Rough sea for consumer startups — how to cope with it!

As consumers change their consumption habits and navigate through challenging times, consumer-facing startups need to rethink how they reach new customers and how they engage with existing ones.

Written By Marcau’s David Hug and Andrea Annese

“The Great Wave off Kanagawa”, artist: Katsushika Hokusai

The world is changing
When the pandemic officially began in November 2019, few people could have predicted the long series of events that have changed our lives and the economic environment in ways not seen in decades. The global economy began to show scary signs of a downturn, the geopolitical balance swung from west to east, while interest rates skyrocketed and a recession seemed just around the corner. So it’s not surprising that anxiety about the future has increased, with more than 60% of consumers around the world not expecting the economy to recover in the near term. Meanwhile, the Consumer Confidence Index (CCI) has reached its lowest level since 2008.

CCI — Marcau’s elaboration on OECD data

Inflation and changing of attitudes

European annual inflation rates (%) in Sept.22 ( Marcau’s elaboration on Eurostat Data)

Consumers’ fears of recession and cost-of-living increases are more than justified when you look at current inflation rates across Europe. Even in the strongest economies, rates are over 10%, far above the ideal 2% target set by ECB.

What does this mean for consumers?
Figures like these concretely change the lives of consumers in their daily activities and strongly influence their purchasing power and attitudes. Let’s just remember that the cost of basic services such as housing, energy, food, and transportation has reached record highs, sometimes exceeding 20% per year.

In addition, over the past three years, consumers have been in a constant state of crisis and have changed their consumption habits, preferring to replace spending rather than simply reducing it:

• The brand loyalty: traditional scheme has been disrupted by COVID, with 75% of consumers changing their brand preferences amid latest global developments.
• Cheaper alternatives: premium offers have left space to high value for money products in essential segments, with 48% of consumers shifting to cheaper alternatives.
• Brand Purpose: notwithstanding the problems in the affordability of premium prices for sustainable products, consumers will not sacrifice sustainability. They are increasing their spending in alternatives, like in second hands and refurbished products while reducing expenses into top brands not doing enough, or harming, the planet. Brand purpose is among the most important drivers when consumers decide to try a new brand.

What does this mean for consumer-facing companies? — some food for thought

The complicated times we went through and those we see on the horizon have affected businesses in the same way they have done with consumers. Lockdowns due to the COVID crisis, the global supply chain inefficiency, the resource scarcity and the latest changes in consumers’ spending habits, will force B2C companies to rethink their strategies. But what is the best way to face this new environment? On the one hand, companies need to reduce cost pressures without compromising the perceived value of their offerings; on the other, they want to keep prices competitive. As if this complex equation were not complicated enough, consumers facing business will have to cope with a new variable:

The usual playbook — “massively BUY customers through paid marketing, then add SEO and CRM” — is out of its equilibrium.

Digital advertising paid channels’ cost have presented a tremendous upward trend during last quarters. CPM (cost per thousand) has surged up to 185% on TikTok, and similar numbers can be presented for Facebook, Instagram and even Google, with a 75% year over year increase in its programmatic display CPM.

Aside from higher costs, digital advertising campaigns are also becoming less effective at targeting the right audience as customers become better at avoiding unwanted ads and more concerned about how their data is used (see for instance Apple’s new data policy ).

What to do next? It is time to discard old thought patterns and tread new paths. Be creative!

Here some of the lessons Marcau Partners learnt supporting Ringier Digital Ventures, specialized in consumer-facing start-ups.

1. How to reach new customers and engage existing ones

• Diversify customers acquisition channels from the start: reducing the dependency on Meta, Google and the rest of the paid ads mafia not only can reduce cost, but it can contribute to an easier scaling process for new (and established) businesses.
• Focus more on content marketing: it’s incredible how quickly content can go viral these days. Creating engaging content on a consistent and programmed schedule can go a long way toward reaching a large audience in a quick and cost-effective way. One of the best example of this strategy can be admired on Teta’s TikTok profile. One of the first videos posted on the platform got viral attracting thousands of viewers, for free and in record time!
• Affiliate programs: It’s undeniable that affiliate promo codes (also known as “coupons”, “discount codes” or “gift codes”) are a powerful way to incentivize people to engage with your brand. We all love a good deal from time to time, don’t we? The opportunities offered by thousands of micro-influencers on social media are endless these days, and the chances of your promo codes going viral and reaching thousands of viewers are very high. Sometimes, influencers become even more than just affiliate, they become true brand ambassadors, like the fit-army of micro-influencers sponsoring the Portuguese Prozis.
• Leverage customer-generated content: Get your customers to sell the products themselves by making them a part of it. Supporting your best customers and making them feel important can have two important effects: First, it increases brand value and second, there’s the added chance that your products will go viral. A good way to pursue this strategy is to offer areas on your channels (websites/social channels/etc.) where customers and fans can show how they use the products, or create a community of brand ambassadors. The best example of this strategy is GoPro: At least six thousand GoPro-tagged videos are uploaded to YouTube every day!
• Build proprietary channels: Today’s world offers a wide variety of relatively inexpensive ways to build your own channels to attract customers.The oldest and probably the best known is the newsletter ( owned or in partnership).
  More and more companies also rely on proprietary podcast next to sponsoring third parties’ ones. Masters and Vanguard from Shopify and Open Account by Umpqua Bank are two great examples of this strategy from the startup ecosystem.
• The craft of good SEO is often underestimated or neglected: The daily search queries on online search portals harbor huge opportunities. If you have done your SEO homework properly and have a clear strategy, you will certainly have seen what it means to be on the first page for matching key words and not on the second or third.
• Explore new channels: when digital ads are out of the question, other channels must be explored. Following the same pattern of aiming at virality through original content on social media, the same can be tested in traditional media channels. Be creative and reach customers where they spend most of their time: reading blogs, watching TV, reading newsletters. Again, content is king.
  Our Ringier Digital Ventures portfolio company Carvolution is using paid content in cooperation with media houses to promote its services. This way of advertising offers more room for explanation, delivers more insights for the potential customer and qualifies the potential click. This channel became one of the main driver for new leads.

Here are other examples of alternative paid channels:

• Cooperation with other brands that have matching touch points with your potential customers or overlapping demographics. Spotify has always mastered this technique, creating amazing partnerships with Starbucks and with Uber, among the others.
• Out of Home: outdoor advertising is recovering very well from the pandemic and it is going far beyond billboards. It is worth to mention at-home health test kit brand LetsGetChecked that set up a giant couch in New York City’s Flatiron Plaza, to promote its kits. Another interesting case can be admired looking at Casavo’s offline campaigns in Italian streets, where the company created a piece of street art in the heart of the Milan city center. The beauty of OOH is that it cannot be overlooked by skipping, fast-forwarding or paying more to avoid ads. But, most importantly, it perfectly fits GenZ and GenY profiles.

Casavo’s art wall in Milan city centre, source: www.casavo.com

2. How to improve the underlying business

In times when customer acquisition costs are skyrocketing, it is important to focus on building the right scorecard with a larger variety of KPIs.

• Average Basket Size: Shopping carts with a certain size and a high CM1 margin offer more breathing space for customer acquisition. Regularly review the size of your shopping carts and give customers the opportunity to buy more than a single product from you. A wider shopping cart assortment not only means a higher ARPA, but also increases the likelihood that customers will fall in love with your products and come back again for them. Bundles, mixed packages, and personalized recommendations are popular ways to achieve better cart size.
• Average contribution margin: Focus on a good margin from day one and if there are higher and lower margin products in your offering — try to bundle them. For example, combine physical and digital products. In our Ringier Digital Ventures portfolio, Makerist (as part of The Creative Club) gives the customer the opportunity to buy e-books with do-it-yourself instructions and the necessary materials on the same platform.
• Life time value (LTV): Even if you are already profitable (after marketing) with the first purchase transaction with the customer, it is important to work on the life time value.

How can consumers oriented businesses improve their customers’ LTV? Here are some points to pay attention to:

• Business model: one-time vs. subscription. Yamo, from our Ringier Digital Ventures portfolio, offered both one-off transactions and subscriptions on its website in the past. Management had the courage to take a bold step and offer only subscriptions. In order to be able to offer something suitable to as many customers as possible, three plans with different durations and price points were drawn up. The hypothesis derived from previous customer behavior was that 80% would choose the shortest option (with the lowest customer commitment). The (ad)venture paid off: 50% of customers have opted for the shortest option since the changeover, 30% for the medium option and 20% for the longest option. They were happy to accept the corresponding price reductions. For Yamo, this behavior brings a major advantage in the form of a higher LTV on the first purchase.
• Re-ordering: make sure the process is as seamless as possible and avoid thousands of clicks. To simplify this procedure, add a one-click reorder feature so customers don’t have to search again for the product they want.
• Top of mind awareness: stay present with the customer (between possible transactions)
• Pricing: test the right strategy to get the necessary commitment from the customer.
• UX: 88% of customers are less likely to return to a website after a poor UX. It is therefore important to provide them with a smooth, error-free and amazing journey. Make sure your offering includes the best features from top performing marketplaces: browsing history, one-click social login, wishlists, related product recommendations, rewards programs, order status tracking, to name a few.

What’s next?

There is no escaping the fact that we are facing a unique combination of new patterns in the consumers environment, but it is in times of change that new opportunities arise. It is a good moment for mental reframing, to get out of the comfort zone and seize new opportunities!

Since we at Marcau Partners have been involved with consumer-facing businesses for decades, we thought it would be really helpful to share our experiences along with those of our founders. So hold on, part 2 of “Rough sea for consumer start-ups — how to cope with it” is coming soon!