Last week, I shared 3 ways to increase the average amount a customer spends in a transaction with you. One of those suggestions was to create an "order minimum."
But how do you decide what that order minimum should be?
Well... you look at the numbers. Which numbers? That's what this episode is all about. I share 5 key metrics you should review to help you figure out your order minimum, AND I share the formula to plug those numbers into.
Your homework this week is simple: calculate what your order minimum should be, and then go set it up! Test it out for 2 weeks and see what happens.
This podcast was sponsored by Local Line, my preferred e-commerce platform for farmers. Are you looking for a new solution for your farm? I can't recommend it enough. Easy to use inventory management, great customer service, continuous improvement, and a culture dedicated to equipping farmers with marketing expertise, Local Line should definitely be one of the e-commerce solutions you consider as you switch. Local Line is offering a free premium feature for free for one year on top of your paid subscription. Claim your discount by signing up for a Local Line account today and using the coupon code: MDF2024. Head to my special affiliate link to get started: www.mydigitalfarmer.com/localline
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Last week, we talked about three different ways to increase your average order value. This is a great way to increase your overall revenue. And one of the suggestions I made was to implement an order minimum. But how do you decide what that order minimum should even be? Well, that's what today's episode is. I'm gonna walk you through the key performance metrics you should be considering, and I'm gonna share with you an example formula that you can use to figure this out. Let's get started. Hey there, this is Karina Bench, and welcome to the My Digital Farmer podcast. In today's market, it's not enough to just grow your product. You've gotta know how to sell it too. Welcome to the My Digital Farmer podcast, where we reveal online marketing strategies and tips to help farmers like you get better and more confident at marketing. Learn how to find more customers, increase your sales, and build a strong brand for your farm. Let's start the show. Well, welcome to episode 270 of the My Digital Farmer podcast. I am your host, Karina Bench, one of the farmers that shared legacy farms out in Elmore, Ohio. I'm also the founder of MyDigitalFarmer.com, which is all about trying to help other farmers like you get more confident in your marketing and sales strategies so that you can grow a profitable business. How's everyone doing today? Welcome back to the show. Big shout out to all of my regular listeners, my binge listeners, and if you're new to the show, I'm really glad you're here. Welcome to the community. Make sure that you subscribe to the podcast. You're gonna wanna do that, and then go check out some of my back issues. You can scroll through, I've got over 250 of them now, and I'm sure you can find something there that piques your interest. If you're really new to the marketing space though, and you need kind of a 101 crash course, I recommend that you go listen to the first 10, or even better get onto my email list because when you do, I'm gonna send you a weekly email for like three months that's gonna walk you through the marketing jungle and kind of get you onboarded into what you need to know. And you can do that by going to mydigitalfarmer.com forward slash subscribe. I get really good reviews for that. So definitely take advantage of that. Today's episode is sponsored by my friends at Local Line. Switch to Local Line and grow your farm to new heights this season. Local Line is the most comprehensive sales software built for farmers and food hubs. Its features include e-commerce, automated inventory management, subscriptions, a website builder, point of sale, and more helping you increase your sales and streamline your processes. So whether you're a CSA farmer, you sell meat, you run a food hub, or maybe you sell wholesale or offer a hard share, Local Line has the tools and features that you need to succeed. We're a big fan. Are you looking to switch to a sales software that does it all? Subscriptions start as low as $49 a month with no set of fees or sales percentages. That's huge for me. Plus, if you join Local Line today, your onboarding manager will migrate your storefront at no cost. So you can be up and running in no time, even in the middle of the season. As a bonus, if you are a podcast listener, Local Line is also offering a free premium feature for one year with your subscription when you use my coupon code MDF 2024. So go to mydigitalfarmer.com/localline and then enter the coupon code MDF 2024. Make the switch today. And now back to the show. Well, hi there, everyone. Hope you're having a wonderful summer and that your 4th of July weekend was fabulous. Today, I am talking about how do you go about figuring out your order minimum for your online store. And last week, if you listened to my podcast episode, the topic of the order minimum came up because the whole topic of that episode was three different ways you can raise your average order value when people come to your online store. And one of the suggestions that I made was to create an order minimum. And so I thought it would be fitting for us to spend some time thinking through, well, how do you decide what that order minimum needs to be? What are the financial metrics that I would have to look at to even determine this? And so we're gonna do a real quick episode here where I walk through some of those key financial metrics and then I'm gonna share some steps for how to determine your order minimum, okay? So let's just kind of back up and review determining that appropriate order minimum for your business is going to involve analyzing some financial metrics in your business to make sure that the threshold both encourages people to spend more but also maintains profitability for you, right? Those are kind of the two goals. And here are some of the key metrics that you're gonna wanna consider. So I'm gonna quickly list them all off and then I'm gonna go through them in a little more detail, okay? So there are six of them. Number one is the average order value. Number two is the cost of goods sold. Number three is the shipping costs. Number four is the cost of acquiring the customer known as the CAC. Number five is your gross profit margin and number six is the breakeven point, okay? So let's briefly go through each of those and discuss what they're all about. Average order value or AOV, we talked all about that in last week's episode, episode 269, so go back and listen to that if you haven't already. Understanding your current AOV is super important 'cause it's gonna help you set a realistic and achievable minimum order value. It's gonna make your customers increase their spending but you don't want it to be discouragingly high. So if you don't even know what your AOV is, this is kind of the first step to go find that out and then kind of where do you, after we do some of these other metrics, where do you kind of need that to move? When I did some of this work and reviewed my numbers, I was kind of shocked to see how low my AOV was and where it really probably needed to be if I wanted to be more profitable. So please, please, please take a look at this one. This is an easy one to do in your e-commerce platform. Number two is the cost of goods sold, also known as COGS. So we wanna be analyzing the profit margins, right? So if we look at our cost of goods sold, that includes labor, the time that it takes for you to do the work if you are the labor force. Analyzing that cost of goods sold to ensure that the minimum order value covers those costs and provides you a healthy profit margin, right? So we're not just trying to hit the breakeven point but we wanna actually make a little bit extra for profit. So do you know what the COGS are? And I'm gonna spend a whole episode just talking about COGS sometime in the near future and kind of give you some different categories of things that should be considered when you build out your COGS. So if I know that it costs a certain amount of money to buy the clam shells for my berries or this is how many hours it typically takes to harvest the raspberries for the store and then I can pencil out the math and figure out that's the labor cost. And here's the bags that go along with all my store orders and I divide that out and here's what it costs me to drive to my pickup locations and actually pay someone to staff that site and pass them out, right? I'm calculating all of that in my COGS. Shipping costs is the third one. So the order of minimums should be high enough to absorb those costs, especially if you're doing something like offering free shipping. You wanna set that number so that you are recouping the loss and hopefully making a little bit extra. So we wanna be making profit, we wanna be profitable, right? So that threshold should be set at a little bit higher than kind of your breakeven point. Number four is the customer acquisition cost. So factor in how much it costs to acquire a customer. Now, this doesn't mean acquire a lead. This means actually turning your lead into a paying customer for the first time. And the minimum order value should be set to ensure that you are recouping those costs and again, achieving profitability. So one of the things that I also look at to help me with this is I look at how much is a customer spending in one year once they turn into a customer. Now, it takes a few months for a customer to turn into that kind of client, but eventually I can see patterns in my data. This is what a typical customer pays me in a year and that will help me kind of know, all right, I'll compare that to my cost of acquiring a customer and am I okay with those two numbers? So for example, I think I talked about this last week. I discovered that it's costing me as of last year, it cost me $38 and 60 cents to turn a lead into a store customer. And in one year, the customer value for a new customer or any customer in my store is $156. So, you know, $38 to acquire them, they're gonna give me $156 that year, I'm still making a profit and then hopefully that customer stays with me for a long time, so they'll continue to add value to me. Am I willing to spend $38 and 60 cents? Now, admittedly that feels kind of high to me considering how low $156 is in comparison. So I'm gonna be working on trying to lower that cost of acquisition over the next year and or trying to increase the number of times that a person buys from the store so I can increase that customer value, right? But I am looking at how much does it cost me to acquire that client in comparison to what they bring me in a typical year and realizing that that person will continue to buy year after year so that is, you know, possibly still worth it. I hope that made sense, I felt like I was rambling. Okay, number five, gross profit margin. So we wanna make sure that this minimum order value is helping maintain our overall gross profit margin or it's helping us improve it. Now, you'll get to set this to be whatever you want. I know at the very beginning of the year when we build our budget for our year, we have a percentage that we want to claim as our profit margin, but even within the scope of this little experiment where you're just looking at your online store sales, you can say something like, well, per order, I want my profit to be X amount of dollars. So figure out what that number is because you're gonna end up using that number in the formula that I share with you here in a second to help you determine your order minimum. And then of course, the last one is the break even point. You wanna know the break even point for each order and you wanna look at both those fixed and variable costs and make sure, again, that that minimum order value is exceeding that point. Now, this is not something that I was doing before. And as I shared in last week's episode, there were times when people were just ordering a pint of snap peas and I was not hitting my break even point. When I finally looked at the numbers, I'm like, whoa, this has gotta stop. I'm bleeding money out here. So I've gotta change my policies and raise the order of minimums so that I'm at least hitting my break even point. And I almost would argue that it's not worth doing unless you're making a little bit of extra money, okay? So those are kind of the key financial metrics you wanna look at. Today's podcast is sponsored by Farm Marketing School. This is my monthly membership where farmers can come in and build marketing assets one at a time in special 30-day build projects that I've created for you. There are currently over 14 different projects inside of Farm Marketing School, including your website homepage, building a promo calendar, building a promotional email challenge, testimonial and reviews, how to build a better offer, your email nurture sequence, your lead magnet. There's a sales funnel audit. There's a ton of good stuff in there. And I'm adding new material every couple of months. Plus you get a monthly Zoom meetup with the whole group in the middle of the month and we'll be doing some book studies off in the fall. I'm really there just to try and empower you and help you get your marketing assets built. So the way this works is you subscribe. From month to month, you can cancel whenever you want. Go in, you take the assessment. There's also a crash course in marketing that you can watch to just learn the lingo and the vocabulary and the framework. And then you get started building your first marketing asset. Every project includes a hour long tutorial, a resource folder that gives you lots of templates and examples to help make the process of actually building your own version really fast and also a project planner to help you time it out and make sure you get everything done. If you wanna learn more about how to join farm marketing school and try it out, you can go to mydigitalfarmer.com/fms. This is my new kind of flagship offer, my community that I'm gonna really be pouring myself into over the next six to 12 months. Really excited about it. So I'd love to interact with you. Join at mydigitalfarmer.com/fms. And now back to the show. Now here are the steps to actually go about putting all those together to determine your order minimum. And this is what I want you to look at here in the next few days in case you wanna just try testing this with your own online store. So here we go, step number one to determine your order minimum is to analyze your current sales data. Now hopefully you have a tool like Local Line where that's easy to do. You can run a report and see what does the data do and set, when you set that report, set the dates, what are you looking at? Are you looking at the first quarter? Are you looking at last month? Are you just gonna look at last week's sales? What do you wanna look at? So when I did this work fairly recently, I discovered that customers order an average of 5.8 times per year in the online store. Now remember I only have 24 opportunities to buy because I'm not open all year long. And so that represents only 25% of the time are people coming in and buying. And for me, that seems like a huge opportunity to increase that. I mean, if I can get people to even buy two more weeks a year, right, or even 50% of the time, I'm gonna make a whole bunch more revenue. So that's like a whole another episode, but when you go and you actually analyze your current sales data, you can identify the current AOV. You can see what is the customer value in one year? What are the costs to acquire the customer? You'll start to be able to compare some of those numbers. I noticed that they were spending about $26.58 and that to me was not my favorite number. I'm like, that can go higher. I noticed that my cost of acquisition was $38.6. And so I'm actually losing money on that first transaction, but making it up by the second time they buy. And that the average, yeah, customer value, the amount they spent in one year and the store was $156. Okay, now some of you guys are rolling your eyes right now. You're like, seriously? And you do like a marketing podcast? Yeah, this was like a little bit eye-opening. Now, if you look at my CSA numbers, my CSA marketing branch, that's the kind of flagship of our business. Those numbers are much healthier. And so when I took a look at this little side hustle here that we're trying to develop and grow, I realized I've got some work to do if I wanna make this kind of worth it, if I wanna make this actually become a major revenue generator in our business. And this is my own fault because I wasn't staring at the data. So once you actually analyze your current sales data and you see what's there, like don't shame yourself. Just take it as data but do something with it. Like, don't ignore it. Compare the numbers and do the math and realize, oh, wow, okay, I'm gonna continue to stay where I'm at. I'm gonna lose money or I'm gonna break even. I'm not gonna get ahead unless I do some shifting. Okay, so once you've analyzed and you've gotten those numbers and you've seen your customer spending patterns, then number two is you're gonna calculate the total cost per order. So add up all the costs that are associated with fulfilling on an order. That includes cogs, that includes shipping, that includes packaging, labor. Make sure you account for your time. Give yourself an hourly wage, your time it takes to do all the different things that go along with it, okay? Then you're gonna set a profit target. That's step number three. What would you like your profit to be? And I typically like this to be a kind of a percentage number and this should be a desired profit margin per order. This is gonna help you establish a baseline for that minimum order value to make sure you are profitable. And then number four, you're going to evaluate your competitors pricing. I don't always do this, but I think it's wise to go and research some of your key competitors and just see, well, what are their order minimums? What are their shipping policies so that you're not completely off your rocker and doing something so different that a person's gonna compare the two different businesses and it's gonna be hard to choose yours. So you wanna set a competitive but profitable threshold, okay? And then finally step number five is you wanna test different thresholds. So you're gonna come up with some kind of an order minimum number like I did and you're gonna try it out and you're gonna do what's called A/B testing, okay? So test A is gonna be that first number you think of, you're gonna try it out for a week or two or three and you're just gonna see what happens. And then you're gonna test option B. You're gonna change the number, maybe it's gonna go a little higher, maybe it's gonna go a little lower based on the results of the first one and you're gonna see what happens. And you're gonna find that optimal threshold that maximizes your revenue, that minimizes cart abandonment and ultimately gives you some good profit, okay? This A/B testing might take a few weeks. It might be more like A/B/C/D testing. And I'm currently in the process of figuring that out. So, you know, I set a certain minimum order value in the first two weeks. I'm kind of still evaluating it and I actually think I need to raise it up higher. But one of the things I am factoring into that decision is the fact that it's still early on in the season. I don't have as much product in the store, don't have as many options that are super popular. And so I don't wanna make it too high because I think if I make it like really high where it would be maybe more in the mid-season, I might not see as many people purchasing. So that's just me basing it off my data and where I am in the season and what I have in my inventory, okay? Okay, here's the basic formula. It's total cost per order plus desired profit, the formula for how you calculate your order minimum. And you're gonna take your total costs per order, which would be your cogs, your shipping costs and your cost of customer acquisition, okay? Those are three metrics that you have to know. You're gonna take that number and you're going to add your desired profit per order, okay? That's gonna get you to a certain number. That number should be your minimum order value. So let's just say that my average cogs per order is 30 bucks, my average shipping costs per order is $10, and my customer acquisition cost per order is $5, okay? My total cost per order would be $45. Then I'm going to add to that, what is the desired profit per order that I wanna make? Let's say I just decide, I wanna be making at least $10 per order based on an average order value of $50. That's 20%, that's maybe too high, but let's just say that I wanna make $10 per order. Well, I would take that $10, I would add it to all the other costs there that $45, and I'm coming up with a number of 55 bucks, right? If I wanna have a profit of $10 per order, my order minimum needs to be $55, and so when I look at, well, what is it now? What is my current average order value? If it's lower than $55, like way lower, I need to bring that up to that number. Now, if you decide, well, maybe it doesn't have to be a profit of $10 per order, maybe it's only a profit of $5 per order, 'cause I know I get this many orders per week, and that'll get me to the number I need to get to, fine. Then you set a lower profit number, okay? This is how you figure it out, okay? Let me review that formula one more time. Total cost per order plus desired profit equals minimum order value. You got that? So the total cost per order are like your cogs, your shipping cost, and your customer acquisition cost, and then you add your desired profit per order, and that's gonna give you your minimum order value. Okay, so my homework for you is to figure out what do you want, I guess, what do you want your profit per order to be? That's something you probably need to know. What are your average cogs per order, your average shipping cost per order, your average customer acquisition cost? What is your average AOV? What's the average amount of person spends in a transaction? Those are all things you need to know, okay? And I want you to run this calculation, this formula, total cost per order plus desired profit. What is that number? And I challenge you to go and set that as your order of minimum. As an A/B test this week, it's gonna feel uncomfortable, but I want you to try it, okay? Just be like, oh, I'm not gonna pay myself. No, you should pay yourself. You should pay yourself. Okay, so let's chat real quick about implementation. You've figured out what you want your order of minimum to be, now how do you get this going? I wanna make sure that you make a point to communicate this order of minimum clearly to your customers, especially if it's going to be a pretty big shift. Make sure that that minimum order value or any associated benefits that come with it. So maybe it's like free shipping if you spend $125. Make sure that's really clearly communicated to your clients throughout their shopping journey. So that might mean that you have that running across the top on a banner in your store. It might mean that it's on the top of your website as a banner to entice them to even go to the store. It might be that you have it in the email that your e-commerce platform shoots out every week on your behalf. I know local line will do that. And that's just standard in the default language. Maybe it's on the top of your header of your store where you review how to go about placing an order and you make sure in bold that it says here's your minimum order, right? So just make sure your clients know you might have to send multiple emails. You might have to post it on social media and include it whenever you're promoting your store or your offer that week. Make sure people understand why or that you have an order of minimum. And when you shift it, you may need to actually tell your clients for the first time, like why you're doing it. You will notice a higher cart abandonment rate in the early weeks when you do this. Just be prepared for that. But push through and realize that eventually that will stabilize. The reason that cart abandonment rate is so high is because people are going into the store assuming that they can do whatever they wanna do, like normal. And then all of a sudden they go to checkout and they can't check out because they don't have enough in their cart. And a fair number of them are gonna decide they're gonna be confused by it. They're not gonna understand why. And for the few that actually figure out why, some of them are gonna be like, no, it's not worth it 'cause you've just created friction in the buying process. So that's why it's important for you to be communicating this kind of early on and over and over and over again. And eventually that cart abandonment rate will kind of stabilize and come down a little bit. Just so you know, like the average cart abandonment rate, like across most industries is around, like I wanna say it's around 60%. 60 to 70%, it's pretty high. So if you have something lower than that, then you're like a rock star. So pat yourself on the back, okay? The other thing I want you to think about is just you wanna be monitoring and adjusting your order minimum. Especially when you're playing in the sandbox and trying to figure out what it should be, that's totally okay. So regularly review the performance of that minimum order threshold, adjust it as necessary based on customer feedback, based on sales data, based on the season of the year, based on the inventory you have available, based on, I don't know, special offer you might wanna run where you remove the order minimum for a certain amount of weeks. And just see what happens, right? Play around with it and don't be afraid to do a lot of that A/B testing. All right, well that's my homework for you is, I want you to try figuring out what your order minimum should be. And then I want you to go set it. I want you to set it and try this for like four weeks. Do an A/B testing where the first two weeks, it's A and the second two weeks of the month, it's B, you change it and see what you learn. See what you learn about that, okay? Let me know what you think of this episode. That's all I got today, if you liked this episode, please share it with a friend, go into Facebook group, text somebody, go into your listserv, tell people about it because it's good stuff. And I would love it if you would go onto Apple podcasts and leave me a rating or a review, always trying to get that higher, so that's another way you can help out the show. If you know somebody who would be a great guest on the show or if you have this really cool thing that you tried in marketing and you wanna quickly share that tip with me, please reach out to me. I'd love to have you on the show as a guest. You can go to mydigitalfarmers@gmail.com and send me an email and we'll see if it's, what else? Oh yeah, today's show notes can be found at mydigitalfarmer.com/270. Don't forget you can get onto my email list if you wanna get more far marked at gmail.com and send me an email and we'll see if it's a match. Otherwise, know that I'm on Instagram Stories at my digital farmer. I'd love to connect with you there and I will see you next week for another episode. Thanks for tuning in, guys. Have a great week and I believe in you. Bye-bye. (upbeat music) (upbeat music) (upbeat music) (upbeat music)
