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Direct-to-consumer (DTC) profitability hinges on one commonly overlooked business metric

CLV is gaining popularity as a concept in retailing, but it is almost universally misunderstood and miscalculated.

Direct-to-consumer (DTC) profitability hinges on one commonly overlooked business metric
[Jacob Lund/AdobeStock]

Despite dramatic swings in e-commerce growth pre- and post-COVID, the fundamentals revealed in the IPOs of direct-to-consumer (DTC) darlings like Allbirds and Warby Parker present a serious wake-up call for the retail industry. As it turns out, customer growth does not generally equal profitable growth. Despite multi-billion dollar valuations for some brands, the rising costs of marketing and customer acquisition activities, along with escalating fulfillment operations and delivery costs, have called consumer brand profitability into question.

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This is the result of an all-too-common theme across so many industries, including retail: prioritizing for sales growth while ignoring order contribution profitability and customer lifetime value, or CLV. CLV is gaining popularity as a concept in retailing, but it is almost universally misunderstood and miscalculated.

When properly instrumented, CLV is a measure of contribution profit—not revenue—over the life of a customer relationship. CLV captures every unique customer’s net value and future potential, taking into account the total cost of post-acquisition experience, including the costs of goods, fulfillment, and delivery incurred across all of that customer’s transactions over time. With the exception of Amazon, very few companies successfully optimize for variable operational costs per order and customer.

To experience profitable growth, brands can take a page from the Amazon playbook and laser-focus on operations. This means gaining an in-depth understanding of operations activities through real-time data. Every operational decision is an opportunity to balance customer experience with unit profitability. Doorstep deliveries that arrive late relative to the shopping cart delivery promise, for instance, are correlated with lower brand loyalty, repeat purchase propensity, and CLV. As such, it may make sense to automatically upgrade the class of partial post-shipping applied to those orders behind schedule in the warehouse.

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Below are three steps your brand can take to enable this level of operational detail.

1. REALIGN SUCCESS TO A NEW METRIC 

First, rethink how your organization measures success. If your North Star is rooted in simple financial measures like AOV and ROAS, then it’s time for a facelift. More and more thought leaders and retail investors are moving away from these overly simplistic financial measures and embracing new frameworks based on contribution margin and CLV. In this new era of retail, the most successful brands will be those with a loyal, engaged, and consistent customer base.

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Brands ahead of the trend have already shifted to CLV-based models, with many consistently realizing exponential growth. This leads to increased enterprise valuations compared to industry peers and competitors. By aligning growth strategies with a brand’s most profitable shopper segments, brands can return-justify more significant investments in acquisition marketing activities, significantly improve the customer experience, and drive recurring customer engagement.

2. HAVE AND OWN YOUR OWN INTELLIGENCE

Of course, aligning business priorities against new success metrics requires a significant move up the data maturity curve. Moving beyond simple traffic and conversion rates, and revenue-per-order metrics to optimize for long-term profitable growth requires a massive data lift.

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PacSun took on this exact initiative last year, unifying its operational and customer data in one place. The move took less than a year, and has since provided PacSun with critical visibility across marketing, merchandising, warehouse operations, and long-term customer behaviors.

By unifying data within a single data platform, PacSun is answering business-critical questions like, “Who are my most profitable customers?” and “Do customers acquired online spend more than those in-store?” Underlying data answering these questions is arming PacSun with the power to intelligently and strategically identify and invest in the best activities to drive profitable growth.

3. USE OPERATIONS DATA TO INFORM MORE STRATEGIC MARKETING ACTIVITIES (NOT THE OTHER WAY AROUND) 

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Once a brand’s data is unified into a single platform, the fun part becomes aligning this data to inform marketing. All too often, marketing and operations are woefully misaligned—not because a brand doesn’t think to sync the two, but because these —and in turn data—are so siloed that it’s nearly impossible to bring the two together.

For example, years ago, when I was the CEO of DTC brand Richer Poorer, our most popular item was a bralete. The only problem was we were losing money on the majority of sales of that item. It took what I now know was far too long to realize that because our distribution warehouse was on the West Coast and the majority of buyers of this particular SKU were on the East Coast. We were spending more to ship and deliver the item than the cost of the item itself. This is an all-too-common occurrence in retail, demonstrating just how little visibility into operations costs retailers have.

Another example that I’m sure we can all relate to is when a brand promotes its most popular SKUs via digital marketing channels like Facebook or Instagram, only for the potential buyer to click the link and find the item is already sold out. This is another classic example where marketing and operations are misaligned, costing both sales and customer loyalty.

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As DTC profitability continues to come into the spotlight, and margins become even more slim, disciplined optimization of operations alongside marketing is what will separate the consumer brands of tomorrow from DTC one-hit wonders.

The retail industry is moving toward new success metrics, and top-of-market brands must align their data strategy accordingly. We believe operations will increasingly play a larger role in every brand’s data strategy and strategic business decisions.

While savvy DTC brands that can make this shift stand to profit, the biggest winners from this prioritization of CLV will ultimately be loyal shoppers.

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Eric Best, CEO and Co-Founder, SoundCommerce

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