The Levers You Can Pull to Maximize Value in Your DTC eCommerce Business
As a DTC founder, you have to set the direction for your company and make tough choices. Do you spend more on ads or inventory? Do you hire a new ops person or try a new advertising channel? When making these tough decisions, you have to keep your goals top of mind. And at the end of the day, remember your main goal is to maximize the value of your business.
In DTC eCommerce, there are three main ways to maximize the value of your business:
- Maximize customer acquisition and minimize customer acquisition costs (CAC) — in other words, get more people to buy your stuff but do it for less money.
- Maximize repeat contribution dollars (see definition below) — in other words, get the same people to buy more of your stuff.
- Maximize margins (i.e., net profits) — in other words, increase the amount of money the business gets to keep.
💡 Key Idea: Which lever(s) you pull depends on a lot of factors. So many DTC eCommerce businesses automatically default to customer acquisition. But the other two levers mentioned above can be equally, or more, impactful for your business.
Below, we walk through a few examples that illustrate the impact of changes to customer acquisition costs, contribution dollars, and margins. The goal of this exercise is to showcase the impact of each change and help you understand how you can manipulate these DTC metrics in different ways to impact the bottom line for your business.
Relevant DTC eCommerce Metrics
Before we begin, let’s define a few key DTC metrics which will be included and referenced in the analysis below:
Contribution Margin Per Order tells you how much money you earn from each order. That money then applies back to your operating expenses (OpEx) and determines how quickly you can get to profitability.
Fully Loaded Customer Acquisition Cost (CAC) tells you how much it costs to acquire each customer, including all the costs of advertising to that customer.
Repeat Contribution Dollars tells you how much money you make from each customer after their first purchase.
First Purchase Average Order Value (AOV) is the average dollar amount you get from the first purchase by a new customer.
Contribution Dollars per Order represents the AOV multiplied by your contribution margin per order.
Orders to Contribution Dollars Payback represents contribution dollars per order divided by fully loaded CAC. This number tells you how many orders you will need per customer to break even on a contribution dollars basis. Remember, this is not a true measure of your break-even point — you still need to cover OpEx.
Repeat Purchase Average Order Value (AOV) is the average order value of all repeat purchases. First purchase AOV and repeat purchase AOV will vary widely by company and business model. A company with a subscription model, for example, might identify the first purchase as a trial and then set a subscription price that is much higher. For other companies, like a leather goods producer, customers may start with a lower AOV (maybe buy a wallet, for example) and then increase as their trust of the brand increases (maybe buy a few pairs of boots).
Additional Orders / Customer / 24 mo is the number of additional purchases the average customer makes over a 24-month period, starting from acquisition. For this DTC metric, 1 means each customer makes 1 additional purchase, whereas 0.5 means half of the customers make an additional purchase. This analysis helps you understand your unit economics, which is why it’s represented on a per customer basis. However, this isn’t a great methodology for modeling your entire business. Instead, we recommend focusing on cohorts and analyzing orders and sales metrics from all cohorts.
Additional Contribution Dollars / 24 mo represents the contribution dollars per order multiplied by additional orders / customer / 24 mo.
Timing of Additional Contribution Dollars is a DTC metric designed to help you recognize that repeat purchases don’t come evenly over a time period. They are almost always weighted to the earlier periods. In this case, we are tracking a percentage of the additional contribution dollar figure that comes in month six, month 12, and month 24.
Lifetime Value: Customer Acquisition Cost Ratio (LTV:CAC) is the dollar amount of the customer’s total contribution for that time period divided by the fully loaded CAC.
Base Case for Comparison of DTC Metrics
The homegoods company represented in the chart below has a high AOV but, given the nature of the company’s product, repeat purchases are hard to come by. Some customers will only make one purchase, whereas other customers may be making repeat purchases when they move into a new home or are furnishing a larger home.
Given the repeat purchase dynamics, this company should choose to focus on maximizing contribution dollars on first purchase and optimizing customer acquisition. That is what we will track in the examples that follow.
The Impact of Increasing CAC for DTC eCommerce
In the chart above, we doubled CAC for the homegoods company. We immediately see that the company’s financials look very different. Now, the company needs to get more than one order (1.1) to reach a contribution break-even point. It’s also taking the company almost 12 months to recoup those additional dollars.
This can be tricky because the company is still not profitable at its contribution dollar break-even point, as it still needs to cover OpEx. The dollars to fund that period have to come from somewhere, which means the company either has sufficient cash on-hand, is raising capital, or is borrowing money. For us to really determine if this is an acceptable CAC for the business, we need to know the company’s ability to fund operations as they extend the time it takes to reach profitability (which requires a more detailed model).
With the information we have, we can see that a $100 CAC is going to be tough for the business to manage. From here, the business can either:
- Take a shortcut and decide they want to be contribution break-even on first purchase, which in this case implies a $90 fully loaded CAC.
- Decide to get to full profitability on first purchase, which would require a lower CAC.
Of note: If the company needs to borrow or raise money, the answer may not be entirely up to them as investors may want to see a faster payback to rely less on repeat sales.
Reducing DTC eCommerce CAC by 10%
What if the company can reduce CAC by 10%? In the chart below, we see that CAC goes from $48 (from the base case) to $43. With that change, contribution dollars remain the same, but LTV:CAC improves, with the 24-month ratio going from 2.4 in the base case to 2.7 in the chart below, allowing the company to get to profitability faster.
The question obviously is how in this environment of increasing CACs (thanks to iOS 14 which is driving up costs on Facebook and other social channels), do you lower CAC? And how much time, money, and effort will it take from the team to do that, if it’s even possible? For the purpose of this example, let’s just focus on the fact that we can see what happens when the CAC gets too high, and how lowering CAC would impact the business’s bottom line.
Now let’s look at the impacts of maximizing margins and maximizing repeat purchase contribution dollars.
Improving First Purchase AOV
In the chart above, the homegoods company focused on increasing AOV by 10% (from $250 in the base case to $275 in the chart above). The result? The company added $9 in contribution dollars. Just like when we reduced CAC by 10%, the speed to profits increased over the base case when we increased the AOV.
Improving Repeat Purchase AOV in DTC eCommerce
Getting more money from repeat purchases can happen in a few different ways. Here, the company increased repeat purchase AOV by 10%, going from $275 to $303. As you can see, this results in a slight increase in speed to payback, and total contribution dollars increased by $5 over the base case.
Increasing Additional Orders per Customer per 24 mo
Here, the company focused on increasing additional orders per customer per 24 mo by 10%, going from 0.25 to 0.36. With this change, time to profitability improves and total contribution dollars rise to $126, which is an $11 increase over the base case.
Improving Contribution Margin
In our final example, the homegoods company focuses on improving its contribution margin. This can be done in a few different ways — from reducing discounting to chipping away at COGS and reducing fulfillment costs. The result is a contribution margin that rises from 36% to 40%.
Like reducing CAC by 10%, this change allows the company to get to profitability faster. The company also adds $11 in extra contribution dollars, going from $115 to $126. That’s a double win.
That double win also compounds, as each order becomes more profitable. Then, as the company drives repeat orders and new orders, more dollars flow to the bottom line. A more detailed model would show the compounding impacts.
Where Should I Go from Here?
Once you understand how tweaks to DTC metrics related to customer acquisition costs, repeat purchase dollars, and margins can impact your business, you need to prioritize which levers are right for your business. We recommend stack-ranking your efforts — prioritizing the levers that will give you the biggest bang for your buck. You can get fancy, but a simple way is for the team to rank each idea on level of collective effort (high, medium, and low) and then rank each idea on level of potential impact. You would then prioritize the low effort, high impacts and so on as you debate the rankings until you have a good list of projects to focus on.
It’s also important to commit to analyzing these aspects of your business on an ongoing basis. To do this, you’ll need a robust model that demonstrates the performance of your entire business over time. A good model will include features that give you the ability to change multiple assumptions simultaneously, test scenarios against each other, and do more detailed analyses that better approximate reality.
Looking for a great platform that allows you to model different scenarios and make data-driven decisions about your DTC metrics? Sign up for a Drivepoint demo.