Ah, the era of “profitless prosperity” is back. I still have my Pets.com sock puppet to remind me of those once glorious times.
Barely a day goes by now that we don’t hear about a stratospheric valuation (actual or rumored) for some digital darling. From Facebook to Twitter to Groupon, it seems that unless your EBITDA multiple is either quadruple digits or infinite, you’re barely worth paying attention to.
To be fair, plenty of highly valued, enduring brands have gone through periods of losses ultimately to emerge with a dominant position and boatloads of cash generation. And there are perfectly good reasons a company might decide to pursue low or no profit sales for a period of time, in targeted circumstances or with certain consumer segments, including:
- Generating trial among prospects with high potential lifetime value
- Driving traffic to a store or website for consumers with a high propensity to cross shop or be up-sold
- Creating positive word of mouth among highly influential persons (“You get a sock puppet! And you get a sock puppet!”)
- Securing valuable customer relationships in a maturing market.
The companies that do this well have a clear understanding of customer economics by segment, a clear vision for how profits will develop over time and a disciplined process for measuring progress.
The brands that do this poorly are typically focused on revenue for revenue’s sake or obsessed with new customer acquisition with no way to tell whether those new customers can be profitable.
More dangerous still is falling in love with the “promiscuous consumer”–that customer that only goes for the best deal. They are often expensive to activate, they have little propensity for loyalty and you rarely break-even with them.
If your customer portfolio is comprised (littered?) with too many of these types, expect it to end badly. It always does.