Ok, this one’s gonna be short. I just want to highlight something that some of you might have missed in the informational overload we are all under every day.
Investors are finally changing their own rules when funding DTC brands.
Profitability is now a requirement.
It is not the SaaS model extended to another (completely different) industry any more.
As a SaaS founder, I didn’t see how you could expect a mattress company grow the same way a social network would. A physical product has so many limitations — it’s not immediately available worldwide, it takes (much more) storage space, it has to be packaged and shipped…
….and usually SaaS is sold B2B where the perceived cost is viewed very differently from that of a personal-use item. $25 for a task planning tool a month? Hell yeah, it saves our team tons of time and helps us get things done. $25 for a shampoo? Not convinced, might just grab the store brand with my other groceries.
Why this shift in approach matters so much — at least in my opinion — is because it reorders the priorities of brand founders.
Before, the MoM growth and top of the line were the indicators — oh, company X makes $1 million in sales. And so investor money is the fuel needed to acquire more and more customers and to improve revenue.
Now it’s more like, VCs want proof other than customer base growth — a good margin off of your CACs. They don’t want to be fueling an endless cycle of cash-burning on FB or AdWords.
That means you either
- spend no money on acquisition,
- make profit even on the first sale or
- just keep customers coming back and shopping more than once.
In other words, you need to have customer retention.
“You used to be able to get through multiple rounds of funding losing money, and that’s how you were supposed to do it. Now the main concern is how we can get to profitable growth,” says Andrew Dudum, the CEO of Hims, for Digiday. “Investors we’re talking to, they’re asking different questions now with different expectations.”
Just a few potential problems waiting to happen to ecommerce brands that rely on funding for customer acquisition without a clear plan for customer retention:
- Too high valuations before profit might place unrealistic profit targets and cause the brand to sell under value as Bevel did.(source)
- Prospective buyer companies may be unwilling to pay for investors’ high hopes. (source)
- Expanding as a way to grow before you’re ready may cost you the company. (See Fab.com)
- If your model is not sustainable over the long run, no amount of cash will save it. (See One Kings Lane)
What IS the way to grow your ecommerce brand then?
Caskers, the online alcohol club, grew without any outside investment. (Read the story)
Its founder Moiz Ali summarizes their success down to:
“Sell differentiated products for more than it costs to make and market them, and reinvest the profits in the business if you want to grow faster.”
So turn profit early and reinvest it in growth. Only after that seek outside help — and the result will be better than expected as Caskers’ acquisition for 7 figures shows.
Here is more of what I see and know, working with DTC brands every day: