3 Mindset Shifts that Drive DTC Profitability
3 Mindset Shifts that Drive DTC Profitability
You have all the answers, you're just not looking at the right things
TGIF! We’re edging closer to Christmas and New Year’s Eve, which means fun times for most people, all while DTC founders are scrambling to fulfill orders and survive the busiest time of the year.
just over 2 weeks is left in 2022 - take a breather and reflect on the year and everything you have achieved ❣️
This week I’m talking about profitability. Many early-stage DTC founders bootstrapping their path to glory are already driving profitability.
However, the DTC sector as a whole is in a bit of a hot water over the viability of the DTC model due to lack of profitability from big-time players, like Warby Parker, Allbirds, Casper and Purple to name a few.
DTC brands use CAC (customer acquisition costs) and LTV (lifetime value of a customer) to calculate long-term profitability.
📌 CAC = You need to understand how much money you spend getting someone to buy from you.
📌 LTV = how much they will end up spending on your brand.
Sounds simple enough, but a common mistake brands make is underestimating CAC and overestimating LTV.
In today's newsletter, I will go over three mindset shifts that help founders achieve profitable growth.
First, let me touch on the role assumptions in running a business and why profitability should be the North Star even for startups chasing growth.
💭 Assumptions
Biggest danger in running a business comes from making assumptions. This is true for other areas in life too, but let's focus on the topic at hand.
As a founder, you have to make assumptions to make quick decisions. You need to have a set of beliefs that define your universe. If you were to question everything at all times, you would be stuck in in-decision. So, assumptions are a necessary evil.
The risk is that these assumptions are wrong, and you may be losing money in places where you thought you were profitable.
👀 Why focus on profitability
Venture money is drying out and valuations are down. So, now, more than ever brands need to focus on becoming profitable as soon as possible. Most DTC brands are already following this route and raising only in the later stages, so I'm preaching to the choir.
Not everyone agrees that DTC startups are in a unique position to pursue profitability quicker than other startups. Venture capital by its nature has always rewarded companies that grow faster than those who hit profitability faster.
Majority of the founders I work with are self-funded and profitability mindset is already a default.
Still, having a profitability mindset and knowing how to grow profitably are two different things. So, let me get into DTC profitability lessons I learned over the years.
Now, let's get into the 3 mindset shifts necessary for achieving DTC profitability:
❤️🔥 Focus on Unit Economics
Many founders chase metrics like ROAS (return on ad spend) and AOV (average order value). Marketers and agencies love to flaunt their ROAS as a measure of success. However, understanding unit economics of each sale is what actually drives profitability.
Unit Economics reveals how much money your brand is making / loosing on each sale. Are you making profit from your first sale? How much? If not, how much are you losing? What's your repurchase rate? How many customers drop off after the first transaction?
DTC founders need to be crystal clear on these numbers to grow their business. To have better clarity on your profitability you need to switch from assessing your business from LTV / CAC perspective to each individual item sold perspective.
In most cases, founders need to drive first-purchase profitability. If it's impossible, you need to have a clear funnel that drives re-purchasing.
You have to understand delivered product margin to find acceptable customer acquisition cost. Common mistake is not including costs like marketing and overhead in calculating the delivered product margin. You need to include not only your COGS and shipping costs, but also any discounts offered, marketing expenses, overhead and operations costs, average return costs, etc.
❤️🔥 Core Collection First
Product line extensions are a great way to increase order sizes and keep customers coming back for more. But many brands routinely make them without first ensuring that the core value proposition is on a sound footing. The result? A proliferation of SKUs, increased costs and confusion among consumers as to what they’re really buying.
If you do it right, product extensions are a valuable way to keep customers engaged with your brand. But if you do it wrong, they can feel like inauthentic cash grabs. Brands must carefully weigh potential incremental revenues against supply chain costs. For a DTC brand to succeed, the market must be large enough for the core product and its direct extensions beyond the launch period. If a stretch into accessories and product extensions becomes critical to profitability, then something was probably wrong with the original business model.
❤️🔥 Marry Operations, Customer Data and Marketing
To have clear visibility across visibility across operations and long-term customer behaviors founders must build a consolidated customer data hub.
Your goal is to answer questions like:
"Who are my most profitable customers?"
"What channels did they come from?"
"What are the SKUs they buy?"
Etc.
Understanding your customer segments will allow you to focus on the most profitable ones. Invest and re-market into the customers who are worth it for your business.
Next, your goal is to identify your most popular SKUs, and answer questions like:
"Am I making money with each sale of this item?"
"Where is this item coming from? Where is it warehoused?"
"Where are the customers who buy this item most often?"
"Are they buying this item alone or with other items?"
"How much is shipping and warehousing on this item?"
Etc.
I saw this issue with one of the DTC brands I worked with. It's a US-based food brand, and on the surface they had healthy margins on their best-selling SKUs. However, after layering the operations data on the sales data, we found out that the delivered margins were negative.
The brand was losing money with each sale of their best-seller (shock horror) because of the supply chain issues in the US. It was too expensive to ship a perishable glass-jar item from California to other states.
Brand solved this issue by diversifying and setting up another fulfillment center in Texas.
Lesson learned here is chasing profitability is more than having a good gross margin. You have to understand your operations and spend time digging through data. Optimize until you die.
Thank you for your attention and talk to you next week!
In the meantime, stay connected on these platforms for more Venture Muse Club content:
LinkedIn: Anya Evans
Instagram: @venturemuse.club
YouTube: Venture Muse Club
TikTok: @venturemuse.club
Cheers and see you next week,
Anya
🐚🔮🌙