CEO Diaries : Economics of Acquiring an E Shopper....

Along with a lot of young entrepreneurs , in 2010-12 , I learned the most critical lessons of my E Retail Journey!!! "It is very easy to build a 10-20 Mln USD E Retail Business". . This is in stark contrast to, say, a niche bootstrap Service , which is very difficult to build to that level but valuable when you do.

As I browsed through week’s internet retailer review for a new Run Away Success story in E retail , I was struck by one of the reasons this discrepancy exists: marketing leverage. Most retail businesses (traditional or online) have to spend marketing money to acquire a new customer at scale. Small e-commerce companies can be exempt from that – if you fill a niche and you have distinctive product-market fit with a set of customers, you can and should land them virally or cheaply. But as the business grows, you need channels of acquisition that you control beyond sitting around and hoping your customers tell their friends. Having a product that delights the user and drives high levels of customer satisfaction (which leads to high levels of referral) is crucial for building a killer business. It separates the great businesses from the good ones at scale, and in the early years, it is often sufficient to drive growth with no need for paid media. It is an important topic, but one for another day. What demands further inspection is the fact that many companies stall out when it comes time to transition off organic growth and add paid media as the primary growth vector as they scale. Customer acquisition costs money and this is where things get tricky in retail. What is the lifetime value of a retail customer? It’s a non-trivial question.

For a concrete example, take the barchart on the side which shows A typical E Retailers business. As you see, the company has been able to nearly double revenues year-over-year, on virtually the same advertising spending as the previous year – in fact, advertising has been flat for three years. This isn’t some magical outcome based on large-scale viral adoption. Rather, it’s just good marketing execution to land new customers who like the product coupled with a model that gets them back on the site an average of 30 times a year, providing repeated opportunities to sell to them. Given that a customer who sticks for the first couple months has an expected length of membership of several years, that’s a lot of selling opportunities. Another way to look at the marketing leverage they get out of subscription:

Re-engagement is the key. This is important because the sneaky problem with e-commerce is paying to reacquire your existing customers. As a retailer, I see a lot of companies with a killer product who have built a billion in revenues at a rapid clip. (Understandably, most burn some cash to get there, but if companies didn’t burn cash to build, investors would be out of business) In almost all cases, these businesses have an “at-scale economics” slide in their pitch deck that shows a customer will be quite profitable in time – buying from them several times a year, and thus justifying the $30-45 spent to acquire them as something that will be easily amortized across future purchases. Re-engagement drives higher LTVs, which enable the ability to spend more on acquisition. Unless you’re Amazon, the capital markets won’t let you grow and burn cash forever. As these companies grow, however, they find they continue to burn cash at an unsustainable rate. One big contributor is the lack of marketing leverage: that customer you acquired for $42, you have to pay $20 again getting him back. Maybe he typed your site name in Google and clicked on the paid link at the top to navigate there, or after ignoring your emails, he finally clicked through on your 40% off coupon. Either way, now that customer cost $62 to acquire.

While Flipkart & Myntra have been the darlings of Indian Ecommerce industry , (and worrying the investors these days) they have a great product, and had been on a growth tear with unreasonable capital consumption. In no time, it will have to demonstrate meaningful earnings, and to do so, I believe, it will need marketing leverage. From 2011 - 2016 they grew revenue nearly by more than 500 times, an awesome rate – reaching an impressive 1.5 billion in 2016, Marketing spend grew exponentially from a few dollars a customer , to a humongous $ 21 per customer. The company is certainly demonstrating a run away topline success, ,while at the other, continues to bleed @ 24% of the topline for the 6th year in a row..

I fear this fate is in store for many popular e-commerce businesses today who are hoping their curation of distinctive products and the brand are enough to lock their customers in. Retail customers are fickle and forgetful. They will find other merchants they like, and even if they continue to like your business, they will forget to come back to shop. That is, unless you create a systematic method of re-engagement with no marginal cost.

There is a perception in some quarters that flash sale and subscription businesses have failed as a category. I think a lot of this has to do with high profile companies that didn’t live up to the expectations they set both in their promotion and in the amount of money they raised. While a full teardown of the operational challenges posed by a rapidly growing e-commerce company is worthy of an entirely separate discussion of its own, it is true that the degree of difficulty of scaling these businesses is much, much higher than that of most mobile, social, or SaaS startups.

There was a period of easy access to late stage capital (2009-2012), where I believe investors were seduced by the large revenue numbers that startups generated, and all that capital allowed undisciplined management teams to dig themselves very deep holes with mediocre operations. Thus the pendulum swung, and investors who were once “all-in” on e-commerce were now all out – rather than a more nuanced realization that there are some great companies and some poor ones.

A health E retail module works on a 12% - 15% COR : COA ratio, and hence, retailers have a huge legroom of 80-85% to improve on the Revisit & Re Engagement modules to bring the same shopper again.

Some potential models to drive re-engagement:

• Subscription: Long popular in low-COGS business (media such as Netflix or Spotify ), e-commerce is just starting to catch on to this approach. JustFab and BirchBox are probably the biggest examples to date, but others like Dollar Shave Club are knocking on the door.
• Flash Sales: AWOK , Plugo , PAL & others pioneered this category and continue to make it work. Dealaday.com also uses this as a primary means of driving re-engagement. The key here is to make daily content an exciting event – unlike subscription, you only have permission to be in the inbox, not a commitment to come to the site – so you have to earn them back every day. Without great content or unbeatable deals this does not happen. Also scarcity is key. Consumers must feel that they better click through that email RIGHT NOW because if you wait an hour, the best things may be gone. If you are going to use “unbeatable deals” as a vector, you’d better have a compelling reason to believe you (as a startup) will have a structural pricing advantage that can’t be matched by other larger scale retailers.
• Loyalty Programs: Amazon Prime is effectively a loyalty program that gives benefits back to the consumer in exchange for concentrating their purchases. A Costco membership is a premier offline example with a similar model: “Pay us $50 per year and we’ll sell you everything at cost.” The question is, what benefit can you provide your customers that re-engages but doesn’t just cost you the same as re-marketing to existing customers? Amazon would argue “it’s better to give that money to the customer than Google,” and that’s true. But, remember, you are not Jeff Bezos and the market won’t let you lose money forever.
• VAS : Custom & Bespoke VAS has been driving the change in the "Niche" category over the last few years, be it Gourmet F&B, Apparel or Recreation, the category is able to build a very strong learning relationship with the shopper, and leverage the relationship more from a comfort & ease route, rather then purchase sales. Use of "virtual relationship managers", " Personalised stores" & " Private Shopping events" have helped build a strong referral network amongst the existing shopper - and leverage the positive experiences & Vibes.
• Seasonality : If the Retailer is able to predict & adapt to the "Purchase Seasonalities" across different categories, he would be able to create an "opportunity" to continue recieving the shoppers patronage & Share of wallet.
• Predictive Algorithms : The relevance of bigdata & predictive algorithms have grown significantly in the eretail era. Understanding purchase behaviours & predicting latent demand , has helped expand the Apparel Purchasing frequency from 4 visits a year to around 12 / 14 purchase occasions - by creating artificial stimuli in the trade plan & using predictive shopping algorithms - recommending the need - even before the shopper feels it .

Without a structural re-engagement mechanism, you are banking on having such an amazing product (or value) that the customer comes back over and over. It does happen – look at LVMH – but it doesn’t happen often, and usually not at the pace necessary for a tech startup. I’d rather run a business where you have your hands on the levers of growth than betting on a merchandiser who can anticipate trends and always be at the forefront – though having both would be really nice.

Author can be reached on kartik679@gmail.com, for further comments & Discussions..