Mastering Purchase Behavior for Strategic Growth
Companies talk a big game about putting customers first, but many don't really know who their customers are or what makes them tick - and that knowledge is key to growing your business.
TABLE OF CONTENTS
How well do you understand your customers and their purchasing behavior? Customer centricity is a common buzz phrase, but many companies don’t have a deep knowledge of their customer base. Building that knowledge can answer critical strategic questions such as:
- Do I have the right growth strategy?
- How exposed am I to customer churn risk?
- Are my promotions doing what I want them to do?
- How healthy is my business in the long-term?
Knowing where to start can be challenging. To provide some structure, we will frame up three questions:
- What was customer purchase behavior like this past year?
- How do different groups of customers behave over time?
- What does this mean for my business?
Let’s jump in.
Lay of the land: The (customer-centric) year in review
The simplest place to start is your most recent year. What drove our sales and margin? You may already know this from a product perspective. But rather than think of our sales as product-driven, let’s pivot for this analysis and think of them as customer-driven.
How many customers did you have?
How many unique customers actually bought your products this year?
What percentage of your customers this year were new customers? If you have a high percentage of customers that are repeat customers from prior years (>50%), your expansion efforts may need revisiting. Lower than 25% and you can likely generate easier profits by targeting existing customers.
How does your profit breakdown by customer?
What percentage of your customers drove 50% of your profit? Alternatively, what percentage of profit did your top 10% of customers drive? This again can be indicative of whether your marketing operations should focus on growing within your existing customer base or expanding your customer base.
It can also tell you how exposed you are to different risks. A high concentration of profit among relatively few customers means you have a diversification risk. A wide profit spread among many customers could indicate a product mix risk.
For your top 10% highest profit customers, why were they so profitable? Take a look at this group’s
- Average order frequency
- Average order spend
- Average order profit margin.
Compared to the rest of your customers, did your top 10% purchase more often, spend more per purchase, or buy higher margin items? This can provide valuable insights for how you can make your remaining 90% more like your top 10%.
Comparing against the prior year
Now that we have answered the above for last year, let’s ask the same questions for the year before that. What changed from year to year?
- How did your number of unique customers change?
- How did your percentage of new customers change?
- How did your profit distribution change?Were your top customers as profitable?
- Were they profitable for the same reasons?
And lastly, compare your customer growth to your overall revenue and profit growth. Did you grow profit by expanding your customer base or did your existing customers generate more profit?
The answers to all of these questions can provide an important diagnosis on the health of your business, but can also tell you if your marketing efforts are achieving your goals.
A day in the life(cycle): Customer purchase behavior over time
After we analyze a point in time, our next phase is taking different sets of customers and tracking their purchase behavior over time. This is often referred to as a “cohort analysis” and is an important step to show you how your customer base is evolving.
- How do your customers that you acquired this past year compare to customers you acquired 3 years ago?
- How do your customers acquired through promotions compare to customers that were acquired organically?
Knowing these answers can tell you how your sales, profit, brand, and business as a whole are trending.
Cohorts across different years
This is a good place to start because it is relevant to any brands and will provide insights as to how your business is trending. Select a several month period (Q1 of the most recent year, for example) and track all of the customers acquired in that period.
How do their purchases look over time (cart size, products selected, total cost, etc)?
Earlier we looked at the average order frequency, average order spend, and average margin of our high-value customers; take a look at how those metrics look for this cohort and compare against how they look for your high and low value customers.
Next, take a look at their purchasing lifecycle. What percentage of the group made a second purchase? What about subsequent purchases? How long is the average gap between purchases? These answers can help you understand the expected lifetime value of new customers.
Now select the same time period in several prior years and answer the same questions. Then compare the results:
- Is there a difference in average order frequency, average spend, or average margin between cohorts?
- Does the purchase cycle lengthen or shorten? Are the same percentage of customers making repeat purchases?
If you notice significant differences here, it could be indicative of a change in strategy or tactics. This will show how you customer acquisition and retention efforts have performed over the years.
Cohorts during seasonal periods
If your brand is seasonal, select a cohort during your seasonal period, and another during a non-seasonal period. How do the above retention metrics look between these two cohorts? How do the sales and profitability metrics look?
You can reasonably expect to generate less loyalty during seasonal periods, since customers are more likely to either be gifting the product or be deal-seeking. However, try splitting your seasonal cohort into customers that bought one product and customers that bought more than one. You might have a set of customers that bought something for themselves while they were buying a gift. How does that sub-group’s purchasing behavior look over time?
Cohorts acquired on promotion
Compare your customers acquired during promotions against customers that are organically sourced. This is a critical measure for measuring how efficient your promotions are. (See post on promotion measurement).
As you compare your promotion cohort to your organic cohort, what stands out about their long-term purchasing? Likely your promotion cohort is not repeat-purchasing at the same rate, but how big is the drop off? For the customers that do purchase again, how does their order value and profit margin look comparatively?
If you notice a significant drop-off, you will want to understand if the short-term volume impact of your promotion was worth the cost of execution and the cost of any discount that was given. Think about how you might restructure your promotion activity. If you are converting long-term customers at a high rate, your promotions are an effective tool for growing your business, but be wary of cannibalization.
Cohorts by product of first purchase
Create cohorts of customers based on their first product or product category purchase. Note that you will want these cohorts to have the same starting time period, to reduce any variation from any of the above analyses.
When you measure these customers’ behavior over time, does anything stand out? Are certain products more likely to drive a second purchase or reduce the time-to-next-purchase? How does the average order spend and margin look between the different groups? This can tell you which of your products are most likely to convert long-term, profitable customers, giving you a valuable insight as to which products should be your marketing priority. Your customer’s impression with their first purchase is critical, which of your products do you want them to experience first?
Customer behaviors are your company’s vital signs
One of the first questions posed in this article was “how healthy is your business?”
A lot of companies will jump straight to their balance sheet to answer this question.
But beneath the surface-level financial result is the underlying driver of your success: your customer. By understanding how they purchase, what drives their profitability, and how different groups of customers behave over time, you can maintain a pulse check on your business’s long-term health. Analyzing your customer behavior is critical for taking the right actions toward long-term, profitable growth.
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