This report helps you understand exactly the effects of your stated assumptions on your acquisition and retention of customers. Recall that you have already defined many assumptions:
On the Sales Model (BU-3) screen, you defined the following assumptions for each market:
Expense Item or Employee Type. The name of an expense item that you want to use to drive sales (i.e., when you double this expense, you want to acquire twice as many new customers), or the name of an employee job title (i.e., when you double the number of employees with this job title, you want to acquire twice as many new customers)
Customer Acquisition Cost (CAC). The cost you think you will need to incur to acquire one new customer. This, if CAC is $10 and you spend $1,000 on the above indicated expense item, you would expect to acquire 100 new customers.
Sales Cycle. When you spend money (on advertising, for example) or when you have sales people go on a sales call, rarely do customers become customers immediately. Instead, there is a delay. That delay is called the sales cycle.
Average Order Size. When a customer purchases from you, how much do you expect him/her to spend?
Periodicity. How often do you expect a typical customer to return to make an average order size purchase?
Annual Retention Rate. What percent of new customers do you expect will still be customers after 12 months?
Viral Coefficient (VC). How many new customers will each of your current customers successfully refer to you (where “successfully” implies that they actually become paying customers)?
Length of Viral Cycle (LVC). How many days does it take for the aforementioned referral to occur? (like the “sales cycle” for referrals)
Product Mix. When a customer spend $x, how is this divided among the various product you sell within this market?
On the Other Expenses screen:
On the Personnel screen:
On the Pricing screen:
From the above assumptions, we calculated the report you see before you, as follows:
First, we determine how many new customers you will acquire each month. Notice there are only two ways for you to get a new customer: by paying for them, and via referrals. Let's calculate these one at a time:
N1. New Customers from Marketing and Sales Efforts (“Paid”). This is the Monthly Expense Amount or the Monthly Salary Amount divided by the Customer Acquisition Cost.
N2. New Customers from Referrals (“Viral”). We look at how many new customers (N3) you acquired LVC months ago (that's how long it takes for the referral to occur). Each of these customers will refer VC other new customers. So we multiply N3 (from LVC months ago) by VC to get N2 for this month.
N3. Total New Customers. This is just the sum of the previous two numbers, i.e., N1 + N2.
Next, we determine how many customers will return this month from the previous month. You could have two kinds of customers, some who will be purchasing and some who are not going to purchase, but are still your customers (because they will purchase again in the future). Let's calculate these one at a time:
R1. Returning Customers Purchasing this Month (“Sticky”). This depends on the Periodicity of your customers' purchases: if monthly, this will be the same as last month's (less attrition); if quarterly, this will be the same as three months ago (less attrition); if annually, this will be the same as last year's (less attrition); if your customers purchase just one time, this will be zero.
R2. Returning Customers Not Purchasing this Month. This again depends on the periodicity. It picks up those customers during the months when they don't place orders.
R3. Total Returning Customers. This is just the sum of the previous two numbers, i.e., R1 + R2.
My viral customers are too high. What should I do?
Go to the Sales Model Assumptions Screen BU-3. Lowering the viral coefficient will have exponentially decreasing effects on your new customers. You could also try increasing the length of the viral cycle.
I have lots of customers but no product sales. What should I do?
You likely have no prices for your products, or you have indicated all zeroes for your product mix, or you have an average order size of zero.
Other Related Questions:
How does Offtoa compute customers, revenues, number of units sold and revenues by product from my assumptions?
Why do I have no customers in a specific market?
Why do I have no new (paid) customers in a specific market? Why do I have zero customers on the N1 line on the customer analysis report for a specific market?
Why do I have no new (referral) customers in a specific market? Why do I have zero customers on the N2 line on the customer analysis report for a specific market?
Why do I have no customers returning to repurchase in a specific market? Why do I have zero customers on the R1 line on the customer analysis report for a specific market?
Why do I have no customers purchasing in a specific market? Why do I have zero customers on the T1 line on the customer analysis report for a specific market?
Why are so many (or so few) customers leaving in a specific market? Why is the A1 line on the customer analysis report for a specific market so high/low?
Why is my average order size (AOS) zero in a specific market? Why is the P2 line on the customer analysis report for a specific market zero?
Why do the percents of sales for each product in a specific market not add up to 100%? Why do the entries on line P4 on the customer analysis report for a specific market not add to 100%?
How do I change average order size?
How do I change the customer retention rate?
How do I change the viral coefficient?
How do I change the product mix?
How do I add or remove a year (column) to/from this report?
How do I suppress a row of all zeros from this report?