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DTC 2.0: Levers of Growth and First Party Data in the New Era

The Casper Problem: DTC Long Run Unit Economics & Shifting to the Numerator

DTC 2.0: Levers of Growth and First Party Data in the New Era
The Casper Problem: DTC Long Run Unit Economics & Shifting to the Numerator

Shopify merchants sold over $176 billion of product in 2021, almost triple the $61 billion they sold in 2019¹. COVID-19 has accelerated ecommerce, but the tide is shifting. Apple’s recent privacy changes, the end of third party cookies, and the general saturation of customer acquisition channels are causing a paradigm shift. To increase customer lifetime value, brands need to focus on optimizing the numerator of the LTV/CAC equation as well as becoming more deliberate in their marketing efforts. Every dollar that comes through your store is an opportunity to learn from your customers to optimize future marketing messaging and spend and explore avenues of growth.

The Casper Problem: DTC Long Run Unit Economics & Shifting to the Numerator

The next era of DTC is upon us. Channel arbitrage is over and the poor metrics and performance by recent public listings of DTC companies like Allbirds, Figs, Hims, and Casper reflect the decreasing returns to scale inherent in the direct-to-consumer business model. It is no longer viable to ride the coattails of another platform’s growth engine. Additionally, traditional brick-and-mortar brands were catapulted forward by COVID. Because the barriers to entry for creating a DTC company are now remarkably low, it has never been more difficult to scale a brand. The DTC brands that will win in the next decade will have to master their return on investment across their marketing, product, and customer service organizations.

DTC is in a transition. Companies are shifting their LTV/CAC equation focus from the denominator to the numerator. The age of landing new customers through channel arbitrage or riding the s-curve of platform growth is over. Brands need to realize that avoiding the Casper Problem and driving sustainable LTV/CACs in the face of increasing privacy-related headwinds is paramount to their survival.

Walking through the Casper Problem:

  • The rise of dropshipping and ability to easily start an ecommerce store with Shopify made it easy for anyone to find an overseas manufacture (often one that also made the product for a competitor)
  • Lower barriers to entry = more competition = more supply of mattresses to the US Consumer = lower prices
  • Facebook Ads removed the complexity in running advertisements that could intelligently and programmatically target the vast majority of Americans
  • More demand for advertising keywords = higher ad prices
  • Although SKAdNetwork, Unified ID 2.0, FB Conversion API, and FLoC/Google’s new replacement Topics API are expected to help ease the IDFA headwinds, currently small brands are lagging big brands in terms of seeing results around conversion and attribution modeling²

We all see the problem, increased supply driving higher discounting and thus lower pricing paired with more demand for advertising keywords in a category is a return on investment death spiral. It should be assumed that every product category will eventually become competitive and long run unit economics will converge at some economically efficient equilibrium for a category. Still, some brands are able to achieve above-average unit economics and margins for a sustained period of time. Absent a monopolistic market, successful brands simply can deliver market leading value to their customers. This can be in the form of great customer service, a differentiated offering, unique messaging, being the low cost provider, etc.

There are a myriad of solutions, applications, and tools available today to attribute, grow, and engage your customer base. Whether that’s driving traffic through organic TikTok content, advanced attribution tools to dive deep into channel specific ROIs, or utilizing a CDP to target look alike customers with high conversion upsell emails, everyone is trying to gain an edge.

The world's most complex ad tech and CDP stack won’t save a brand from the long term unit economics problem though - it will simply delay. Yes, companies that effectively employ these resources and orchestrate their marketing and retention efforts utilizing that data will have a leg up, but brands that listen to their customers needs will win long term. First party data provided by customers is a necessity to sell online, not a want.

Evidenced by Twilio’s acquisition of Segment and subsequent release of their integrated Engage product, customer analysis and orchestration with regards to optimizing retention and upsell marketing will eventually become a machine’s job. It’s now the job of the merchant to move from A/B testing creative to A/B testing the focus of their brand: products and customer experience.

Moving to the Numerator: CBCV and Examples @ Scale

Putting on our CFO hat, any company that has a customer relationship can be analyzed via Daniel McCarthy’s Customer Based Corporate Valuation, or CBCV, approach³. A management team can utilize this framework in pursuit of investment opportunities and an analysis of unit economics. While this exercise is useful for academics and strategists⁴, we as DTC companies want to understand the levers we have for long-term, profitable growth.

DTC companies have several levers for profitable growth. First and foremost, the initial customer acquisition cost is the total marketing dollars we spend on across channels to drive a purchase. While some (and maybe all), brand marketing for sub $1bn brands should fall into this category, a last-touch and first-touch approach gives us 90%+ of the picture. Next, managers need to look at reacquisition and/or continuing customer acquisition costs. What actions are necessary to drive repeat purchases? How can we retarget customers with relevant ads if they’ve fallen outside our common repurchase window? Do I have products that lend itself well to upsells/cross sells/repeat purchases? We’ll call this Expand/Retention Customer Acquisition costs and they include the direct cost to email customers, retargeting ads, and the share of ad conversions in product expansion categories that can be attributed to current customers.

Shifting to the numerator, LTV is simply the summation of the gross profit per customer over their lifetime. In consumer, to avoid over extrapolation it’s often best to line up the lifetime value window with your buyer journey or look at the customer level metrics on a 1 or 2 year basis. For example, a DTC electric toothbrush company utilizing the razor and blade model should be laser focused on the following factors in determining lifetime value:

  • What is the price of the initial toothbrush; what is the absolute lowest price I can sell the toothbrush for if I get a 6 month or 12 month commitment on brush heads?
  • How do I motivate the stickiness of my brush head offering? How do I merchandise the offering between shipping the 3 month package, 6 month package, and 1 year package of brush heads and how should I incentivize upselling to a higher tier?
  • Here we may run analysis on the churn rate between months 6 and 12 to determine how big of a discount we should give to those who subscribe for 6 months vs 12 months; in addition, shipping 4 brush heads at once for the entire year vs 2 biannually increase gross profit all else equal given one less shipment
  • What opportunities do I have in adjacent categories? Are customers asking for a full suite of dental products from floss to toothpaste to mouthwash?
  • Here we ask ourselves how do I upsell, bundle, and merchandise this correctly?
  • How do I de-risk any product launches of new products? How should I conduct this survey?
  • Eventually, we may decide to get into a big box retailer
  • While a lower gross margin business, does this aid brand awareness? Do we get a pickup in new customer sales from customers who saw our product in a big box retailer? How do we measure this?

All these factors that go into the LTV and CAC portion of the equation drive the long term return on capital for your brand. If your company cannot replicate profitable contribution margins (gross profit on the average initial order - customer acquisition cost) on initial orders (or within the first year for consumer business with a subscription mode) at scale, your losses will grow as you scale. DTC companies no longer play on easy mode on the CAC side. Companies of all sizes need to focus on making deliberate and informed creative and ad buys based on data. On the top line, management teams must understand their avenues for growth. This requires knowledge of your TAM, competitive set, and avenues to grow through the introduction of new products or services.

Collecting first party data on all customer interactions on and off site are table stakes, but listening to what your customers have to say is the holy grail.

There are a number of tools to capture customer interactions that merchants must adopt to, at a bare minimum, compete in the changing ecosystem. These include on-site analytics, a customer data platform, post purchase surveys, and attribution software.

Rich Fulop, CEO Brooklinen on Post Purchase Surveys:

“No matter what business you’re starting, that’s a really really critical piece you should have.” - NYU Startup School: Customer Acquisition talk 2017⁵

How you use this information to craft a differentiated brand is paramount. Collecting it is just table stakes. Let’s take a look at several consumer brands that have had success despite challenges:

Chubbies: Treating Customers to an Amazing Experience

Customers love free stuff. Chubbies saw a 70% increase in repeat purchases by starting a gifting program that sends a personalized note and free gifts to customers⁶.

Embedding the cost of free gifts in your prices can pay massive dividends if it leads to great customer affinity for your brand. The resulting reviews, UGC, organic social posts/tags, reorder rate, and word of mouth can more than make up for the cost of a small gift with a customer’s order. Randomizing gifts or implementing a system to programmatically give gifts to first time customers, high LTV customers, or likely to churn customers can be a successful method to establishing a strong brand.

Yeti: Niche Gone Mainstream

Yeti leveraged their founder’s roots in outdoor sports into a lifestyle brand. An amazing product, premium positioning, and word of mouth have propelled the company from $5mn in sales in 2009 to nearly $1.5bn in 2021.

Yeti leveraged advertising and distribution into a cheap-to-acquire niche during its early days. The company built a cult following on the back of their video content showing the extreme abuse their coolers could endure. Later, they had permission from customers to expand into drinkware which now eclipses its cooler business in sales. Building a cult following within your niche in the early days can expand opportunities for category growth. The average consumer thought they had zero need for a $500 cooler, but YETI’s aspirational marketing and storytelling created the premium cooler and lifestyle drinkware category.

Hims: Building on Brand Advertising, Not Performance

There’s a saying in consumer marketing that it costs nearly $100mn to reach 1/3rd of Americans. Hims & Hers inverted the traditional scale-performance-ads-until-they-break approach by building a moat around brand marketing. Today, it’s growing 70%+ on over a quarter of a billion in revenue with 75% gross margins.

Hims & Hers benefits from some of the highest brand awareness in its space. Rather than driving heavy advertising on Facebook, the company made a concerted effort to advertise in awareness campaigns such as subway ads and billboards in Time Square; even today, no specific channel makes up over 20% of marketing spend⁷ which has allowed the company to fight off IDFA headwinds and gain share versus competitors⁸. This strategy has led to competitors commenting on their superior brand awareness⁹. Hims & Hers knows where their customers will see them and hits those channels often. We’re not all running major consumer brands with wide appeal and venture backing, but we can experiment with brand marketing to establish strong recognition in our niche.

Lastly, compared to other brands in the space that just focus on one specific condition, Hims & Hers has positioned itself as more than just its original ED and hair loss which leads to a seamless and integrated cross sell opportunity.

Sonos: Turning Products into an Ecosystem

Building a brand isn’t easy. It’s even more difficult when Amazon and Google sell competing products at a loss and Apple enters your space. Sonos has built an ecosystem around making it simple to pair and group high-quality speakers and soundbars around your house that work with any streaming service or physical media.

This strong ecosystem and value to consumers means that close to 40% of Sonos products sold every year are from existing customers expanding their system. As such, Sonos acquires ~40% of its revenue every year for close to nothing. As the company grows, this engine provides great operating leverage leading to higher profit margins. In addition, Sonos benefits from strong word of mouth. As such, the cost to acquire a new “household” has fallen over the last several years, allowing the company to buck the typical diseconomies of scale CAC trend many DTC brands see despite being on track to hit close to $2bn in sales this year.

Juxtapose these examples with what commoditized brands look and feel like. Does Casper or the over 100 mattress in a box companies make you feel special? Do they provide an amazing experience? Are they the low cost leader? In contrast, Purple created a brand around a differentiated product offering and great video marketing proving commodity products like mattresses can have aspirational attributes.

As Warren Buffet once said, “a sans serif font and light pastel coloring is not a moat.” And while celebrity influencers might lead to short term revenue boost, the winners of tomorrow will be brands that have built the engine and customer experience to escape the Casper Problem.

Attribute. Grow. Engage

The winners of the new era of DTC will be defined by strong customer experiences, brand connection, and personalized messaging. They will be able to listen to customers to augment their attribution, growth, and engagement efforts. Let’s look at an example for each:

Attribute

Where customers came from is not always easy to figure out. Some young companies do very well on organic TikTok or Instagram influencer reach, but how do you know where someone saw you? Additionally, as brands get bigger their marketing channels broaden from purely performance based ads on Google and Facebook to brand advertising on billboards, public transit, or even sports stadiums. Lastly, with IDFA hitting iOS and the end of third party cookies on the web, performance marketing won’t be as effective or measurable. As with most things, the K.I.S.S principle applies here. Leading DTC Brands have found that a simple, “where did you hear about us?” survey solution like PostPurchaseSurvey.com allows them to get a deeper contextual understanding of where their customer’s are actually coming from.

Grow

Companies implementing product-led growth strategies are always launching new products and categories. To de-risk inventory buys, companies should augment data from ad tests for new products by asking customers directly what they want from you next on the order page.

Surveys that arrive through email often do not get answered or completed due to their length. This can lead to selection bias based on those who have more time to open emails and complete longer surveys. With Post Purchase Surveys shown on the thank you page, companies can ask a single question after their customer completes an order or when they come back to check their tracking number to gather more data. Allowing for a more comprehensive and accurate data set. Good Post Purchase Survey platforms have the ability to ask all, returning, or just new customers certain questions.

Engage

Similar to how Yeti and Chubbies built a community by involving their fans in the brand journey, Post Purchase Surveys allow merchants to systemize this engagement. By asking fans “what products do you want to see us make next?”, savvy DTC 2.0 brands can foster more brand loyalty, engagements and goodwill ultimately leading to higher LTVs and a stronger moat.

Successful brands inform their marketing messaging by drilling down into what specific segments are asking for, why they’re buying, and what they’re buying. A good Post Purchase Survey application can be configured to ask customers returning to your brand why they’re buying or why they chose your brand over a competitor. Then in Klaviyo, brands can analyze the differences in responses and create specific customer audiences enabling more robust targeting for flows and campaigns. Lastly, these companies can craft and test messaging for email or SMS outreach that resonates with each segment and can measure the conversion uplift.

What We Like About PostPurchaseSurvey to Attribute, Grow, and Engage

After analyzing nearly every Post Purchase Survey provider out there, these are a few reasons why we like PostPurchaseSurvey.com:

Fast & Free

  • Lightweight development means their surveys load fast, leading to high response rates on your brand’s best real estate
  • It’s always free. Their free tier includes 100 Orders per month

Programmatic Questioning

  • Big brands know survey responses fall off dramatically after 1 or two questions. Unlike  competitors who bombard customers with endless questions, PostPurchaseSurvey.com enables brands to ask customers a new question every time they revisit the order page. Another thing we like about it is the ability to order which surveys appear with their easy drag-and-drop interface and option to ask all, new, or returning customers

Integrate with Klaviyo

  • Copy and paste two lines of text from Klaviyo and all responses will be synced up in Klaviyo automatically, eliminating the need for you to manually cross reference order numbers with survey response, segments, and accounts. This allows companies to create rich segments and look alike audiences for Facebook, email and SMS marketing.

You can find PostPurchaseSurvey.com on the Shopify App Store.

Sources

  1. Bloomberg Consensus Estimates, Shopify 2019 10-K
  2. Facebook Q3FY2021 Follow-Up Call
  3. Valuing Subscription-Based Businesses Using Publicly Disclosed Customer Data; Daniel McCarthy
  4. The Economics of Customer Businesses: Calculating Customer-Based Corporate Valuation, Morgan Stanley Research (Michael Mouboussin), 2021
  5. YouTube
  6. Digital Commerce
  7. Hims & Hers Q3FY2021 Earnings Call
  8. SimilarWeb Data for Hims & Hers, Keeps, Ro
  9. Tegus Call with Keeps former Head of Growth, 2021
  10. Warren Buffet did not actually say this but check out