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Five Signs Of Healthy D2C Enterprise
A healthy start-up is akin to a healthy human body. All the different systems need to work together to achieve complete good health. There are some objective signs that the business is headed in the right direction. What are these?
A big challenge faced by early-stage founders face is the lack of a right or wrong answer in most things. It’s almost impossible to tell if you’re making the right choices, since there are no obvious, traditional indicators like profits or stable revenue growth. A healthy start-up is akin to a healthy human body. All the different systems need to work together to achieve complete good health. There are some objective signs that the business is headed in the right direction. What are these? A peak into an investor’s mind might help answer this question. Here are some metrics that we consider the signs of a healthy business:
1) Unit economics: Unit economics is the calculation of how much money the business makes per unit of product sold. It takes into account the cost of making the product, packaging, logistics and marketing costs for one unit. The idea is to have a healthy margin after all these variable expenses for fixed expenses and Profits. It’s important to have a sense of the industry standards, too. For example, the gross margins for F&B (non-staples) businesses are usually around 40-60%, while for personal care they’re higher around 65-75%. However, post adjusting for marketing and consumption patterns, the net contribution margin could be similar for both categories. Unit economics are the heart-beat or pulse of any business. They NEED to make sense from very early on. While there could be fluctuations in the short term, they should be corrected sooner rather than later. If the unit economics stop making sense, the business stops making sense.
2) Repeat cohorts: Acquisitions and repeats go hand-in-hand. There’s no point in spending money on acquiring a customer if you don’t have a plan in place to retain them, especially because the cost of retaining a customer is around 10-20 per cent of the cost of acquiring one. Many businesses track the number of repeat customers as a percentage of total customers, as shown below.
But repeat cohorts, which track the number of customers returning after a period of time, give a more accurate, real story of the business when compared to simple repeat percentages. They are not only an indication of good health, but also give an insight into customer psyche, and help make the right decisions with respect to product SKU, sizing or pricing decisions. Repeats are like the blood pressure of a business. It’s easy to fall off the wagon, but can be corrected with some work. If they drop too low, there’s something seriously off about the business, possibly even life-threatening.
3) Net Promoter Score (NPS): The most underrated metric, NPS is calculated based on one question that brands ask consumers- “On a scale of 1 to 10, how likely are you to recommend this product to a friend?” Today, when brand loyalty is at its lowest, a customer remembering your brand and recommending it is a great sign.
NPS is a lot like cholesterol or blood sugar levels (except that no amount of high NPS score is bad for the business!). It should ideally be splendid at the beginning of the business. If it does deteriorate, it takes some time and serious changes to improve again. For businesses that maintain a healthy score, NPS is one of the strongest moats.
4) Customer Acquisition Costs (CACs): CAC is the largest variable in most D2C unit economics. It’s usually the major delta between a company making profits and a company burning money, given the industry and stage are the same.
The best way to go about it would be to pilot acquisition strategies for few independent customer groups, communication statements or price points that could work for your brand, run campaigns around these, and track CACs for each funnel.
Almost all businesses struggle with maintaining stable CACs today due to immense competition and limited channels for advertising. Identifying and exploring newer channels where your TG is present, re-targeting customers innovatively and effectively, are good ways to reduce CACs. CACs are like body fat percentage- highly volatile, can increase drastically around the festive season, and are as difficult to maintain as they are to achieve. CACs can be reduced with good consistent branding.
5) Branding: The most subjective, intangible metric. We cannot measure the impact of good branding initiatives based on immediate sales, its true effect is seen only in the medium to long term. Think of your brand as a person and attribute some qualities to them on day one. Everything that your brand says or does should now be in-line with this personality you’ve created: from creatives to logo to social media captions to even the way you respond to comments and messages. Consistently staying true to your brand can do miracles in the long run. For example, The Souled Store’s brand has a very fun, witty, boy-next-door personality, while Skinkraft’s approach is a more does-what-it-promises, science and information focused personality, and we can see these tones of voice throughout.
Branding is exactly like working out. Everyone knows it needs to be done consistently, but most people either ignore it or treat it like a short-term new year resolution.
If the above-mentioned metrics are at satisfactory levels, the business is healthy! Every founder should deeply understand and strive to improve these numbers in a planned and sustainable fashion, and analyse or asses them every quarter - think of it as a quarterly health check-up!
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house
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