Eventually, the “slap an app on it” school of growth stops working. To build a profitable business, you need to think of customer acquisition as an investment.
This content was first published on the No Best Practices newsletter on 10.16.2022.
A bunch of you reached out after the last newsletter, wanting to know more about how to leverage merchandising in your marketing efforts.
I’ll be honest: I’m reluctant to share more about this topic because it’s never been popular in the past. Newsletters or posts with “Facebook Ads” in the title always drive a lot more reader interest. But I’m going to plow ahead anyway, because these concepts are incredibly valuable.
I used to ask people “What is the number one factor influencing the conversion rate on your site?”
If those people were members of the cult of “Best Practices”, they usually gave an answer like “site speed” or “offer”. But that’s not the answer; the answer is the product that you’re selling.
If you’re selling something that no one wants, the best marketer in the world will fail.
Most digital marketers and agencies feel that product is outside of their control. Part of this is disempowerment; sometimes designers and merchants can be incredibly territorial, especially when data threatens to turn a soft skill into a hard skill.
But a big part of marketing’s aversion to product is laziness and a lack of intellectual curiosity. If you can get promoted every 1.5 years by implementing vendors who show “big wins” using faulty attribution, why bother doing anything else?
I’ll tell you why: eventually, the “slap an app on it” school of growth stops working. To build a sustainable brand, you need to think of customer acquisition as an investment: what is the return on your ad spend, and over what timeframe will you realize that return?
And to build a big brand (like >$50M), you need a diversified customer mix. Here is how to use merchandising and marketing to manage your growth.
The Customer Pyramid: The Key To A Profitable Business
At scale, a brand contains three types of customers. At the top of the pyramid are your VIPs. These customers are absolutely enamored with your brand, and they have the financial resources to pursue that obsession.
These customers purchase multiple times per year. If you drop new product, they’re first in line. They are some of your most profitable customers, and not just because they spend a lot of money. If these folks have friends, they’ll talk you up frequently and bring new buyers into the fold.
In the middle of the pyramid are your Average Customers. These folks purchase from you more than once, but they aren’t as die-hard as your VIPs. They may not have the disposable income to purchase from every new product drop. Or they may come to you for something specific, which only requires one or two purchases per year.
At the base of the pyramid are your Casual Customers. This group only buys from you once. They never return, at least not within three to five years of the initial purchase. These folks might lack the disposable income to buy multiple times. They might have been dissatisfied with their first purchase. Or they might simply become distracted and forget about you.
In the image above, VIPs are a small sliver of the pyramid and Casual Customers are the chonky base. For most mono-brand, mono-channel retailers, this is the way your customer pyramid will play out at scale.
But that doesn’t mean your business’ active customer base must resemble the pyramid. If you are running a physical retail store in a high end resort town, your VIPs might constitute half of your active customers. And if your business has a merchandising issue, you might not have any VIPs or Average Customers.
Merchandising & The Customer Pyramid
VIPs, Average Customers and Casual Customers have different buying habits, and tend to zoom in on different aspects of your product assortment. If your assortment doesn’t consistently deliver the product that these customers like to buy, they will go away. That is why understanding merchandising is so important for marketers.
Think about it: if you’re a caffeine addict and your local coffee shop stopped selling coffee, would you keep coming back? Probably not!
VIPs will buy the most expensive things you sell, multiple times, at full price, no questions asked. They’ll also stock up on the midpoint of your assortment in multiples, again at full price.
If you sell fashion they’ll buy your sequined silk evening gowns and thigh-high leather boots and five cashmere sweaters in every color. If you sell makeup they’ll buy the full-face kit, the limited edition eyeshadow palette and lipstick in six different shades. If you run a “lifestyle brand”, they’ll kit out their living room, fill their closet, and buy their Yorkie a logo-ed leash.
Average Customers buy from the core of your assortment, and they’ll often purchase at least twice a year or consistently return every year. Their AOV and average AUR are going to be lower than the VIP, but higher than the Casual Customer.
If you sell fashion, they’re buying one or two cashmere sweaters per year in core colors like black or taupe. If you sell makeup, they’re buying your core product on replenishment along with one or two “fun” products to try out. If you run a “lifestyle brand”, they’re buying from the product line that cemented your reputation, and they’re buying the classic items with subtle but recognizable logos.
Casual Customers buy trendy shit. If you find yourself with a hot item on your hands, many of those buyers will be Casual Customers. If you have one item that gets a reputation as “the best X”, many of those buyers will be Casual Customers. These customers may also buy from the lower AURs in your assortment because they like the brand, but they can’t afford to buy any more.
If you sell fashion, they’re buying a screen-printed T-shirt or a “viral dress”. If you sell makeup, they’re buying your hero product after watching several TikTok-ers review it. If you run a “lifestyle brand”, they’re buying a heavily logo-ed wristlet or card case, or a pair of flip flops or something.
Can I Build A Profitable Business If I Only Sell One Thing?
Maybe you’re a brand that only sells a few products, like Shark Slippers or LMNT. How does the customer pyramid play out for you?
It’s a two-part answer. If you sell something consumable like LMNT, your VIPs are going to purchase multiple flavors and reorder frequently. Your Average Customers will reorder a few times at a lower frequency. And your Casual Customers will be “one and done” buyers.
If you sell something that isn’t really consumable like Shark Slippers, your VIPs are going to purchase multiple colorways and potentially gift the product. Your Average Customers will buy once, then potentially come back for a repeat purchase or a gift at a lower frequency. And your Casual Customers will also be “one and done” buyers.
Having a limited assortment places an upper limit on your ability to develop any given new customer into an Average Customer or a VIP. That’s why brands with big scaling ambitions inevitably expand their assortments.
Customer Pyramid + Merchandising + Marketing = Profit
So, what does this have to do with marketing? Like I said at the top of the newsletter, your marketing spend is an investment. If you know that some customers have higher lifetime value potential than others, you can spend more to acquire those customers. And if you know that many of your customers will be “one and done” shoppers, you need to be thoughtful about how you invest in customer acquisition.
There is no such thing as a free lunch. You’re going to pay more for VIP customers. To acquire VIPs, you have two options: pay an above-average CPA on platforms like Facebook, or invest in a lot of (for lack of a better word) brand-building in the lead-up to purchase.
VIPs usually enter a brand “doing the most”–they buy multiple units from multiple categories. They do that because you really like the product, or because you’ve been learning a lot about the brand in the lead-up to purchase and are really pumped up about it.
If you want to bring in VIPs, you need to learn what your existing VIPs are buying and then feature that type of product in your marketing. Even better? Try to set up some customer calls with existing VIPs to learn more about why they love you so much. Then do more of that.
PR, macro-influencer, print and OOH advertising, and strategic physical retail (owned and wholesale) are all channels that help attract and develop VIP customers. I wrote more about tactics for acquiring future VIP customers here.
Average Customers can be the Facebook sweet spot. If you make something that women ages 35-55 with basic betch tendencies can’t get enough of, and you consistently iterate on that product, Facebook can be a money printer. Similarly, if you make something with broad appeal that solves an obvious problem, Facebook ads can work very well for customer acquisition.
Jenni Kayne is a brand that has mastered the art of aligning merchandising, customer knowledge and marketing to crush it on Facebook and other direct response channels. They have created a really clear, aspirational but accessible vision. And then they use that vision to sell lots of $395 cashmere sweaters.
It’s going to be harder to accomplish that if the vision you’re selling is niche and/or not cohesive, or if the product you’re selling is inconsistent.
Facebook is just like a department store or other wholesale venue. Traditional wholesale has a buyer who will pick and choose what parts of your assortment resonate with the store’s shoppers. Facebook makes you play the role of the buyer, but you figure out the tastes and preferences of the audience through expensive trial and error.
Casual Customers are where you need to be careful. You can acquire a lot of casual customers on Facebook, but many of those transactions will be unprofitable at a contribution margin level.
Most brands report on metrics like CAC and AOV on an average basis. But those averages may mask the fact that you’re spending a lot of money to acquire low spending customers who never return.
The faster you scale, (especially if you’re scaling strictly through performance marketing and not investing in making the brand feel “real”) the more casual customers you’re going to acquire. A lot of modern growth marketing tactics are focused on eking out incremental conversions from in-market audiences vs expanding awareness and then capturing that awareness.
I get it: “brand building” feels incredibly risky when compared to the abundance of data that performance marketing provides. And a lot of brand marketers don’t have a strategic bone in their bodies. You don’t have to do it. But if you decide that you’re not even going to try, you forfeit the right to complain about Facebook getting more expensive.
The best way to acquire casual customers for the right price is to try to continuously make yourself go viral. When I say going viral, I don’t necessarily mean a dedicated segment on Good Morning America. But you’re trying to create a 1 + 1 = 3 effect, where a series of marketing strategies layer up into something that feels part of the cultural conversation.
There are a million ways to do this. Some will feel right for your brand, and some will not. You have to make a lot of small bets with the hope that one will pay off.
There are also some tactics you can employ to achieve a lower CPA on Facebook. The first is to develop ad creative that features your best selling product. The second is to choose creative formats that don’t look like ads–this usually means user-generated content or “ugly” ads (see Barry Hott’s Twitter for more on this). The third is to test a lot of offers and landing page designs in an attempt to reduce friction and increase AOV.
You should be doing all of these things as part of your Facebook marketing SOPs. But this strategy will take those optimizations past your creative director’s comfort zone. You basically have to get as “down and dirty” as possible, with little to no regard for brand image.
What About Markdowns?
You might assume that customers who buy on sale form their own layer of the pyramid–an even chonkier base. But that isn’t necessarily true. You can have VIP customers who only purchase on sale, Average Customers who religiously shop your semi-annual sales and Casual Customers who buy from you once on clearance and never return.
Most of the advice above also applies to markdown customers. You just need to account for the fact that these customers bring in fewer margin dollars.
Sales and promotions typically improve marketing efficiency, but you need to analyze if the extra volume and lower CPAs outweigh the fact that each customer you acquire contributes less to the bottom line.