the inventory spectrum is the “must-haves”, the stuff you never want to be without.

  • If customers come in asking for the product by name, it is a must-have.
  • If your store is known for selling this item, it is a must-have.
  • If you sell more than one a week, it is a must-have.
  • If the item is something you always sell and the customer needs it right now, as in they’ll drive all over town until they have it, it is a must-have.

When cash flow is poor, this is where the inventory dollars need to go. Don’t worry about profit margin. Worry about keeping your core customers happy. If you are constantly saying “No, we don’t have it,” your customers will eventually stop asking.

There are several models for what percentage of your inventory should be changing to new product each year (or season). Rather than worry about percentages, let’s just put this into priorities. When you are looking to place orders, your priorities should be:

  1. Must-Haves
  2. New Products
  3. Everything Else

The vast majority of your customers are going to ask for two things:

  • Do you have a specific item?
  • What’s new?

Inventory Management is about making sure you have a positive answer for both of those questions.

DOS AND DON’TS

If you’ve made it this far, I’m going to leave you with some simple tips that will help you improve your cash flow.

Here is my Do List:

  • Do measure those numbers above. Together they tell a story. What gets measured and managed improves.
  • Do ask for Extended Terms from your vendors (but be sure to reward those vendors by paying those bills on time).
  • Do buy less but buy more often. Smaller orders placed more frequently will always improve cash flow. If a vendor has great terms at a trade show, see if they’ll take your huge order and split it into two or three ship dates to spread out your payments.

Here is my Don’t List:

  • Don’t buy anything you don’t want. Never pad an order with something you don’t fully believe in selling. It never works out well.
  • Don’t run out of the Must-Haves.
  • Don’t out-buy your terms. If it is Net 30, try to buy 30 days worth of product (not always possible, but incredibly effective when you do it right).

Whew! We’re at the end of this Self-Diagnosis Tool. Realistically, however, this is just the tip of the iceberg for Inventory Management. There are some more details in the FREE eBook Inventory Management for 4th Quarter Stores. (I also have one specifically for the Pet Store Industry.) I also recommend you look at Merchandising Made Easy. sometimes it is your displays that are turning good merchandise into dead weight.

-Phil Wrzesinski
www.PhilsForum.com

PS If the math is driving you crazy, find a high school kid getting all A’s in Calculus. Show him this. He’ll find the math to be incredibly easy and can set up your Excel Spreadsheet so that all you have to do is plug in the numbers.

PPS Sell off your seasonal merchandise. Don’t carry it over. Without going into all the details, you’re better off marking down your seasonal merchandise at the end of the season and turning it into cash than carrying it over into next year. The math says it is the right thing to do.

PPPS One last number I might look at is Shrinkage—the amount of inventory that disappears, unaccounted for. If you’re using a POS system, your shrinkage is the discrepancy between what your computer thinks you should have in inventory and what your physical inventory actually shows. Read those FREE eBooks on Inventory Management for more info on what causes shrinkage and how to control it.

Go here for Self-Diagnosis Tool #5 – Marketing & Advertising

Self-Diagnosis Tool #3 – Customer Service

My favorite Smile Story was actually told to me by a customer, not my staff. Dawn had three grandchildren coming to visit her for five days. She wanted to have a different gift to give each child each day they were there. Fifteen gifts in all. Lakisha said, “I’m on it,” and led Dawn all around the store.

A few weeks later Dawn called me. “Phil, I have to tell you that gal of yours was fabulous. My grandkids loved the gifts. My grandson, he’s seven, turned to me and said, ‘Grandma, these gifts are better than if we had picked them out ourselves!’ Thank you, thank you, thank you! And thank Lakisha, too!”

That’s the phone call every store owner and manager dreams of getting.

If you’re regularly getting that call, you’re doing the right things with your staff and with your customer service. Go back to Tool #1 Core Values and Tool #2 Market Potential or wait until tomorrow for Tool #4 Cash Flow.

If you’re not getting that call at all and would be totally shocked if you ever did get a call like that, read on.

NOT AS UNMEASURABLE AS YOU THINK

Many people say Great Customer Service is not quantifiable, therefore it cannot be measured. I disagree. There are numbers you can run to see whether you and your sales staff are doing right by your customers.

I showed you two ways to measure your Customer Service in the post The Right Measuring Cups – Repeat & Referral Business and Units per Transaction. They are good starting points even though neither of those is completely perfect.

Sometimes your Referral Business is because of a product you sell that is hard to find. Sometimes it is because of some Over-the-Top Design element in your store your current customers tell their friends they have to see. I knew a jeweler who had a $30,000 diamond ring, way out of the league for that sleepy summer tourist town. She had tons of traffic right up until the day that ring finally sold. Once the ring was gone, her Referral Business dried up.

Sometimes your UPT grew because the hot item that year had several accessories or attachments. The following year the hot item had all those things included so your UPT fell.

I would still start there and see what you learn.

OTHER PLACES TO LOOK

If I were to come in to your store to do this diagnosis, here are some places I would look to get a handle on your levels of customer service.

  • Team Member Handbook – Do you have one? What does it cover?
  • Training Videos – Do you have them? If not, how do you handle new employee training?
  • Continued Training – How often does the staff meet for training purposes? What are you covering? How do you measure results?
  • Your Store Policies – Are they Customer-Centric or Business-Centric? Who do they protect?
  • New Hire Process – How do you find new employees? I want to see your Help Wanted Ads, Job Descriptions, and Interview Questions

If you don’t have a Handbook, you should make one. Write out all your policies. Write out all your philosophies. Write out how you will measure their employment. Have an HR professional and an HR lawyer proof it to make sure it is legal. Then give a copy to everyone and use it as your guide. It puts everyone on the same page and helps eliminate confusion from different team members saying, “That’s not how I was taught to do it.”

Training Videos are another way to make your staff training consistent and thorough. They don’t have to be fancy or even perfect. You can shoot them fast and simple on your phone, post them privately to YouTube, and provide the links to your new hires. If you don’t offer Training Videos, how else can you ensure that training is consistent and thorough? One way is to have the same person do all the trainings. Another is to include a checklist of everything to be covered. No matter which method you use, there also has to be a final check. One person who will verify what the new hire has learned and send him or her back for further training if necessary.

Continued Training is a must. Back in third grade I may have learned how to golf, but I’m still a few million hit golf balls shy of going pro.

“An amateur practices until he can do it right. A professional practices until he cannot do it wrong.” (source unknown)

One way we measured the results of our continued staff training was through Smile Stories. Every staff meeting began with Smile Stories where my team would share the different ways they made customers smile. Those stories not only reinforced the culture and the goal of the store – “We’re here to make you smile!” – but they also encouraged the team to actively seek out opportunities to make customers smile.

Store policies should be Customer-Centric, meaning they are in place to protect and help the customer. Liberal return policies, easy layaway plans, and helpful services that make less work and less thinking for the customer are the hallmarks of Customer-Centric policies. If you limit what forms of payment or how much someone has to spend to use a credit card, you’re telling the customer that your nickels and dimes are more important than them. Once your product is no longer exclusive or hard-to-find, they will leave for someone who treats them better.

If you have aligned your business with your Core Values in a market with a lot of Potential, and are taking care of your customers the right way, you should see your Share of the market steadily climbing upward. Rarely does a company get through all three of these tools without recognizing areas that need shoring up. Start working on those.

Tomorrow we do math. (Just giving you fair warning.)

-Phil Wrzesinski
www.PhilsForum.com

PS If Cash is King, why does it fall all the way down to fourth on the Self-Diagnosis priority list? Because all the cash in the world won’t help you in the long run if your business model is flawed. Those first three priorities are all about your business Goals and Strategies. Buying and selling product is simply a means to the end. Notice how I didn’t say, “We’re here to sell you toys!”? Our goal was much bigger than that. Sometimes your Cash Flow problem is because you aren’t attracting the right customers (Core Values), don’t have enough customers (Market Potential), or are driving customers away (Customer Service). Make sense now? Get those three areas right first. Then you’ll know if your Cash Flow problems are truly Inventory Management problems.

Go here for Self-Diagnostic Tool #4 – Inventory Management

Self-Diagnosis Tool #2 – Market Potential

When my son was in Cub Scouts, his Den Master was the manager of one of our local Kmarts. He gave me some amazing insights into the world of big-box retail including numbers of what the big-box stores in Jackson were doing in sales both overall and for toys.

It was an eye-opener, especially when I learned we were doing more in toy sales than both Kmarts in town combined.

Knowledge like that is game-changing. Knowing where you stand in your market, and what is happening to your market is critical to your success. Heck, just knowing if your market is even viable is quite important.

If you were a start-up looking to get into business, I would actually put this Tool ahead of Tool #1 – Core Values. Let’s go find a viable market before we even begin with the other stuff. As it is, if you’ve made sure your business lines up with your Core Values, the next step is to look at what is happening with your market. How big is the pie and how big is your slice of it?

CALCULATING MARKET POTENTIAL

The best way to find the potential amount of sales in your area for your industry is to follow this step-by-step formula.

  1. Find the total dollars spent in your industry in the US. Usually a quick Google search can find you this number. For instance, in 2015 the Toy Industry was $19.1 billion.
  2. Divide that number by the US Population. In 2015 there were 322 million people in the US. $19.1 billion divided by 322 million equals $59.32/person
  3. Multiply that number times the population in what you consider your Trade Area. For instance, we considered Jackson County our Trade Area. Population 158,000 people times $59.32 equals $9.4 million Market Potential

For years I did the calculations and stopped right there. It is a close approximation. But it isn’t accurate. I needed to add two more calculations to get a true picture.

ADJUST FOR HOUSEHOLD INCOME

We didn’t sell groceries. We didn’t sell commodities. We didn’t sell basics like clothing. I needed to adjust the Market Potential based on the local economy. The number I used was Average Household Income (AHI). Find out the AHI for your Trade Area and compare it to the national average.

Back in 2015 the national average was $55,775. Jackson County was $43,170 or 22.6% less. (The city was much lower, but I used the county because we considered the entire county our trade area.)

That adjusted our Market Potential down to $7.3 million.

If you sell luxury items, this is a critical step for understanding your Market Potential.

ADJUST FOR INDUSTRY DEMOGRAPHICS

You may also need to adjust your numbers based on a demographic specific to your industry. Since we started with total US sales and total US population to get a sales/person amount, you might get a number that is skewed for your area.

For instance, if you sell boats, your market is much bigger in Michigan, with the Great Lakes, or Minnesota, with ten thousand lakes, than it might be in Nebraska or New Mexico. You might look into average boat ownership per population and compare your Trade Area to the national average.

If you sell books, you might want to look at the educational level in your Trade Area compared to the national average.

If you sell toys, you might want to look at the youth population in your Trade Area.

This number may be harder to find. I was able to cross-reference the US Census to find that Jackson County had 6% fewer children than the national average. That dropped our Market Potential down to $6.8 million. 

Notice how those two adjustments really changed our Market Potential?

CALCULATE YOUR SHARE OF THE MARKET

Once you know your Market Potential, it is easy to find your Market Share. Simply divide your sales by the Market Potential. In 2015 our sales were 15.7% of the Market Potential.

I used a spread sheet for all of these numbers. I put in the formulas for calculating percentage differences. All I had to do each year was find the raw numbers and plug them in.

The power of doing this math is two-fold.

Not only do you know exactly where you stand in your market at any given time, you also know how your market is changing.

WHERE YOU STAND

Walmart has 25% of the grocery market and around 10% of the entire retail market in America. As sobering as that may sound, at one point back in the 1950’s Sears had over 50% of the appliance market. That’s a mind-blowing number—especially when you consider where Sears is today.

The real Gold Standard for any retailer is to achieve 30% of your Market. It will likely take a perfect storm to get any higher than that. Back in the early 1980’s before we got a second Meijer, a Target, a Toys R Us, and a Walmart, we were pretty close to that mark. For most independent retailers the more likely expected number is 3-5%. Our 15.7% was a combination of store size and longevity in the market, along with all the other things we were trying to do right.

The interesting point here, though, is not in how many people shop with you but in how many people don’t shop with you. Almost 85% of our Market didn’t shop with us. That’s a lot of potential customers. If I wanted to grow my business by 10%, I only needed to convince another 1.57% of the 158,000 people in the county (2500 people) to walk through our doors. If you only had 5% of your Market, you would only need to convince another 0.5% of those people to shop with you to achieve 10% growth.

Trying to convince 2500 people is far easier and much different than trying to convince 158,000 people. You only need to find 2500 people who don’t yet know you, but share your Values.

CHANGING MARKET

The other critical piece of information you can gain is by doing this calculation year after year and watching how the numbers change. Is your Market Potential growing or shrinking? Is your share of the Market growing or shrinking?

We watched two critical numbers during the Great Recession. One was Average Household Income. One was Youth Population.

From 2007 to 2016 our Youth Population for Jackson County dropped over 40%. I drilled down into those numbers and saw even worse news. While national birth rates were dropping during that time, our birth rates were even lower than the national average except for one glaring segment—teen births. The city’s birth rates, thanks to this segment, were similar to national averages while county birth rates were well below average.

Average Household Income didn’t fare much better. At one point the AHI in the city limits was hovering around the poverty line at $27,000. Our closest customers had no money for toys. The outer areas of the county where the money was had no children. Not a good recipe.

Add into that mix, we watched the Sales per Person of toys in the US also decline from a peak of $75.17/person in 2004 to only $59.32 in 2015. People were spending their money on electronics like smart phones, tablets, and computers.

Over the years our Market Share didn’t change a whole lot, but our Market Potential did. In 2007 it was $11.9 million and we had 16.5% of it. In 2015 it was down to $6.8 million and we still had 15.7% of it (even though Amazon had become a major player in toys around 2011-2012). 

COMPETITION

The other barometer Market Potential and Market Share gives you is your own business’s health compared to the competition. While top line sales are nice, the true question you need to ask is whether your Market Share is growing or shrinking. You could be up 10% in top line sales, but if your market grew by 15%, someone else is eating your lunch.

If you have done your spread sheet and have several years of data to analyze, plot into the data when major competitors came to town or made major changes to their businesses. See how that affected your numbers. For instance, I can see that when Walmart opened in Jackson in 2005 our share dipped from 16.5% down to 15.9%. I can also see how we jumped back up to 16.4% the following year after the novelty of the new store wore off. I can also see how we dipped down to 16.1% in 2011 and 15.8% in 2012 when Amazon became a serious player in the toy market.

All of these numbers tell a story far more compelling than whether your store’s sales are growing or shrinking. They help you understand your business on a far greater and more important level.

If your Market Potential is growing, there is money to be made, but be cautious. The big guys are tracking that number, too, and might be looking to expand into your market. If your Market Potential is shrinking, you might need to look at moving, changing, or finding an exit strategy.

If your Market Share is growing, you’re doing things right. If your Market Share is shrinking, you have work to do.

That’s why you should make this your second priority to diagnose and understand.

-Phil Wrzesinski
www.PhilsForum.com

PS Where does that 3-5% number come from? This comes from looking at average store sales for several different industries including toys, pet supplies, shoes, jewelry, photographic supplies, and flooring. While there are many outliers and the range is quite broad from large to small, the average store for most of these industries has enough sales to grab about 3-5% of their market. I use it purely as a benchmark for start-ups to be realistic about their business prospects in the first few years. Getting to 3% within two to three years is a realistic goal. If you’re in a town with a strong Shop Local movement that might be easier, but you might also have more indie competition. If there are no indie competitors, you have an unusually large store, and you’ve been the fixture in town setting the bar of expectation for over sixty years, your numbers should be much higher.

The reality, however, is that the number itself doesn’t matter nearly as much as what is happening with that number. Is it going up or down? If it is going down you need to find out why.

Go here for Self-Diagnostic Tool #3 Customer Service

 

Self-Diagnosis Tool #1 – Core Values

I told you yesterday what I would do if you hired me to look at your business. Thirty questions inside of five topics to figure out what bullets you need to fire to get your business to the next level. Since one of my Core Values is Helping Others, I’m going to use the next five posts going over those questions more in detail so that you can try to help yourself. (Note: you can skip this post and just hire me to do this for you. Or you can read on. Your call …)

KNOW YOUR CORE VALUES

A business not aligned with the owner’s Core Values will not last long. You’ll constantly be fighting against yourself. If you haven’t done so already, take a few moments to read the eBook Understanding Your Brand (free download). Then download the Branding Worksheets. Those worksheets are designed to help you uncover your Core Values.

Toy House Character Diamond and Core Values
The Toy House Character Diamond – our Core Values that drive our business.

Mine are Having Fun, Helpful, Educational, and Nostalgic.

Once you know your Core Values, take a look at your store’s actions. Do they align? Actions speak louder than words.

SHOW YOUR CORE VALUES

You can figure this out two ways. Either first make a list of your Core Values then below each value list all the ways your business shows that value. Or make a list of everything your store does and then group those actions by similarity. That similarity will almost always align with one of your values.

(Note: this is page two and three of the Branding Worksheets.)

For instance:

  • Having Fun: Toy demos throughout the store, Monthly and weekly events including story times, game nights, and themed parties, Always willing to open a package and see what is inside
  • Helpful: Free Gift Wrapping, Layaway, UPS Shipping, Car Seat Installation, Carry-out and Delivery Service, Assembly, Gift Suggestions, Gift Registry, Bike Repair …
  • Educational: Free classes on buying baby products, Educational brochures on buying toys, Articles and links on our website, Posting of articles to social media, Email Newsletter, Educational signage throughout store, Belief that all toys teach (and knowledge about what each toy teaches)
  • Nostalgic: The Birthday Bell, New Baby, Birthday, and Christmas presents, A permanent history display, Classic toys like Lincoln Logs, LEGO, Barbie, Hot Wheels, and Slinky

You can see from that list how I incorporated all four Core Values into the day-to-day business operations.

ADD VALUE WHERE IT ISN’T

If there is anything on your list of actions that doesn’t fit into one of your values, how can you change that?

For instance, when I first learned about making my own values more apparent, I changed two things right away—my phone message and the bathrooms. Our phone message was very business-like and boring so I injected a little humor into it. Our bathrooms were dark, dingy, and plain. We added new light fixtures, painted the walls, and then posted fun and informational signs on the walls. Neither of those cost much money, but they turned negatives into positives.

We also bumped up those values where we could. Not everything on the above list existed before I decided to make those values more apparent. The history display, the educational signage, and an extra emphasis on toy demonstration stations all came from trying to make our Core Values more apparent and obvious.

ADD IT TO THE BACK END, TOO

I also attempted to make the back-end of the business more in alignment. I used my core Values in the hiring process to find people who shared those values. I made our trainings more fun, helpful, and educational. I encouraged continuing education by helping pay for my staff to take classes and attend workshops on their own (even if it had nothing to do with selling—learning is learning and continued learning is a mindset).

I also used my Core Values in my advertising message. I learned quickly that ads filled with Nostalgia spoke to the heart much more deeply than anything else. I made sure every ad spoke clearly to one of my values.

One truth about human nature is we prefer to do business with people and businesses we like. We like people and businesses who share our values. Look at your strongest fans and followers. They share your values. They are part of your tribe. They figured out the values you’ve only so far been showing subconsciously. Imagine what will happen when you start showing those values consciously?

Here’s one more benefit …

When your business is perfectly aligned with your Core Values it will never feel like work!

I can honestly say there was never a day in 24 years where I woke up and said, “I’d rather be anywhere than at Toy House.” There were days I didn’t want to wake up, but not to avoid going to the store.

Aligning your business with your values helps you enjoy your business even more. It puts you in a better mood which puts your staff in a better mood, which puts your customers in a better mood. It also helps you attract the kind of customers you prefer—people who share your values. It also makes your decision-making much easier. Does what you’re about to do align with your values? Then do it. If not, then don’t do it.

Before you look at anything else, first make sure your business is aligned with your values. Then make sure those values are apparent in everything you do. Often that will solve some of the problems you are facing. More importantly, it won’t get in the way or hold you back from the other problems you’re trying to solve.

-Phil Wrzesinski
www.PhilsForum.com

PS A big shout-out to Roy H. Williams of Wizard Academy and David Freeman from Beyond Structure who were instrumental in helping me uncover my own Core Values and learn how to harness their power. Roy helped me find Having Fun and Helping Others. David helped me find Education and Nostalgia. Yeah, those values were there all along, but uncovering them, dusting them off, and being them more openly and consciously has helped me in more ways than I could have imagined. It will help you, too. If you need help uncovering your values, if you’ve done the worksheets and aren’t clear on your answers, shoot me an email.

PPS What if you are the manager, not the owner? I get this question a lot. If the owner is an absentee owner, the business will likely take on more of the values of the manager. But be forewarned. If those values aren’t in alignment with the owner, the manager will eventually get fired because the business isn’t “going in the right direction.” That’s why it imperative to hire managers who share your values whether you are there or not. Every member of my team had a healthy dose of Fun, Helpful, Educational, and Nostalgic bones in them.

Go here for Self-Diagnostic Tool #2 – Market Potential

The Thirty Questions to Find Your “Silver Bullet”

I got suckered in once. Long before the phrase “fake news” came into existence, back in the days when Norton and MacAfee were the only names in anti-virus protection, my computer started slowing down.

Then up popped an ad for a free diagnostic test of my computer, guaranteed to clean it up and take it to speeds the factory settings never could. I downloaded it and immediately all these warnings came flashing on the screen telling me I was infected and needed to download this fancy, official-sounding fix right away before I lost critical data.

Yeah, you can probably guess the rest.

I took the computer to a local shop who cleaned several viruses and Trojans off the hard drive and got me back to my normal, plodding, limited-by-my-service-provider-not-my-computer speeds.

We’re all looking for that quick-fix, aren’t we? That guaranteed, take-you-to-the-next-level tool that will transform your business? That’s why scams like that computer virus one worked so well. We all keep thinking there is that one silver bullet we’re missing that will make all our ills go away.

Here is where I’m supposed to tell you there isn’t a silver bullet. Eat less and exercise more, right?

The truth is there is a silver bullet. And a bronze one. And a gold one. And a titanium-plated, platinum-infused, diamond-encrusted, gold-leafed, emerald-cut, space-aged aluminum, time-released-capsule one.

The problem is that every business needs a different bullet. In retail there is no one-size-fits-all bullet.

You might be struggling with cash flow while your neighbor down the street needs help with a better marketing message. The store on the next block has a customer service problem, while the store across the street is in a market with too many competitors.

What retailers really need is a good diagnostic tool to help you identify the true problem(s). Unfortunately your business isn’t like an automobile where you can plug it in and see what’s wrong.

You can hire a consultant, but unless they have a background in understanding independent retail, they might not be able to diagnose your true problem either. You can try to do it yourself (I gave you a few Measuring Cups to use in an earlier post), but it is often hard to read the label from inside the bottle.

Since I am the DIY guy of retail, though, I want to show you the approach I would take to diagnose where your business needs work so that maybe you can find the demon holding you back. If you were to hire me, I would look at your business in this order …

  1. Core Values – Is your business aligned with your Values? If not, how and where can we change things?
  2. Market Potential – Where do you stand in your market? Who are your competitors? What is your share of the market? Is it shrinking or growing? What local factors influence your market presence?
  3. Customer Service – How much of your business is Repeat and Referral? How much training do your front line people have? What skills do they have? How well do they greet, meet, and interact with customers? How are their “closing” skills? What services do you provide? Do your services lean customer-friendly or business-friendly? Do you meet and exceed expectations?
  4. Inventory Management – How is your cash flow? What is your Profit Margin, Turn Ratio, Accounts-Payable-to-Inventory Ratio, Cash-to-Current Ratio, etc? What are the “must-haves” and how was your stock position on those items last year? Where is the fat that needs to be trimmed from the inventory? What systems do you use to keep from over-buying?
  5. Marketing & Advertising – What is your Marketing Message? Is it consistent across all platforms (including the in-store experience)? How can we make that message more powerful and effective? Where are you spending your marketing money? Are there cheaper, better alternatives for reaching the people you want to reach? Are there collaborations that make sense? Are you harnessing all the free publicity available to you?

Notice the order of things. Most businesses come to me saying they need help with their Marketing because they aren’t getting the traffic they want. Yet sometimes the problem is their business isn’t aligned with their values so they aren’t attracting the right types of customers. sometimes the problem is there aren’t enough customers in their market to sustain their business. Sometimes the problem is their service is so bad, those who do visit are telling friends to stay away.

Better Marketing won’t fix those other problems or help the business.

If you want to run your own diagnostics, there are several hyperlinks to articles and blogs related to the thirty questions posed above.

If you want to hire me to run your diagnostics, I’m going through that list in that order until we find the first problem.

There is no single silver bullet to fix any and all retailers, but there is a bullet to slay the specific demon holding you back. I encourage you to run your diagnostics on your own to see if you can isolate your problem. When you do find it, send me an email and I’ll help you brainstorm several solutions to solve your problem on your own or with help.

There is a bullet for you, but it’s buried in the haystack next to the needle.

-Phil Wrzesinski
www.PhilsForum.com

PS I hired a consultant once. He compared my Turn Ratio to Walmart’s and told me my problem was inventory control and that I needed to go to “just-in-time” inventory where I had at most a one-week supply of inventory on hand. My dad hired a consultant. He compared our prices to Kmart and Toys R Us and said our prices were too high and then pitched a total revamp of our sales floor into a circus theme (not sure what that had to do with prices). If you’re going to hire someone, make sure they have extensive experience working with indie retailers. Make sure they have a list like this one, too, that spells out what they’re going to evaluate.

PPS Sorry for the mixed metaphor at the end. It sounded good in my head.

How Your Core Values Influence Your Work

For a short period of time I was between bookkeepers. The job fell on my shoulders for a few months. While this was a godsend in one way because it helped me better understand the job and the skills necessary to do the job well, it also frustrated me because one of the most important tasks was filing papers. I hate filing papers.

I would have a small stack of papers, a nice, neat, organized set of file drawers, and folders already labeled and waiting, yet I couldn’t muster the energy to spend the ten or fifteen minutes to put those papers away.

Mock me all you want (those papers did) but it just wasn’t something I liked to do. My desk at Toy House was almost always a mess of piles.

That’s me attempting to clean my desk once again! (Yes, that’s my Core Values Character Diamond in the background)

I’m still that way. My keyboard is surrounded by piles of papers that just need to be put away. My mouse has the barest minimum of space to work. No one would look at my office here at home or at the store and accuse me of being a neat-freak.

Yet when I was out on the floor I was constantly straightening products on shelves, cleaning up messes, and rearranging merchandise to keep it organized and pleasing to the eye. I detested a messy store and worked long hours to keep it clean and neat.

Why the Jekyll and Hyde?

The office was for me. The sales floor was for my customers.

As you remember, one of my Core Values is Helping Others. Keeping a clean and organized office helps me. Keeping a clean and organized sales floor helps my customers. When you look at it through that prism, you can see why the former was so difficult and the latter was so easy.

This is just one of the many reasons why knowing your Core Values is so important. It helps you understand the decisions you make. It helps you understand why you put your priorities in a certain order.

As you’re evaluating the previous year and plotting your course for 2019, I encourage you to evaluate last year’s results through the prism of your Core Values. See just how much influence those values have on your everyday existence. You’ll be surprised to see how much of your pain was from when your business and your values were at odds and how much of your joy was when they were aligned.

When you begin to see it, you realize you have the power to harness your Values to bring you more joy.

I hired a bookkeeper to do the stuff that helps me and spent my time doing the stuff that helps others.

-Phil Wrzesinski
www.PhilsForum.com

PS Sometimes you have to do the painful stuff yourself. I wrote about how to muscle through that here. Sometimes you need to hire someone to do the things you don’t like to do, don’t want to do, or don’t have the talent to do. I wrote about how to find those people here.

PPS If you aren’t sure of your Core Values, here is a worksheet I use to help people identify them. You’ll know it is a true value of yours when you see it in your business, too.

When Do You Become an Expert?

Back in December I published my thousandth blog post. Each post takes about an hour and a half to compose on average, so I’ve dedicated about 1,500 hours to blogging. According to Malcom Gladwell’s “10,000-Hour Rule” in his book OUTLIERS I’m 15% of the way there to being an Expert blogger.

I spent twenty-three plus years working full time retail at the management level. Assuming 2500 hours/year (50/week), I have 58,750 hours of experience working retail. Believe it or not, but that still doesn’t necessarily make me an Expert on retail.

One of the reasons is that the 10,000-Hour Rule requires you to “practice the right way” for those 10,000 hours. Just having years of experience in retail doesn’t mean you’re any good at it or getting better at it—especially if you aren’t practicing it the right way.

It is the continual practice that Gladwell believes is the key. Continual practice, however, is severely lacking for most retail employees.

Just because you trained them back when you hired them does not turn your staff into rock stars.

Experience is only valuable if you are also Learning and Evaluating while Experiencing. 

Famed scientist Niels Bohr had his own take on how to become an Expert … “An expert is a person who has made all the mistakes that can be made in a very narrow field.”

That is awfully hard to do, so as John Luther said … “Learn from the mistakes of others. You can’t live long enough to make them all yourself.”

According to Bohr and Luther, you have to fail and learn from your failures (or at least learn from everyone else’s). 

Here is my own recipe for becoming an Expert:

  1. Learn
  2. Do
  3. Evaluate
  4. Repeat

Follow those steps over and over. Learn, Do, and Evaluate. The third step is the trickiest because it requires brutal honesty to really be able to Learn more. Yet it is also the most vital because because your future Learning requires proper Evaluation.

Sometimes that Evaluation leads you to the conclusion, “I need to Learn from someone else.”

That’s what happened to me in 1996 when I took over the hiring and training for our staff. I started reading all the books I could find on hiring. When those didn’t match my own evaluations, I wrote my own book.

It happened to me again in 2005 and led me to take classes on Advertising and Branding from Wizard Academy where I learned whole new tools for measuring my business, many of which I share in this blog.

It happened to me once more in 2012 when the American Specialty Toy Retailing Association asked me to write a book about the Financials of a typical toy store. I spoke with several accountants until I felt comfortable enough to translate accountant-speak into retail-speak.

It happened to me in 2013 after having already written three hundred blog posts and knowing I still needed to learn more, so I hired a writing coach to help me understand and write more clearly for my audience.

When do you become an Expert? I think the real answer is … When you’re smarter than most of the other people in your field.

How do you get smarter than most of the other people in your field? When you Learn, Do, Evaluate, and Repeat.

-Phil Wrzesinski
www.PhilsForum.com

PS The idea for today’s post came late last night. I was thinking how much I would rather write about “winners” this year than write about the mistakes others have made. Those posts are more fun. Those quotes, however, reminded me that learning from our own mistakes and the mistakes of others is our best path to becoming better ourselves. Hopefully I’ll still have plenty of winners to highlight this year. Please send me stories of the retailers and small businesses doing it right in your area. We can learn from them, too. Please forgive me if there are a lot of posts about businesses doing it wrong. My hope is to save you from being one of them.

PPS If you feel stuck in your Marketing & Advertising, Hiring & Training, Customer Service, or Inventory Management, let me know. If I can’t be the resource you need to get to the next level of Learning, I often know the right direction to point you to find that resource.

The Right Measuring Cups

When the recipe calls for 1 cup Vegetable Oil do you reach for a teaspoon? When it says 16 ounces Sour Cream do you grab a scale? Of course not. Sure, you can get close with those tools, but it won’t be as accurate nor as handy.

Yet we do that in retail all the time. We use the wrong tools to measure our business.

For instance, most businesses look at Sales Growth as a barometer of their business health. If sales went up, business is good. If sales went down, business is bad.

The problem with that tool is that it doesn’t take into account what happened in your local marketplace. If your sales went up 5% but your market grew by 10%, then your business is not on the right path. If your sales were down 2% but your market shrunk by 5%, you captured a larger share of your market.

You have to know how to calculate Market Share to truly know the health of your business.

RECIPE FOR MARKET SHARE

Market Share: your percentage of the Market Potential for your trade area. Calculate Market Potential by finding the Annual Sales for your entire industry, divide that by the population of the United States and multiply that answer times your own trade area population. Then adjust for income levels. The math looks like this …

  • Industry Sales = $20.2 billion
  • US Population = 325 million people
  • Your Trade Area = 150,000 people
  • US Average Household Income = $59,039
  • Your Area Household Income = $63,026 (6.75% higher than US average)

$20.2 billion / 325 million = $62.15/person

$62.15 x 150,000 = $9.3 million

$9.3 million x 1.0675 = $9.9 million Market Potential

(Note: that number can be adjusted again for one other factor dependent on your industry. For instance, if you’re in the toy industry you can adjust for the number of children in your area compared to the national average. If you’re in the boat industry, look for something along the lines of percentage of boat owners nationally and in your area.)

Figure out your percentage or share of that market and whether it is growing or shrinking. That will be a more accurate measurement than your top line sales.

CUSTOMER SERVICE MEASUREMENT

How do you measure something as abstract as Customer Service? One tool is Units Per Transaction (UPT). While several factors can influence this number including your merchandising skill of impulse items and whether the items you’re selling have more or less accessories than last year, the largest influence on this number is your sales force. Are they taking care of the customer properly? Are they completing the sale? Are they making the customer feel welcome, comfortable, and happy? Are they building trust?

The calculation for UPT is simple. Take the total units sold during the year and divide that by the number of transactions.

75,000 units sold / 22,000 transactions = 3.4 Units Per Transaction

If that number is going up, your team is doing their job.

Another measuring tool that is slightly harder to quantify, but equally effective in telling the true tale of your customer service is Repeat and Referral Business.

Repeat Business is a sign of Good Customer Service. Referral Business is a sign of WOW Customer Service. Your service was so good they had to bring their friends back with them. If you’re tracking transactions by name in your POS, you’ll know your Repeat Business. You can also ask when you enter someone new into your POS how they heard of you. If they say “from a friend” mark them as Referral.

The ideal business has a majority of their customers as Repeat and Referral. The raw number of Repeat and Referral Customers should hopefully be growing and should be a larger percentage of your traffic. The larger, the better.

MARKETING AND ADVERTISING MEASUREMENT

Sure, you can run a coupon or a Call to Action in every ad to see how many people it drives to the store. But if you have been reading this blog or following the wisdom of people smarter than me like Roy H. Williams or Seth Godin, then you know that kind of advertisement leads to short term gain and long term pain.

One other way to measure the effectiveness of your advertising is from your Repeat and Referral Business. Add those two numbers together. The remainder of your traffic is your marketing-driven business.

Yes, some of that traffic is based purely on your location. Your location is part of your marketing. Your signs on your building are part of your marketing. Your parking situation is part of your marketing. Your advertising is also part of your marketing. If the raw numbers of people coming through your doors for the first time and not by Referral are growing, your marketing is working.

Which part of your marketing is working? That is a little bit harder to measure. As famed retailer John Wanamaker said, “Half the money I spend on advertising is wasted; the trouble is I don’t know which half.”

At least you have a tool to see if it is working in general. (Check the Free Resources for Making Your Ads More Effective to figure out how to make all halves work.)

When you use the right measuring tool, you get a better result. That’s true for cooks, bakers, and small business owners. 

-Phil Wrzesinski
www.PhilsForum.com

PS Before you plan for 2019, you really need to know what happened in 2018. Even if your top line sales rocked the world and your bank account is fatter than usual, if your Market Share decreased or your Repeat and Referral Business fell off, you have important issues you need to address sooner rather than later. I’d love to help you address those issues.