As the success of online retailers skyrockets and online shopping continues its rise in popularity, brick-and-mortar retailers have seen a significant decline in business. While most subscription-based and online businesses have a strong digital marketing team and marketing plan in place, many brick-and-mortar shops are lagging in their knowledge of retail marketing KPIs and strategies.
The focus in budgetary planning differs for a brick-and-mortar shop in comparison to an online retailer. While a brick-and-mortar retailer’s first concern when preparing for a store launch is the revenue forecast, an online retailer is more focused on the Lifetime Value of Customer (LTV), which is arguably the most important revenue KPI in online shopping. Differences between the two retail styles continue to emerge when you look at where they spend their money. A brick-and-mortar retailer’s major spend is generally the fixed cost of rent, while an online retailer’s major spend is the more variable customer acquisition cost (CAC).
As they continue to fall behind, brick-and-mortar retailers have begun exploring strategies to keep up with their online counterparts. Wholesalers have also entered the game, parlaying their new access to the online customer into direct-to-consumer platforms. But they, too, are often lacking formal digital marketing departments.
Brick-and-mortar stores and wholesalers that lack the digital strategies and departments of their savvy online competitors can leverage the finance team to provide major assistance with metrics and strategies.
With the strategies listed below, the finance team can aid merchandisers, product managers and/or digital marketing vendors to boost profitability.
1. LTV Determination
Lifetime Value of Customer is one of the most critical metrics in the online world. It calculates the amount of revenue that comes from a customer over the life of the business relationship and is a vitally important KPI of overall revenue. The LTV is calculated by multiplying the average order value (AOV) by the purchase frequency (PF) where AOV is the total sales divided by the total order count and PF is the total orders divided by the total number of customers:
- LTV = AOV * PF
- AOV = Total Sales / Total Order Count
- PF = Total Orders / Total Customers
Consider the following example: A customer visiting the cash register orders $50 of merchandise at each visit (AOV = $50). They purchase twice a year (PF = 2). The LTV would be 50 * 2 = $100.
Once obtained, the LTV essentially places a value on each customer. If desired, deeper analysis of LTVs can be done based on cohort trends, past purchase behavior or other subcategories.
2. CAC Spend
Another important metric that works in tandem with LTV is the customer acquisition cost. While LTV calculates the long-term value of an average customer, CAC calculates the average cost to acquire a new customer.
The difference between LTV and CAC is the margin the company generates per customer. One would hope that the CAC is always lower than LTV. A good rule of thumb for CAC forecast is 1/3 of LTV, but this will vary by industry.
While brick-and-mortar stores have a fixed cost in their rent, the online retailer’s CAC is variable and can be increased by spending more or decreased by spending less. This presents an opportunity to control costs and improve margins.
A few strategies for reducing CAC spend are:
- Fine-tuning the target market – Creating a more specific ad can improve the conversion and lower the cost
- Segmented email marketing instead of sending mass emails
- Utilize longer-tail pay-per-click (PPC) ads – the more specific and long tail the search words, the higher the conversion and lower the cost
- Leverage the existing user-base by boosting referral rewards
- Another feature of CAC is that it’s not limited to a specific geographic location like a brick-and-mortar
3. Product Margin
Just as a retail store would place higher-margin products in the most visible shelf space, digital marketers should place their higher-margin goods at the top of the product page. Knowing the margin for each product is a critical piece of information that can help the company make informed decisions on product placement. The finance and merchandising teams can work together to identify those products with the best margins and channel the traffic towards those items. Custom product landing pages can be designed for these higher-margin products and customers can be funneled there from tailored ad spends. The immediate benefit of this strategy is to drive profitability and lower the CAC.
4. Invest in Training
Whether working with vendors or an in-house digital marketing team, as the ultimate budget owners, finance teams should have a deep understanding of digital marketing. Taking courses in digital marketing can be a worthwhile investment for finance teams particularly as digital marketing relies heavily on margin analysis, mathematical calculations and KPIs. A strong argument can be made that the FP&A skillset is better equipped to utilize the data that drives digital marketing than traditional brand marketers. Allocating a small portion of the FP&A training budget in this area is likely to yield positive results.
5. Align on Budget
Whether the finance team has an active or passive role in deriving KPIs to support a company’s digital marketing efforts, the FP&A team will benefit from understanding LTV, CAC and other related metrics. As the primary users of operating expense budgets, the FP&A team should ensure that the inputs that drive LTV and CAC ratios are correctly reflected in budgets and forecasts. Correctly incorporating this information is one more lever toward higher profitability.
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About the Author
Jackson brings 15 years of finance and systems experience in apparel, entertainment, and technology. Prior to 8020 he has served in various leadership roles in the apparel industry: VP of Finance at PPLA Clothing, VP of Finance at Little Giraffe, and the head of FP&A at Junk Food Clothing. At Fox Entertainment, Jackson led the implementation of business intelligence tools and reporting, and at Fox Sports, he conducted analysis on multi-billion dollar sports deals. Jackson’s experience also includes financial modeling for technology startups as well as large public-sized tech companies. Jackson holds a Bachelor’s from USC’s Marshall School of Business with a concentration in finance.
Categorized in: Financial Planning & Analysis