By Rob Reynolds and Jason Solano
A ‘sustainable business’ has been defined as a green company dedicated to a minimal impact on the environment.
Now a second definition is beginning to circulate in Silicon Valley and other venture-centric hubs: a ‘sustainable business’ is one that can simply remain cash positive over time. This is somewhat of a pivot for The Valley, which was prone to shovel loads of cash at a business based on its speculative potential, not its P&L sheet.
One company taking pre-emptive, responsible steps is Optimizely. Last October they received $58 million in Series B funding which brought their venture total to $146 million and a $585 million valuation. Despite these impressive numbers, Optimizely laid off 10% of their workforce last week. In a letter to employees, co-founder and CEO Dan Siroker tied the cutting of staff to the necessity of reigning-in costs and a promise for the company to be more profitable. Dan wrote “Destiny, which means controlling the path we are on as a company without having to depend on anyone but ourselves. In order to do that we must build a business that makes more money than it spends. We set a goal of getting to cash flow breakeven and we have made tremendous progress toward this goal.”
Companies in the Direct-To-Consumer and consumer subscription spaces are not immune to this emerging trend. In the first quarter of 2016 there are increasing media reports of layoffs at startups across the DTC spectrum including Birchbox, Sonos, Fanduel, Nasty Gal, Motiga and LivingSocial.
Outside of headcount reductions, what can today’s DTC and subscription startups do to build a sustainable business that will continue with steady growth and deliver responsible profits?
Directade has five suggestions:
1) Know your LTV at an offer (not just brand) level
Not only does LTV lay the foundation for your financial planning, it also enables brands to right-size their media spend to maximize new starts. It is essential that you de-average your LTV calculation at an offer level before you invest too much in an aggressive offer that doesn’t pay out on the backend.
2) Dust off and formalize your Business Rules
Subscription-based brands can protect as much as 18% of their profit by implementing optimized Business Rules in areas such as Credit Card recycling, billing and dunning processes, and guidelines for the velocity of claims and returns. We love Business Rules and will cover the topic in depth in a new series of upcoming blog posts.
3) Protect your pricing strategies by not giving away the farm
Continuity businesses should offer trials and coupon codes to get new starts, but an overreliance on these offers to drive growth can destroy overall brand value. Challenging your teams to innovate through fresh creative, offers featuring new products and gifts, and new emerging media channels should take priority over the “Free Trial” easy button.
4) Balance retail one-offs vs a direct relationship
Consumers should have many compelling reasons to buy directly from your website. Not just one, but many. Make sure your direct customer is sacred and preferred. Fostering an ongoing relationship with your customer is more valuable than any retail one-off sale.
5) Buy Flow Optimization
You’ve invested a small fortune on advertising to get people to visit your website. Advertising may even be your largest expense. Reap the full return on that investment by making sure you follow two deceivingly simple objectives.
You’re most likely already focused on the first objective: conversion rate optimization. Capture every potential customer. Easier said than done? Sure. But, there are tried and true approaches which many websites don't follow. The majority boil down to creating a low friction buying experience.
Fewer companies focus on the second objective: maximize your customer's LTV (Lifetime Value) starting with that first sale. Retention marketing has it’s place, but in our experience we’ve seen the biggest boosts in LTV by changing the approach at the point the customer starts. How to do that? Not all customers are created equal. They often have different needs. Some potential customers are more engaged with your brand, have specific motivations or have more disposable income. Develop and offer them product configurations that meet those needs. They will be happier customers (who will stick around longer) and often those new products will increase how much they are spending.
On the surface these five suggestions are simple to follow. But they also take years of experience to master. It’s also good to keep in mind that some of these approaches can work against each other. That is why it is so important to manage your business with a testing mentality and go heavy on the analytics. Taking the time to find the right balance is always worth the effort. Invest resources behind these approaches and you’ll go beyond being a ‘sustainable business’. You’ll bring your company to new levels of profitability.
Reach out to Directade for more detail on these ideas, and others, to ensure the stability of your DTC business.