Last time I post about who your Customers are. This time I want to get into a bit more of the blocking and tackling of Business Plan development and ask about the number of Customers Your Business needs. Most small business owners and startups give me a blank stare when I ask about this. There is a lot involved in this question. Brian Tracy (the Founder of FocalPoint) has a concept called "The Customer Formula" as part of his Way to Wealth system. This formula looks like this:
Number of Customers x Average Revenue Per Customer x Number of Purchases = Revenue
Note that Revenue is a Result of having Customers buy. I get two pushbacks regularly.
First, I am always told that there is no average customer. True. But it does not matter for this kind of calculation. At AFC, we quoted to investors that we had 800 customers. This was a true statement. However, not all of them were active in any given year. We had some large customers that accounted for the 50% of the revenue (call it Top 5 customers) and they remained constant. We had active customers that were doing significant projects. They accounted for about 30% of the revenue and several of them changed each year. Then we had customers that were just buying upgrades or nothing at all for any given year. But we still had an average of about $500K per year per customer. Landing a large customer was hard and we did not get new ones often. Most of the time we were talking about landing new smaller customers. Over any time horizon they would generally average about $400K per year in spending. The rest was compensated for by the large customers.
Second, they don't have an idea of the Number of Purchases. This number is highly dependent upon the kind of business that you are in. If you are an Auto Dealership, it is unlikely that you will get more than 1 purchase per year (except for fleets). If you are a Hair Salon, you should expect 6 - 12 purchases per year for your ongoing customers. Every business is different, but each of them have an average. For AFC, generally purchases were done on a location by location basis. So, transaction count was all about the number of locations per year. After that, we had many small orders to add additional capacity to any location.
Now all of this depends on the amount of Revenue that you need. Revenue is not the be all or end all of a business. Profitability is more important. But this analysis can help you figure out what you need. Do you need 10 customers? 100 customers? 1000 customers? There are businesses that can be built with any of those customer counts. Each of them is built VERY differently. That is why this is probably the most constructive financial question to answer first.
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