The biggest startups in the world are laying employees off. The yield curve has become inverted, inflation is at 8.6%, and economic pessimism is the highest it’s been since 2009.
For e-commerce brands, the wave of bad economic news is a shot across the bow heralding a major change in consumer spending. Bleak times are ahead. But, I think there’s room for optimism for the brands that make it.
Why am I qualified to make such a statement? I spent over four years as a consumer investment partner at Andreessen Horowitz, where I met hundreds of consumer companies and worked closely with dozens — from hypergrowth unicorns to companies winding down operations.
But I’m not an investor writing from a Sand Hill tower. I co-founded Canal to enable brands to sell more. Since our launch in 2021, we’ve worked with hundreds of e-commerce brands to expand their product catalogs and grow distribution. Most importantly, we’ve kept a close eye on what’s working for consumer brands,and what isn’t.
The more complementary and additive a product is to your catalog, the larger your cart size and the more likely a customer is to return.
While it is certain that the next 18 months will be difficult for many e-commerce operators, this time will also hone resilient brands. Here’s what we think every brand leader must know to survive the downturn:
Margins are everything
To bastardize a famous turn of phrase, your costs are eating your world. To survive, you must examine the costs chipping away at your margins. By understanding where you are wasting spend, you can weed out unprofitable and higher-risk initiatives.
Let me break down the two major cost centers for e-commerce brands that you can do something about:
User acquisition
The DTC playbook was written during a period when customer acquisition was relatively cheap thanks to digital ad spend on Facebook. But that sugary-sweet diet of cheaply acquired customers left brands with an unsustainable over-reliance on growth.
Digital ads are no longer the cheap and effective solution they once were, so brands are sinking more and more money into increasingly inefficient ads. And, juicing ad spend with a massive proportion of revenue looks even less enticing now that iOS 14.5 updates have seriously impacted targeting capabilities and updates to cookies loom on the horizon. Even TikTok CPAs are starting to skyrocket. It only gets worse from here.
All of these growing inefficiencies mean that the quality of each new customer is going down, while the cost to acquire said customer is going up — up by 75% and 61% YoY at Google and Meta, respectively.
Your unit economics are in the process of flipping on their head, if they haven’t already. Lower-quality customers spend less in their first order and are less likely to return, so your LTV is shrinking while your CAC continues to grow.
Product R&D
Unfortunately, the cost, and thus risk, of producing new products is also growing by the day.
Delays that began with the initial shock of the pandemic are still wreaking havoc on order timelines. Warehouse space is in high demand, and the average price for square footage is forecasted to grow by 22% this year. Global instability and high fuel prices are resulting in surging freight costs.
These trends make for an inflated cost of goods, a longer journey to profitability and a higher level of execution risk. If developing a new product can cost millions and take years, in-house product development is not necessarily a short-term solution for brands looking to survive a downturn.
Staving off the brand-pocalypse
What will it take to avoid letting cost centers chew through your capital in the middle of a recession? It comes down to whether you’re willing to be dogmatic about profitability while staying nimble and still keeping an eye toward growth.
By carefully stewarding your unit economics, your brand can emerge from a downturn with a strong business and loyal customer base.
But what does that mean tactically?
Increase your LTV by selling more products
Your LTV is structurally constrained by the depth and relevancy of your product catalog. The more complementary and additive a product is to your catalog, the larger your cart size and the more likely a customer is to return, particularly when your customer learns that new inventory enters your “shelves” at a higher frequency.
A larger product catalog also helps reduce the impact of supply chain challenges — with a varied catalog, “out of stock” should never mean mean “no sale.”
A larger product catalog is fundamentally a customer loyalty play. Almost half of e-commerce revenue comes from repeat customers, and the most loyal cohorts likely have pent-up spend. If you can send them more product choices that match what they already love about your brand, they will buy more from you.
Cut COGS by sourcing third-party products
You need to start reducing your R&D costs to preserve runway. While you should sell more products, you don’t have to make those products yourself.
In-house product development requires major up-front investments in cash and in time — two things that are in short supply these days. That means it’s time to start exploring how you can add complementary products to your catalog without developing them in-house.
Stabilize your acquisition costs and focus on direct optimization
This requires realistic evaluation and optimization of your current channels. First, find the channels that are the most profitable and stable, then double down. If you don’t have any, then you just take a step back and reevaluate your entire user acquisition strategy.
Here’s a hint: The most profitable channel will always be direct. Your marketing strategy must incorporate a plan for strengthening loyalty with your customer base in order to make the most of that channel. That means optimizing your website for conversion throughout the funnel. Remember, traditional wisdom suggests that it is five times more expensive to acquire a new customer than to retain an existing customer, and that multiple is likely growing as acquisition costs rise.
All of these tactics take work, of course. Survival guides don’t typically close with a magic-bullet solution. I truly believe that the consumer brands that will survive in the coming months will do so by using creative solutions to optimize their direct channels. Those that succeed will emerge from a downturn with a strong foundation of well-earned customer loyalty that will serve them well for a long time to come.