Growth is about distribution, we’re not talking logistics.

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Reach vs Frequency

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How do you grow a business? If you asked that question in an MBA college class, you’d get a varied set of answers, but themes would emerge: have a strategy, control costs, know your customer, a unique product/service, execute the plan. None of these answers are wrong, but MBA students’ answers miss the point: the real world is imperfect with neither the time, resources nor budgets to tackle the issue of growth from an academic standpoint. Shareholders want value…now. Customers want the product/service…now. Employees want to be taken care of…now. In established businesses, a growth strategy generally involves changing an existing course of action. What exists may be well known and preferred, and change is generally seen as something which is painful, risky and undesirable.

Which explains why many businesses eke out incremental growth year after year. So, let’s address some of the macro questions associated with growth and strategy.

Strategy is the most overused word in the world of business. It’s simply shorthand for the question “how should we allocate our resources to hit our objective?”, this question implies two things, firstly you know what resources you have, and secondly, you have an objective. Answers to these two questions cannot be taken as a given, and the world of consultancy would bereft if they were.

Too many senior leaders have read the Bluffer’s Guide to Strategy, which centers around generalizations in nonsensical jargon, consultant designed 4-box charts and a ninety slide PowerPoint deck. Therefore, it would be foolish to make overblown generalizations about guaranteed winning strategies within a short blog post.

However, there is a corner of customer analytics which could generally be said to hold true for a considerable swathe of business products and services, including fast moving consumer goods, retail and QSR amongst others. 

The phrase which best describes this insightful phenomenon is a ‘negative binomial distribution (NBD) of customers’, and the NBD is an interesting foray into the place where customer behavior meets statistical analysis. This analysis highlights a strategic nuance within the binary world suggested by simply categorizing customers as existing customers or non-customers.

For example, have you ever bought Coca-Cola? For most people within this binary, closed question the answer will be yes, in one format / flavor or another. Therefore, the more interesting questions are when was the last time you bought Coke and how much did you buy? If it’s more than a year ago, you are a lapsed or non-customer. If it’s once within the last 6 months, you are a very light customer. If you buy Coke twice a day, then you are a heavy customer. The insight in measuring this penetration (ever purchased) and weight of purchase (how much) becomes apparent when a robust sample size is plotted in a graph, for example see the chart in fig1. for a retail client, below.

What can be concluded are several startling facts. Not startling because the chart is incredible or exaggerated, but precisely for the reasons outlined at the beginning of this article, namely, many businesses’ strategies ignore these facts:

  • The green line shows significantly more light shoppers than heavy shoppers. In fact, 50% of the total have less than thirty trips to the store each year. The retailer is lucky to see a majority of their shoppers more than twice a month. So much for regular shoppers and loyalty.
  • The red line shows a linear progression of annual spend until the shopper gets to ~90 trips per year. At that point, shopper cohorts decline significantly, i.e. there are very few shoppers visiting the store more than once a week. After ~120 trips per year annual spend begins to decline as saturation sets in. Either shoppers have spent all they have or they have spent all they need, they cannot consume or use any more. So much for one more item in the basket.
  • The majority of customers have a relatively low number of trips and light baskets. They are characterized by the term marginal shoppers and they represent ~65% of the total customer base. They are the core shoppers, and they have significant headroom for growth in trips and basket size. So much for heavy shoppers.

Going back to the hyperbole, are these startling facts? Yes, because so many businesses define core customers as heavy customers and design their growth strategy around an increase in the number of purchases by these heavy customers.

Furthermore, businesses produce charts and data to discredit investment in marginal shoppers, namely cost of acquisition. CPA definitely has a place, especially in B2B, but in B2C it is a relative cost and that relativity should be measured against the cost of not attracting marginal customers, as opposed to the cost of retention of those customers who were going to purchase anyway and have low headroom for growth.

If you want to grow your business, grow your marginal shoppers; broaden the appeal of your  mass media and printed or digital ads, use machine learning to build models to maximize reach and drive efficiency of promotions. If you want to know how give us a call.

DecaSIM AI builds models for individual stores, versions & personalized ads, zip codes, geographies and demographics. We can share the empirical evidence which shows volume uplifts of up to 6% and EBITDA increases of 0.5% pts to 1% pts. 

At DecaSIM we haven’t got all the answers, but we know what an NBD is. Do you? 

Put growth at the center of your promotional investment – DecaSIM.