3 Customer Value Creation Strategies for Low-Ticket Consumer Businesses

I’ve observed that most newly established small businesses are consumer based. My theory is that this is because the founder(s) often start off as ‘consumer-employees’ who want to realize their entrepreneurial ambitions through the only type of businesses they knew well enough- ones that they frequented as customers.

These businesses often fall under the food service (restaurants) and direct to consumer (DTC) product categories. In Saudi Arabia it seems like every other person is thinking of opening up a restaurant or starting an Abaya (female dress) line.

The issue with many of the consumer businesses out there is that they sell low-ticket and low gross margin items. Your average restaurant order is probably between $15-$20 and your deodorant probably does not cost much more than that either. This is probably why a large percentage (around half) of newly established companies go out of business within their first few years.

Let me demonstrate why that is an issue.

I worked closely with a company selling discount stationary online in the Middle East – lets call this company Client A.

Client A was run by an A-star operator, but operated in a highly competitive space that is dominated by a few large players who can outspend on marketing.

Client A had a few issues to deal with, one of which was increasing its top line revenues. They had a clear marketing problem.

For most small businesses, marketing beyond your network will have to involve some level of paid ads via online platforms (think Google ads). The cost per click (CPC) that Google would charge you for an ad on its platform using the keyword “notebook”, for example, is $0.9 (or SAR 3.4) in Saudi Arabia.

Assuming that 2% of everyone who clicks on the stationary ad is converted into customers (this is the conversion rate), the cost to acquire a customer through the Google ads channel would be SAR 170.

The issue with this is that a notebook costs SAR 20, and even if the average customer decided to purchase 4 notebooks, 10 pens and 2 pencil cases valued at SAR 180 over their lifetime as a customer of this hypothetical stationary company, it would have made a net loss on their ad spend. Assuming this company’s gross margins are 40%, it would have netted SAR 72 in gross profit.

72 is less than 170 it spent on ads, so the company lost 98 on its ad spend.

Not good.

Given the above example, we can deduce that there are two ways a company can improve its business.

1. Increase the value of the customer base and improve lifetime value (LTV)

2. Increase the conversion rate to reduce customer acquisition costs (CAC)

All businesses should actively do both, but in this blog post we will discuss point 1: increasing the value of the customer base.

There are 3 strategies I would recommend to Client A in order to make competing in a difficult environment more manageable.

1. Increase Average Cart Value (ACV)

Client A’s ACV was probably less than SAR 30.

But what if they increased prices by 10% - which they probably could since the items were very low cost on a total and relative basis?

And at the same time upsold other or higher value items before the customer checked out?

And what if they offered subscriptions for certain non-durable goods like pencils, printer ink or paper?

The ACV could then go up to SAR 90+ and the customer’s LTV would likely become much larger than the SAR 170 CAC due to more frequent purchases.

Overall Improvement: Slightly Better.

2. Market to Affiliates

Affiliates are people or companies who help sell your products to their audience or customers in exchange for some benefit.

In the case of a company that sells stationary, they could partner with a content creator focused on productivity.

Ali Abdaal is a content creator who focuses on generating productivity related content and has over 4 million YouTube subscribers.

An affiliate deal could involve providing Ali with a unique affiliate link or discount code which he could then use when promoting the stationary company.

Anyone who uses the link will then get a discount and Ali would get a percentage of the sale as commission.

Even if only a small percentage of Ali’s followers are converted to customers that would still result in a large sales spike. (A lot of sales as a result of marketing or selling to 1 person is a good thing).

Businesses should focus their efforts on affiliates that are relevant (the affiliate’s audience should be potential customers) and who have large audiences.

Repeat this affiliate-getting strategy with as many content creators and influencers until the relevance to audience size ratio becomes unacceptably low.

Small businesses can use the affiliate strategy with businesses. A company selling boutique perfumes can partner with other businesses in the beauty category. Premium perfume brands can position themselves as lifestyle brands and partner with other businesses within the luxury space who sell products like custom suits and luxury cars.

Overall Improvement: Much Better.

3. Sell to businesses

A look through Client A’s sales data showed something peculiar. Every now and then there would be large sales orders worth SAR 2,000 and more.

The client even had one order for over SAR 50,000!

When I asked about these large purchases I was told that they were from businesses that needed stationary delivered to them.

I can confidently say that it would not cost more than 2x-3x more to market to businesses online through platforms like LinkedIn, for sales that could be 10x-1,000x or more the level of sales of a consumer.

Selling to businesses can be like competing in another league of its own.

Note that they type of business you sell to matters. Client A could sell to other stationary retailers, but the margins there are poor. The type of customers that buy ‘big and more expensive’ are end users of the product – except in this case they are companies and not individuals.

Overall Improvement: Incredible!

But it doesn’t stop there.

Think about what can happen if you combine all 3 strategies – so that you sell to businesses, directly and via affiliates, while upselling other items and subscriptions at higher prices.

Overall Improvement: Best!

A word of caution: Achieving the outcomes of any of 3 strategies involves investment into new skillsets and a shift in mindset. These ideas are simple to grasp but not necessarily easy to implement.

Implementing the 3 strategies can be hard, but it’s probably not as hard as struggling to get customers and operating a business that is barely staying afloat.

Please do share this blog post with anyone you think could benefit!