Generating sales: customer knowledge decides what you stock and what you charge

1. Customers judge a business on price, quality, choice and convenience, which are covered in 1.2.1a, so understanding your customers means knowing which of those four matters most to the particular people you sell to.
2. Knowing that answer tells you what to buy in and what to charge, so a far higher share of the stock you pay for actually sells.
3. The chain from customer knowledge to higher sales runs in four links.
   1. The right products: you stock what people came in looking for, so goods sell at full price instead of being cleared at a discount at the end of the season.
   2. The right price: a price set at what this group of customers will pay means a shopper who was ready to buy does not put the item back, so more visits turn into sales.
   3. Repeat custom: a customer who got what they wanted comes back, and you spend nothing to bring them back, so the second sale costs less to win than the first.
   4. Word of mouth: a satisfied customer tells other people, so new customers arrive with no advertising spend behind them.
4. Sales therefore rise from two directions at once, more of the stock you already own selling and more people coming through the door, while the money spent to win each sale falls.

Business survival: misreading customers drains the cash the business runs on

1. A business survives only while cash keeps coming in fast enough to pay the bills that fall due, and customer knowledge is what decides whether the stock you paid for turns back into cash.
2. Get the customer wrong and a chain starts that ends in closure.
   1. The cash leaves first, because you pay the supplier for stock weeks before any customer pays you for it.
   2. Stock nobody wants then sits on the shelf, so £8,000 of the owner's money is locked up in boxes instead of sitting in the bank.
   3. The next supplier invoice arrives with nothing to pay it from, so deliveries stop, the shelves thin out and the customers who were buying drift away too.
3. Most new firms that fail go this way rather than because the idea itself was poor: there was a market, but the owner misjudged who would buy, how many would buy and what they would pay.
4. Blockbuster rented DVDs from shops and its UK business entered administration in 2013, once customers had moved to streaming with Netflix: the want to watch a film at home never went away, only the way people wanted to get it.
5. Size is no protection, since Wilko had traded since 1930 and ran around 400 shops, yet entered administration in August 2023 and had closed every one of them by October, with around 12,500 jobs lost.

Where the money leaks: stock, promotion and price

1. Not understanding your customers costs you in three separate places, and only the first one is obvious.
   1. Wasted stock: goods bought in for customers who never wanted them are either sold off cheaply or thrown away, so most of the money spent buying them never comes back.
   2. Wasted promotion: a leaflet drop to retired households for a product aimed at students is paid for in full and brings in nobody, so the whole cost is lost.
   3. The wrong price: pricing above what customers will pay leaves the shelves full and the till quiet while rent and wages still go out, and pricing below it, charging £3 where they would happily have paid £4, hands over £1 on every unit sold and hides itself because the stock still sells.