A dollar is a dollar, right? Not quite. Not all revenue is equal. Some transactions are inherently more valuable than others.
This piece was published in the No Best Practices newsletter on 5.1.2021.
A dollar is a dollar, right? Not quite. Not all revenue is equal. And I’m not simply talking about profitability here. Some transactions are inherently more valuable than others, even if they produce the same bottom line impact today.
This is a lot for most operators to swallow. Retail lives and dies by the “comp”–how are we doing this year compared to last year? And inventory-based businesses live and die by cash flow. When the selling season has peaks and valleys, you need to work hard to ensure that money is coming through the door when you need it.
Even so…not all revenue is equal in eCommerce because some revenue will help you achieve your future goals, and some revenue will actively prevent that from happening.
It’s been said that company culture is who you hire, fire and promote. Similarly, your customer base is who you acquire, retain, and how you train them to behave. Your customer base is not an idealized persona. It’s not a target market. Your customer base is the contents of your customer file.
Acquire. Retain. Train.
Each sale puts some money in your pocket, but each sale is also an action that shapes the nature of your customer file. It’s your job to ensure that the contents of your customer file aligns with your strategic plans for the business. If there is misalignment between your strategy and your customer base, expensive pain will ensue.
Here are some examples that illustrate not every sale is created equal:
#1 Acquisition v Retention
Every sale you make is coming from either a new customer or a returning customer. A sale from an existing customer moves that person one step closer to true loyalty, which is good. And each new customer converted increases your total “shots on goal” for creating future loyal customers. This is critical.
You’ll never retain 100% of your customers. In fact, if you are selling one brand in one category, it will be hard to retain more than 30% of this year’s new customers into next year.
If you look at sales performance from a pure P&L perspective–what did we invest and what was the return–you’re leaving the flow of customers into your business “up to god”. Over-focus on retention and you’ll eventually plateau. Over-focus on acquisition and it will be hard to turn a profit. You need to measure and manage both.
#2 Full Price v Markdown
For many businesses, markdowns are inevitable. And for many businesses, markdowns can be incredibly profitable. Build a nice margin into the product and enjoy a dramatically lower CAC when you slap “UP TO 50% OFF” all over your ad creative.
Many eCommerce operators and marketers are under the faulty assumption that you can convert customers you acquired during a deep sale into full price shoppers. This will almost never happen at scale–I’ll explain why in a future installment of the series.
This assumption leads many businesses to push acquisition into whatever time frame they can get it cheapest, which is usually when the brand is offering its deepest discounts. Do this often enough and your customer file will be full of people who, in all likelihood, will never buy from you at full price.
If you want to sell things at full price in the future, you need to acquire customers at full price today.
#3 Casual v Invested
There’s no such thing as a free lunch–this is a cliche for a reason.
If you want your customers to become loyal one day, you need them bought into both what you’re selling and what you stand for. This takes time, effort and money. You can front-load the effort with brand marketing or back-load it with a memorable purchase experience and remarketing.
This is the typical new customer journey for a DTC brand: see a cool ad on Instagram, visit the brand site once, view a few PDPs, get retargeted a few times, convert.
There is not much within this experience to provide context on your brand and why it is special. These are semi-predictable sales today that deliver less value in the future.
Even more fraught are the slew of audience rental platforms that have popped up over the last five years, aka third party marketplaces. These partners provide access to their audience in exchange for a commission and provide zero customer data. Conversions won here will help you move inventory, but that’s about it.
Are you trying to build something sustainable, or just move inventory?
Training The Customer
Training the customer sounds sinister, but I promise it’s not. It’s more of “your actions and the boundaries you set teach people how to treat you”.
Most retailers run the same playbook year after year: new arrivals, friends and family, seasonal promotions, markdowns, clearance. This happens in one annual cycle or two six-month cycles. Retailers operate this way because they’re laser-focused on comping. Shifting demand around the calendar feels risky.
But if you run your business this way, your entire strategy is essentially sitting on Milled.com for all your customers (and competitors) to see. Once an email subscriber has been in the file for six months they know exactly what to expect from you. And if they know that full priced merchandise will go on sale in a few months, why pay full price now?
To maintain a full price business you need to think of creative ways around this–mixing up your promotion strategy, selling limited edition items, making promotions more targeted and less public, etc.
Revenue from a site-wide sale that you blast all over digital marketing channels is money in your pocket. But you also need to measure, or at least consider, the impact of the promotion on your ability to sell at full price in the future.
The Meaning of Life
You’re in business to make money, I get it. If it’s not turning a profit, it’s not a business. But the advantage (and frankly, the challenge) of running a direct to consumer channel is that you’re able to shape your customer file and, in doing so, shape your destiny.
If someone else cultivates your audience for you, you make strategic decisions at the whims of someone else’s customer development and growth strategy. Their buyers can tell you what to do until your brand becomes commoditized. Your raison d’etre is simply to churn through inventory–put a dollar in, try to get more than a dollar out.
If you cultivate your own audience, you can shape that audience in a direction that is aligned with your future goals. If you want to expand into a new category, change your brand positioning or sell the business, you can take steps today that will make those moves more likely to be successful tomorrow.
That doesn’t mean it will be easy. You’ll need to think about your business differently and evaluate advice from every growth-hacker and agency on the basis of “does this align with my long term goals?” But it will be worth it. And that’s what Modern Lifecycle Marketing is all about.