When meal-kit companies were started, they created quite a disruption in the food industry because consumers loved the concept. Why? Because meal-kit delivery services were the industry’s best example of the consumers’ growing movement towards greater convenience in eating fresh foods, along with the need for transparency and awareness in knowing what’s being consumed and the provenance of their food. This is especially true in the cases of younger consumers who are also extremely strapped for time, making this segment more open to the idea of accepting meal-kit services.
On the business front, there is an obvious opportunity in this space considering that in the UK alone, the £200 billion plus grocery market has had only one disruption in the last decade — Ocado: the only company that tried to bring in technological innovation to help consumers make their lives more convenient by improving the process of their grocery shopping. The U.S. grocery industry is bigger, with annual sales in the range of $650 billion, making it more attractive and hence more competitive, with the likes of Blue Apron.
It is salient to note that in an industry that is just opening up to disruption, meal-kit companies possess an extremely important influencer of not only their own future growth but of the industry’s as well: data. By harnessing the massive amounts of data collected on consumers’ dining preferences, companies could come up with myriad ways to provide better services to their consumers and position themselves as lifestyle products as well as enable adjacent industries to create more value.
So, what’s the problem?
With Blue Apron going public earlier this year, there has suddenly been a lot more performance data available publicly than before, making it easier to gauge the ground realities beyond the hype of marketing and venture funding. It has highlighted something critical in this space:
Turning a profit has proven elusive
On one hand, it is quite normal for venture backed companies to focus on growth over margins and profits; on the other, data has revealed that large sums of money have been invested in marketing and advertising to acquire new customers — in the form of giving away free meals and heavy discounts, making profitability elusive and revealing retention challenges.
Daniel McCarthy, Assistant Professor of Marketing at Emory University has done a detailed study on the challenging unit economics of Blue Apron, which can be found here.
To summarise a couple of key points from Daniel McCarty’s study:
- 77% of customers will churn by the end of the year
To give you a perspective, a study showed that Netflix’s 12-months churn rate was 9%. Meal-kit services are different from digital streaming companies, but hopefully this gives some context of a successful subscription business.
- During the customers’ lifetime, the amount of revenue that Blue Apron generates from them tends to go down over time, not up
This proves that it is not even that effective to try and acquire new customers at any cost because the average revenue per customer is actually decreasing over time. In fact, it is possible that some of the earlier users are compensating for some of the more recent users who are coming in purely because of discounts and offers, not to form a long-term relationship with the company.
This problem is not limited to Blue Apron alone: Professor McCarthy has also recently published a follow-up study to indicate that HelloFresh has a bigger retention problem than Blue Apron.
These insights prove that this affects the entire space. Essentially, they all point to the same:
Retention is a big problem in meal-kit delivery services
How can we improve this?
Using the insights derived from above sources, I have highlighted some product suggestions on how to deal with the increasing churn problem for one of the UK’s leading meal-kit services, Gousto:
(Please note that the suggestions below are purely based on my assumptions on the business; it is possible that some or most of these are already considered on Gousto’s roadmap, but since I am not privy to that information I have had to make some assumptions. Also, I am in no way affiliated to Gousto).
If we want to improve retention, a primary business KPI to measure and monitor is Customer Lifetime Value (CLV). As we know, a small difference in CLV could have a potentially significant impact on overall revenue.
For example: Let’s say the AOV of an average Gousto customer is £40, and the average order per customer is 3, then the Average Revenue per Gousto customer is £120 per month.
Given the data and insights from the above studies on retention for similar companies in this space, let’s say the average customers stays with Gousto for only 6 months, then the average CLV of a Gousto customer is £720.
As you can see, there are 3 levers to try and increase the average CLV:
- Increase the AOV per customer
- Increase the number of orders per customer
- Increase the average amount of time customers stay with Gousto
For point 1, let’s say we increase AOV from £40 to £45, keeping everything else constant, CLV will increase from £720 to £810, resulting in an uplift of 12.5%.
For point 2, let’s say we increase average numbers of orders from 3 to 4, keeping everything else constant, CLV will increase from £720 to £960, resulting in an uplift of 33.33%.
For point 3, let’s say we increase average amount of time customers are staying with us from 6 months to 8 months, keeping everything else constant, CLV will increase from £720 to £1080, resulting in an uplift of 50%.
Arguably, points 1 and 2 are up-selling strategies, rather than retention strategies, but at the end of the day, retention is all about adding value so they could be considered valid methods to achieve that. However, considering the fact that we want to focus mainly on pure retention strategies, and considering that in our example above, point 3 is the most effective (assumedly) for increasing revenue, we are going to try and focus on creating a product roadmap that satisfies this objective of:
Increase the average amount of time customers stay with Gousto
In order to hit the objective of increasing retention through making customers staying with Gousto for longer, these are some product suggestions:
- Delighting the customers
- Featuring your fans in your service offering
- Ability for customers to accrue benefits
- Mounting losses for customers to disconnect
Please note that all suggestions below are just ideas. They first have to be validated inside and outside the business through user research testing, and possibly A/B tested to iterate in small stages to hit desired objectives/KPIs.
These suggestions are fleshed out in more detail below:
Delighting the customers
Gousto is not in the business of simply supplying food ingredients to customers, but is actually in the business of solving the customer’s pain points of lack of time to prepare tasty and nutritious meals by providing a better food experience.
As Reed Hastings, the founder & CEO of Netflix, once popularly said that Netflix competes with “drinking a bottle of wine”, similarly, Gousto does not compete only with other meal kit service companies but also with supermarkets, restaurants or food delivery companies such as Deliveroo. People who subscribe to Gousto want a delicious home cooked meal but with none of the hassle of grocery shopping, meal planning and a kitchen full of ingredients that they might seldom use.
To give a real example of what delighting could mean for customers, this is what I received from Ocado last week:
Why did Ocado send this? I would have probably continued to shop with Ocado regardless, but receiving something like this makes me feel important and valued as a customer. This delighted me! Moreover, now that I know they are going to send me a bottle of champagne when I hit my 5th purchase, I am probably not going to stop until then.
They have convinced me to stay longer than I possibly would have!
Gousto has earned solid credibility regarding the quality of its ingredients and the variety and deliciousness of its recipes among its consumers. By delighting the customers further, it has the opportunity to position itself as a lifestyle product that its customers cannot do without.
To relate this to Gousto, here is an example scenario:
- On post-checkout, ask the customer: “Why did you purchase this box? Is this for a particular occasion?”
- If the customer responds with “Cooking for a Date”, how about sending them a personalised note saying: “Good Luck! Hope you have a great time!”
- If the customer responds with “Anniversary”, how about sending them a scented candle for that candle light dinner, or a complimentary bottle of wine.
Thoughtful experiences like this could create a long-lasting impression on the customers’ minds, making it difficult to disconnect with a brand that cares for them.
Featuring your fans in your service offering
HelloFresh has enlisted celebrity chef and poster child of home cooking, Jamie Oliver, to come up with exclusive recipes and associate with his fans. Over in the U.S, Marley Spoon is doing the same with Martha Stewart.
Bringing on celebrity chefs is great and makes perfect business sense to try and associate with the lifestyle and cooking of those chefs, however, in my experience of running a supermarket business in the past, the Coca Cola bottles that sold the most weren’t the ones advertised / promoted by celebrities, but the ones that had the names of normal people like you and me — buyers associated a lot more with bottles that read names of ‘Chris’, ‘Sarah’, and ‘Laura’, for example. In fact, this ‘Share a Coke’ campaign became one of the main reasons for Coca Cola’s revival in sales, after more than 10 years of steady decline.
This is one example of how Soda Stream features fans in their content:
Gousto already has a fantastic presence on social media but encourage your users to share even more content on these platforms, for example Instagram. Put your fans in the spotlight and let them know how much you appreciate their support in your journey by including them in creating recipes. Create a buzz around this by creating a competition, with the winner’s recipes being featured as a recipe choice for other users to purchase.
Now, in the case of Gousto, imagine that in the below example, it did not say “Annabel’s Chicken Tikka Masala”, but instead said: “Laura Bridge’s Lamb Meatballs” OR “Tim Smith’s Grandma’s Baked Fish Pak Choi”.
‘Laura Bridge’ and ‘Tim Smith’ — regular people like you and me — have now suddenly become celebrities. How inspiring is that for others to try and have that kind of impact.
Allowing customers to accrue benefits
If you are an Amazon Prime customer, this must look familiar:
Amazon takes a lot of pride in quick deliveries, but quick deliveries cost more money. If every Prime customer opted for the quickest delivery possible, it will mount up expenses for Amazon. That’s why I find it very smart that they are incentivising users to choose a No-Rush delivery in return for a benefit. I have chosen this option several times myself, because there have been times when I haven’t really needed an item the very next day, however I could always use that extra credit for my future purchases. In this way, by now, I have a lot of credit in my Amazon account.
This is a good example for accruing benefits for the future.
But what happens if I discontinue Amazon Prime? I lose all those credits that I have worked so hard for! This makes it hard to discontinue using Prime services.
In the case of Gousto, with the current offering, it could be a very similar strategy to present users with the following delivery options at the time of checkout:
- ASAP (3 days)
- No-Rush (5 days): in return for 5% discount on the next purchase
This concept can also extend to referral discounts by inviting friends and family, or maybe introducing “Gousto points” to accrue in such cases with the potential option of using those coins for future purchases/upgrades or by offering staggered discounts throughout the purchase journey of the customer or by offering other low hanging benefits.
Mounting losses for customers to disconnect with Gousto
This could be a controversial tactic, yet it is very commonly used in most businesses. The idea here is to try and integrate your product/service in people’s lives in such a way that it makes it difficult to rip the bandaid without undergoing some kind of pain — in other words, try and create value for your product by making it revolve around your customer’s lifestyles.
One way to do this for Gousto is to try and cater to individual personalised needs of the customers, to whatever extend practically possible. These are some ways to try and achieve that:
- Allow them to mix and match ingredients: In order to go mass market, Gousto needs to cater to all kind of cooks — that means, if a more experienced cook wants to be able to add in a little extra of one particular ingredient, or swap one ingredient for another in a particular recipe, there should be flexibility in the platform to be able to do this. Disconnecting from Gousto would mean losing this flexibility unless allowed by all other competitors to the same extent.
- Create a communication medium within the platform: We don’t have to create a sophisticated community forum inside the platform, but maybe invite top chefs and cooks to do AMA (Ask Me Anything) sessions and allow users to learn more about cooking in general, or get top tips and advice from experienced professional chefs. Disconnecting with Gousto means losing access to this kind of interaction and education, included for free with the subscription package.
- Catering to specific diets: Gousto should aim to collect more data about a customer’s lifestyle/diet choices. This could be in the form of a very simple post-checkout survey to collect such information: “Hey! Do you have a specific lifestyle?” with maybe the following options: “Muscle building: High protein, low carb; Ketogenic: High fat; Weigh loss: Low carb; Diabetic: Low sugar; No preferences; Other; etc…”. Once Gousto has this level of rich data, in the future, there could be options to choose boxes that suit these needs. People that follow a specific lifestyle tend to be more specific about meal choices, in turn making them more suitable for remaining Gousto customers for a longer period. Ripping away Gousto from their lifestyle could be painful for them.
Any platform/service that is more embedded in the lifestyle of the users makes it hard for them to disconnect without bearing this loss. The greater the losses, the harder the decision.
Once seen as a potential thorn in the side of the massive grocery industry, meal-kit companies have started facing an onslaught of competition from big brands and newcomers alike. In order to truly go mass market, companies like Gousto need to balance short-term revenue wins with long-term sustainable profitability. Solving challenges around retention will be a key factor to try and achieve that. Once the novelty wears off, most customers will ask themselves if these meal kit subscriptions suit their lifestyle. If the answer is a resounding Yes, companies in this space should not be found wanting!