Customer Growth Strategy · e-commerce · Marketing · Retail

Unsustainable Customer Acquisition Costs Make Much Of Ecommerce Profit Proof

As much attention as both the growth and disruptive nature of e-commerce receives, few observers seem realize that often the economics of selling online are terrible (what I often refer to as “the inconvenient truth about e-commerce”). The fact is only a handful of venture capital funded “pure-plays” have (or will ever) make money and most are now embarked on a capital intensive foray into physical retail that even Alanis Morissette would find deeply ironic. Amazon, which accounts for about 45% of all US e-commerce,  has amassed cumulative losses in the billions, and even after more than 20 years still operates at below average industry margins. And while I have yet to see a comprehensive breakout, it’s clear that the e-commerce divisions of many major omni-channel retailers run at a loss–or at margins far below their brick & mortar operations.

So why is this?

Last month I wrote a post pointing out how high rates of returns, coupled with the growing prevalence of free shipping “both ways”, makes certain online product categories virtually profit proof. While the impact of this factor tends to be isolated to categories with relatively low order values and a high incidence of returns or exchanges (e.g. much of apparel), a different dynamic has wider ranging implications and profit killing power. I’m referring to the increasingly high cost of acquiring (and retaining) customers online.

Investors have been lured (some might say “suckered”) into supporting “digitally-native” brands because of what they believed to be the lower cost, easily scaled, nature of e-commerce. Seeing how quickly Gilt, Warby Parker, Bonobos and others went from nothing to multi-million dollars brands, encouraged venture capital money to pour in. What many failed to understand were the diseconomies of scale in customer acquisition. As it turns out, many online brands attract their first tranche of customers relatively inexpensively, through word of mouth or other low cost strategies. Where things start to get ugly is when these brands have to get more aggressive about finding new and somewhat different customers. Here three important factors come into play:

  • Marketing costs start to escalate. As brands seeking growth need to reach a broader audiencethey typically start to pay more and more to Facebook, Google and others to grab the customer’s attention and force their way into the customer’s consideration set. Early on customers were acquired for next to nothing; now acquisition costs can easily exceed more than $100 per customer.
  • More promotion, less attraction. As the business grows, the next tranches of customers often need more incentive to give the brand a try, so gross margin on these incremental sales comes at a lower rate. It’s also the case that typically these customers get “trained” to expect a discount for future purchases, making them inherently less profitable then the initial core customers for the brand.
  • Questionable (or lousy) lifetime value. It’s almost always the case that customers that are acquired as the brand scales have lower incremental lifetime value, both because on average they spend less and because they are inherently more difficult to retain. It’s becoming increasingly common for fast growing online dominant brands to have large numbers of customers that are projected to have negative lifetime value.

So it’s easy to see how an online only brand can look good at the outset, only to have the profit picture deteriorate despite growing revenues. The marginal cost of customer acquisition starts to creep up and the average lifetime value of the newly acquired customer starts to go down, often precipitously. Accordingly it’s not uncommon for some of the sexiest, fastest growing brands to have many customers that are not only unprofitable, but have little or no chance of being positive contributors ever.

While it’s not the only reason, this challenging dynamic explains in large part the collapse of valuations in the flash-sales market in total, as well as several major flameouts like One Kings Lane. It also helps explain why so many pure-plays are investing heavily in physical locations. To be sure, opening stores attracts new customers that are reticent to buy online. But another key factor is that customers can often be acquired in a store more cheaply than they can be by paying Facebook or Google.

Slowly but surely the world is starting to wake up to this phenomenon. The nonsense that is the meal-kit business model is finally getting the scrutiny it deserves as people start to question whether Blue Apron is a viable business if it spends $400 to acquire new customers. Spoiler alert: the answer is “no.” Increasingly, many “sophisticated” investors are backing off the high valuations that digitally-native brands are seeking to fuel the next stage of their growth, leaving these companies to thank their lucky stars that Walmart seems to relish its role as a VC bailout fund. More folks are starting to realize that physical retail is definitely different, but far from dead. And, in another bit of irony, some even are starting to see that many traditional brands (think Best Buy, Nordstrom, Home Depot and others) are actually well positioned to benefit from their stores and improving omni-channel capabilities.

It may take some time, but eventually the underlying economics tell the tale.

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here

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Innovation

Whose idea of stupid?

Since we seem to be a society that judges quickly, we often waste little time affixing all sorts of labels to all sorts of people and all sorts of situations.

That guys a loser (not to mention low energy).

We tried that before.

This will never work.

Your idea is stupid.

To be sure, there’s no shortage of dumb ideas. Yet sometimes stupid wins.

Facebook and Amazon were once pilloried as concepts that couldn’t possibly work. When Google started it was the 20th search engine to launch and completely lacked a revenue model. It also followed in the footsteps of several high-profile flameouts.

Tesla, Instagram and PayPal were all once seen as pretty ridiculous business models by just about everybody.

Psychologists talk about “projection”–the notion that when we feel the need to point out the failings of others it’s often rooted in our own insecurities. “If you spot it, you got it” as some like to say.

Sometimes there is stupidity in the world that needs to be called out and confronted.

But sometimes it’s better to judge slowly.

Sometimes it’s better to realize innovation frequently happens at the razor’s edge of stupidity.

And sometimes you just need to consider the source.

Customer Growth Strategy · Growth · Loyalty Marketing · Retail

Profitless prosperity

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.

Innovation · Leadership · Mobile · Omni-channel · Retail · Social Media

Zip it, your generation is showing

Not too long ago I had a very well-respected executive tell me he could not understand why anyone would buy a luxury product online if there were a physical store close to them.  “They must have had a bad salesperson,” he told me.

If you are anything like me–and by that I mean the parent of a teenager–you may be appalled by how texting and Facebook postings now pass as “conversations.”

Or you may be frightened by how your safe little cocoon of controlled, one-way marketing plans is giving way to the Blur of the omni-channel world.

Or you may be unwilling to commit to an aggressive mobile or social strategy because you just don’t see the pathway to profits.

Or you may be “studying” a response to the competitor that has an innovative business model that is gobbling up market share.

Let’s face it: change IS inherently difficult. But it is rendered impossible when we assume that the market will behave as it always has.  Or, more dangerously, that the way WE would act is the way our target customers will.

For most companies, and their top leadership, it is the customers of a different generation that will shape their destiny. And all too often it is the lack of familiarity that breeds contempt.

So if you find yourself saying “I just don’t get it” maybe there isn’t anything to get.

Or maybe it’s time to zip it. To listen. To learn. To accept that maybe your generation is showing.

 

 

 

Mobile · Omni-channel · Retail · Social Media

A very omni-channel holiday

First there were brick and mortar retailers and direct-to-consumer companies–and never the ‘twain shall meet.

Then came retailers operating in multiple channels–but don’t call them “multi-channel retailers”–most pursued their strategies in operational silos.

Then more companies came to realize that silos belong on farms, and we saw more integration: consistent branding across channels, pricing and promotional synchronicity and cross-channel marketing.

So where do we find ourselves this holiday shopping season?

Now it’s a world of the constantly connected customer, navigating an explosion of communication and transactional channels and touch-points.

Now it’s Twitter and FourSquare and FaceBook and blogs and customer product reviews on a retailer’s own site.

Now it’s Groupon and Gilt Groupe and dozens of other sites driving down pricing through channel innovation.

Now it’s a world where customers use their mobile devices to shorten the purchase funnel cycle to mere seconds.

Information is everywhere.

The customer can be activated anywhere.

Are you ready for the omni-channel world?

 

Brand Marketing · Customer Growth Strategy · Customer-centric

So excited! Just discovered hyperbole is the best thing ever!

You don’t have to spend much time on Twitter or Facebook to learn that “so excited” is included in a significant percentage of posts–and usually describes something as mundane as what the person is about to eat or that a new episode of Dancing with the Housewives of the Jersey Shore is about to come on.

Marketers tell us that the beer we drink will make us irresistible to the opposite sex or that we are a good and valuable person because of the handbag we carry or the new car we drive.

Charlatans suggest that addictions can be cured by reading a book.

Infomercials claim that our financial problems can be solved in five easy steps with no money down.

Because of the recession consumers are more focused on substance in their purchasing decisions.  Obvious value and tangible bang for the buck are front and center, and fewer customers are obsessed with this season’s disposable fashion or willing to pay a big premium for a rather ordinary item from a fancy label.

Yet, for many brands, the hype and the hyperbole continue.  Consumer relevancy takes a back seat.   The authentic voice remains muted.

What’s exciting about that?

Customer Growth Strategy · Engagement · Retail · Social Media

Prospects, Not Suspects

The notion that a smart sales and marketing strategy distinguishes between suspects–consumers who MIGHT turn out to become profitable customers–and prospects–consumers who are highly likely to turn into valuable clients–is an old idea. Great sales people possess this intuition.  Great marketers use customer insight, robust analytics and customer segmentation to do this more scientifically.

If you are anything like me, you may have noticed a lot of attention being given to companies that are posting seemingly impressive customer statistics.

The hot social media sites–from FourSquare to Yelp to Twitter to Facebook–have signed up millions of users (in the case of Facebook reportedly over 500 million!). But how many of these folks are actually buying anything?

Members-only “flash-sales” sites use free-shipping and high value gift cards to coax existing members to refer a friend.  Are these newly acquired members turning out to be customers with a positive lifetime value, or is this mostly a land-grab to keep private equity money flowing and high-end vendors interested?

Groupon recently executed a promotion with Gap during which a reported 441,000 customers spent $11MM in just one day. That particular promotion offered $50 in merchandise for just $25.  Most press reports deemed it “successful.”  Really?

Successful in generating awareness?  Apparently.  Successful in acquiring a significant number of marketable e-mail addresses?  Most likely.  Successful in driving short-term revenue?  Clearly.  Successful in creating buzz about Groupon? You betcha.

But how many of these consumers were promiscuous shoppers, only enticed by the deep discount?  And let’s face it, just about any reasonably desirable brand could generate an impressive incremental sales lift by cutting their prices in half.

Most of these hot brands are still dealing in the world of suspects.   Only through time and more rigorous customer analysis will they know they are gaining prospects.

In the meantime, I remain suspicious.

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Being Remarkable · Customer Growth Strategy · Innovation · Leadership

What does it cost me to see the next card?

When it comes to innovation, many companies approach it as an all or nothing proposition.   Without a clear road to profitability, they do nothing.   If the cost to develop the new line of business seems particularly daunting, they table further discussion.  When clarity around key assumptions seems challenging, well it’s better to delay (or worse yet, form a Task Force that meets once a week but generates no forward progress).

Innovation rarely comes in a clear glidepath to prosperity.  Rather, it’s a journey where reaching the first hill provides more direction as to how to climb the next.

Once I worked in business development for a company whose CEO was passionate about innovation.  When we brought him a new idea he never asked to see a detailed multi-year project plan with Excel spreadsheets showing ROI under various scenarios.

If the idea fundamentally held promise, he asked one powerful question:  “What does it cost me to see the next card?”

Sometimes it was a bit of consumer research.  Sometimes tumbling some high level numbers.  Sometimes working with R&D to assess basic technical feasibility.  But what the CEO knew was that like certain card games, winning in new business was about a series of antes–multiple lower cost steps that helped decide whether to make the big bet.

So instead of endless speculation (and task force meetings!) about whether there is a market for a new concept, spend a little bit of money on basic consumer research to get some guidance.  Instead of months of study about whether there is ROI in being on Facebook or Twitter, get one of your junior marketing folks to spend a few minutes each day trying stuff to see what happens.

Usually the cost to see the next card is less than you think.

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