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Crunching the numbers
Direct-to-consumer brands have not had it easy as of late. Inflationary pressures have made it more expensive to buy materials, hire staff and ship goods, while supply chain disruption seems to have become a permanent feature. Apple’s privacy-boosting iOS updates have also made it more expensive for direct-to-consumer brands to promote their products on social media — formerly their go-to marketing channel.
This gaggle of challenges also appears to have made venture capital firms cautious when it comes to investing in these companies — making it even harder for brands to secure the funding and clout these investors are known for providing.
The pivot towards profitability
In response, savvy founders are trying to take the sting out of rising costs and get closer to profitability by improving their margins.
A number of brands have chosen to do this by increasing prices, sending heartfelt emails to customers explaining their reasoning. At the same time, they are also carefully analyzing their bank balances to figure out where spending can be cut. For example, Alcohol-free aperitif brand Ghia, which said it was at risk of losing money on its products after ingredients prices rose 20-30% last year, has slowed hiring, while better-for-you instant ramen brand Immi cut its influencer marketing budget by 95% at the tail end of last year.
Dan Wilson, chief data officer at brand building and consulting agency Charlie Oscar, says that brands are having to be picky on what they spend on, and temper their growth expectations as a result. “There’s a trade-off between the new growth you bring into the business, which in the short term increases cash flow, [and] managing retention and lifetime revenue in the medium- and long-term to extend that pathway,” he says.
Wilson says that brands have been puzzling over this problem since early 2022. Some categories have been hit harder than others, Wilson says, with categories that boomed during the pandemic such as homewares have also having to deal with softening demand since lockdowns have been lifted. On the other hand, categories where there is a tendency to repeat purchases have been somewhat insulated, because consumer demand has remained higher.
Setting goals
The path to profitability will look different depending on the specific category a brand is operating within.
Last September, hard kombucha JuneShine decided to stop selling its drinks on its website altogether, after the cost of acquiring customers rose from $20-30 per customer to over $100. While that particular sales channel had generated more than $4.5 million in sales for the brand in 2021, it simply wasn’t worth the cost of running the operation. Now, JuneShine only sells its products via wholesale channels, which generate up to five times as much revenue for the business when compared to its best direct-to-consumer sales months.
But in some cases, continuing to focus on getting new customers on board could still be the best route. For Different Dog, a Charlie Oscar portfolio business, “the fastest way to become profitable, because it’s a subscription business, is to increase that customer acquisition number and [try to] increase retention to a maximum level,” Wilson explains.
He says that Charlie Oscar uses data modeling to try and figure out which customers are most likely to churn, so the company can intervene and try to keep them. Over the past six months that Charlie Oscar and Different Dog have been working on this, the brand’s first-month customer retention figure has improved by 26%.
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