Tucker Matheson is a co-founder and Managing Partner at Markacya digital marketing strategy firm headquartered in New York City.
Over the last decade, direct-to-consumer (DTC) business models have changed to meet evolving consumer demands. According to CB Insights, DTC startups (not counting the food and beverage sectors) reached over $1 billion in funding in Q1 2021, showing continued investor interest in the industry.
Early DTC adopters such as Warby Parker, Casper, Everlane and All Birds have had the benefit of lower customer acquisition costs from 2008 to 2020 across digital channels. Now, with more competition flooding the digital marketplace and driving up the price of advertising across platforms, customer acquisition is becoming more challenging—and more expensive.
In a Harvard Business Review report, Gary Vaynerchuk noted: “Ninety-eight percent of DTC brands are out of business, they just don’t know it yet.” It is more important than ever for brands to take a finance-based approach to defining their e-commerce strategy and investments to ensure profitable revenue growth.
There are some basic principles that not only can help DTC businesses stay in business—but also thrive—by connecting their marketing investments to the P&L.
Three Focus Areas of Finance-Based Marketing (FBM):
• Optimizing marketing infrastructure and investments.
• Creating a profitable customer acquisition funnel.
• Expanding customer lifetime value.
By setting clear overall and channel-specific KPIs to use for decision-making, brands can be agile and strategic in achieving P&L objectives. It also ensures brands are focused on customer margin expansion over time through repeat purchases, loyalty programs and omnichannel growth.
Calculating Core E-Commerce P&L KPIs
Finance-based marketing, which is what our firm specializes in, starts with an evaluation of unit economics for an average new customer e-commerce order. While there are numerous frameworks we apply in day-to-day operations, we first introduce a profitability calculator framework to understand delivered product margin and to calculate a permissible customer acquisition cost.
When calculating delivered product margin, brands should first start with their average order value and subtract their average first order discount (eg, 10% off first order) to determine a net sales figure. This amount should be decreased by the average cost of goods sold per unit, freight and logistics costs per unit, customer acquisition cost, agency fees, other internal overhead at the unit level, average customer shipping costs, average return costs per unit, etc. Brands will want to use this formula to baseline how much margin they make from new customers after all costs, once the product(s) get delivered. Here is a template we use to help determine a client’s media efficiency rate that can help you calculate delivered product margin for your business.
While acquisition, product and operations are categories in the calculator that brands can leverage to improve their profitability over time, when it comes to marketing strategy and management, MER (marketing efficiency ratio) and CAC (customer acquisition cost) are the two foundational KPIs brands should focus on.
MER is an e-commerce metric that assesses cross-channel performance and profitability. Since the formula is gross revenue minus discounts divided by total advertising spend, it takes into account email, SMS, affiliate, influencer, organic, direct and other channel revenue. This enables brands to look beyond cross-channel attribution and manage the business holistically to achieve this defined baseline margin spread. It creates an overall metric for leaders to know quickly if their DTC business is more or less profitable than its target for any period.
CAC is a metric transaction focused on the cost of getting a customer to purchase. Brands should aim to identify a new customer CAC range (eg, $40.00-$60.00) that accommodates the ebbs and flows in product demand and seasonality. To make this determination, looking at historical data in individual channels as well as blended cross-channel CAC can be helpful. Where possible, brands should aim to drive first purchase profitability, but if this is not possible, there must be a clear funnel infrastructure to drive repeat purchases and create a profitable customer lifetime value. This KPI, in particular, is critical to managing new customer acquisition and monthly budget pacing in core channels like Facebook, Instagram and Google. Due to decreases in efficiency from the recent user privacy rollouts across Apple and Android, brands can no longer scale on these core channels alone. Brands must manage these channels more efficiencies based on unit economics and allocate a marketing budget to brand awareness, marketplace and omnichannel investments to get in front of new customers.
With third-party cookies and user tracking going away, brands must be savvier than ever with their marketing budgets, and that can be achieved by reporting performance in a way that translates to P&L results. Defining baseline profitability metrics like MER and CAC will help brands manage revenue and profitability in real time through peaks and troughs in business performance. Finance-based marketing enables leadership teams to stay in the cockpit around scaling profitability without getting distracted by vanity metrics and the complexities of cross-channel attribution.
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