eCommerce boomed in the big DTC (Direct-to-Consumer) years, but as we enter the years ahead the business model is under pressure.
Rising Customer Acquisition Costs (CAC) and shifts in consumer sentiment relative to rising interest rates and accelerating inflation have put many eCommerce companies in a tight cash position as we head into 2023.
Some categories remain hotter than others – beauty, cosmetics, health supplements and certain luxury categories top the heap – but the entire business model is under pressure. Below we dive in the with Business Model Canvas and some Business Model Analytics to better understand what drives the success of the model.
- How do eCommerce/DTC firms make money?
- eCommerce Business Model Analytics
- Retail Bankruptcy, M&A, and More
- Live Shopping Expected to Boom
- Sustainability Takes the Limelight
- The Power of Community
- eCommerce Outlook – 2023 and Beyond
- Top 3 – Learn More
How do eCommerce/DTC firms make money?
eCommerce-DTC (Direct-to-Consumer) companies generally make money on the difference between they produce/source (landed cost) the good(s) at and the price they sell it to consumers at. Gross Margin is typically a measure of this across the company’s products.
Contribution Margin takes the net differential after all variable costs to get the product to the consumer and uses that as a ‘contribution’ to the other costs the business takes on such as staff, space, etc. It is typically more useful at an individual product level.
eCommerce/DTC Value Proposition
- Sell high-quality goods in various categories to consumers without a physical retail store
- On-demand ordering (24/7) and rapid delivery to consumers’ home for most products
- Returns available on most goods – can buy and try
- Curation, search, and price comparison is better than most retail storefronts
Many companies will sell their goods both wholesale and DTC. This helps to create a more resilient business model with two or more revenue streams:
- DTC via eCommerce channels (ie. web only) is typically higher margin than Wholesale
- Wholesale (retailers sell in-store) is typically higher volume in most mature models, and has less CAC volatility
eCommerce/DTC Business Model Canvas
eCommerce Business Model Analytics
The CAC (Customer Acquisition Cost) is the core of the eCommerce business model.
Due to Apple’s privacy updates in 2021 and a set of other economic factors, CAC costs began to rise, which negatively affected many DTC (Direct-to-Consumer) brands in 2022.
Despite average CAC costs rising across the board, average AOV (Average Order Value) for Repeat Purchases increased by roughly 40% over the same period.
What does this mean to the eCommerce business model?
It means that costs for Paid Channels (ie. New Customers) are increasing, while revenues from Repeat Customers are also increasing. New Customers require an added CAC cost on top of the variable costs to deliver the goods; while with Repeat Customers there is no CAC on each repeat purchase, meaning that margin on Repeat Purchases is much higher.
These are the core tenets of the CBCV (Customer-Based Corporate Valuation) framework to produce blockbuster businesses over the long-term. Ideally, we want a high % of Repeat Customers, which helps lead to high LTV (Lifetime Values) where those customers will come back and progressively spend money intermittently over the long-term. Customer loyalty is at the core of this model.
Furthermore, research indicates that as Consumer Confidence declines in the broader economy, CAC generally trends upwards; thus, we should only expect the trend of higher CACs to reverse as the economy improves. It is hard to predict where this trend will end.
Customer Analytics Dashboard
Any entrepreneur or business owner who has an eCommerce component to their business will run it on a platform like Shopify. On Shopify and similar platforms there are multiple metrics/analytics that are relevant to the business model.
- Average Order Value (AOV) – which can be used to calculate ARPU (Average Revenue Per User)
- Repeat Customer Rate (%) – shows the number of ‘Repeat Customers’ over time
- Customer Cohort Analysis – shows a time-series of data points around repeat purchases over time from certain months of purchase
- Sales by Traffic Source – shows which channels are driving the majority of sales
In combination with other platforms – such as Google Analytics – CAC can be calculated and attribution assigned to different marketing channels. Other tools can be used to calculate LTV (Lifetime Value), which starts to become more complicated given that it needs to be tracked over time relative to multiple different variables.
The main point, from a business model perspective, is that we don’t want a negative margins on purchases from the initial customer. If CAC on Paid Channels is too high, flat or negative margins mean that a large % of those customers will need to be Repeat Customers just to recoup costs. Organic customer acquisition through channels like SEO are imperative to the long-term success of the model, but they take time and investment to develop.
CRO, Social Proof & Sentiment Analysis
Conversion Rate (%) is one of the other core metrics on any eCommerce dashboard. While the CAC metrics are important, ultimately it is hard to tell whether it is acquisition strategies or CRO (Conversion Rate Optimization) on-page that need to be adjusted (or both):
- If Paid CAC strategies are optimized but on-page CRO is poor, then even the best-placed Ad strategy will likely fail as many potential customers will be deterred by certain website factors
- If Paid CAC strategies are poorly optimized but on-page CRO is great, then the strategy may still work as those who do land on the pages convert
Ideally, you want both to be A+, but in a world of multiple variables, little time, and constrained resources, you have to pick one.
There are many CRO Agencies and professionals who specialize in these areas and use tools like to help brands optimize their on-page performance:
- Google Optimize
- Other combos of Google Analytics, etc.
Then there are factors like Social Proof that can be instantly added (from reviews) to add more trust to any brand’s product or services (assuming reviews are good). Even with good reviews, however, there can be critical details massed in the large amount of data from free-text (unstructured data), which can be analyzed using Sentiment Analysis tools using NLP (Natural Language Processing).
Overall, the eCommerce business model is very data-driven in many ways. There are multiple factors and different metrics-analytics for each different sector-category of model, but overall a high CAC and/or poor Conversion metrics will kill virtually any DTC-retail business over the mid-term.
Retail Bankruptcy, M&A, and More
As mentioned above, we head into 2023 with the eCommerce-retail business model under pressure. This foretells a lot of future bankruptcies going forward. One large-scale example of this trend was seen with the surprising bankruptcy of UK-based Made.com in Q4 ’22.
Just a year ago, at the company’s IPO, Made.com was valued at 800 million euros. With a turnover of 315 million pounds in 2020, it is one of the most high-profile companies to go bankrupt in the United Kingdom this year.RetailDetail
In 18 months, Made.com went from a billion-dollar brand to complete insolvency. There were many contributing factors specifically to Made.com, who sold furniture online, but the broader trend has to do with in inability to adapt to rapidly-changing economic conditions, in this case in Britain.
Natural Products – Grove Collaborative M&A
There are sectors like the beauty sector – particularly natural beauty (ie. natural deodorants, shampoos, skincare products, etc.) – where both the outlook and competition are red-hot coming into 2023. This creates a dynamic where some companies will rise and grow exponentially, others will get stuck in the middle, and a large amount will ultimately fall.
Publicly-traded, natural-products, DTC specialist Grove Collaborative (Ticker: GROV) has positioned themselves to take advantage of this type of market with a $100 Million dollar Fund for M&A (Mergers and Acquisition) of small, boutique brands in partnership with HumanCo Investments in the U.S. market.
“There’s never been a real scaled-up natural products company. They all get taken out by the big guys,” he said. “Our company’s aspiration is to be that important in the industry. And in order to do that, we need to get a lot bigger.”Modern Retail
This type of M&A strategy may be seen in multiple categories, but there will be a discrepancy between the strength/weakness of the sector and the potential upside in a given recovery. Beauty is one of the hotter sectors, along with other wellness-based brands, creating a lot of potential value in an acquisition. Whereas others like Made.com were sold only for their ‘intellectual rights.‘
Thus many former ‘high flyers’ in multiple categories will be forced to make difficult decisions amid big valuation drops (if they raised outside capital), a constrained fundraising environment, and a generally tough macro-economic backdrop. Those who are self-funded or already self-sustaining will have more leverage to make decisions, especially if they have multiple products in a hot category.
B2B retail platforms like Faire are poised to capitalize on this type of market, as more and more smaller/niche brands across retail/eCommerce look to cut sales-related costs and boost sales.
Live Shopping Expected to Boom
There is a lot of excitement about what live, video-based shopping can bring to the market into 2023 and beyond. Think the Shopping Channels meets Instagram/Tiktok. Video as a whole looks red hot coming into 2023 for Digital Advertising.
We have seen the rapid rise of live shopping on digital networks in the Asian market, but to date it has had a limited impact/appeal in more Western market. For a variety of reasons, that looks set to change imminently.
In Asia, live stream commerce, or live shopping, is revealing massive revenue opportunities, and that trend is extending to other regions.RetailDive
There are multiple models to potential live-shopping marketing initiatives, many of which centre around ‘influencers’ or ‘creators’ who have built-up large audiences.
Klarna Spotlight – Live Shopping
BNPL-player Klarna is one of the companies entering this space with the recent launch of their Spotlight app.
We can see the potential of live shopping revolves around the evolving dimension of the Customer Relationship relative to more traditional social media or paid advertising type scenarios:
- there is a greater intimacy to live, interactive type engagements like live shopping
- there is an urgency to buy products ‘in the now,’ especially if brands are offering incentives in the process
- video allows easier showcasing of items, making certain items much easier to sell than traditional eCommerce marketing channels
For brands, this type of endeavor will probably feel like R&D (research and development) and will require some experimentation. While a lot can go right in a live shopping-type event, a lot can also go wrong. That’s why there will likely be a large ‘middle market’ for live shopping, including agencies, influencers/creators, and the major platforms themselves.
Sustainability Takes the Limelight
Could there be a more subjective term than ‘sustainability?’
After years of build-up, 2023 and beyond will likely be the years where real sustainability separates the herd from the pack ie. no more greenwashing.
Sustainable Fashion is probably at the top of the list of markets where there has been an underlying ‘sustainability’ trend for years; yet is has remained difficult to crack the mainstream. This is likely the year that starts to change as it becomes more of a demand from the market rather than a ‘nice to have.’
eCommerce – Gross Margin example
Using the above example, we can see that margins are typically tight enough on traditional products, let alone if a company starts adding other ‘sustainability features’ to it. An example of that in fashion would be ‘sustainable packaging.‘ A product like RePack costs only ‘a few dollars’ but that is probably a couple dollars more than traditional packaging.
Does a brand eat this cost at the margin or pass it on to the consumer?
As discussed above, consumers are stretched and the requisite pricing of most organic/natural/sustainable products pushes them into a premium or even luxury category in many cases. Pricing relative to those standards is paramount, but so is a careful analysis of how all the dimensions of meeting those standards affect the business model.
eCommerce Grocer – Thrive Market
U.S.-based Thrive market has a deep organic/sustainability focus, and solves this problem (from a business model perspective) with a membership model. Thrive is a pureplay eCommerce grocer with no brick-&-mortar presence, so they ship out a lot of packages.
The average Thrive Market basket is $90 and contains 14 items, he said. We only give free shipping on orders over $50 .
Thrive Market has worked with its delivery partners to negotiate lower prices. Thrive Market also reduced the number of colors on the box. “It will save us several million dollars per year.”Winsight Grocery Business
We can see how in addition to a Buyer’s Club becoming a bigger part of the eCommerce/retail space, Thrive Market’s strategy outlines how sustainability can be done in a way that works to maintain or improve the unit economics of the business model .
The Power of Community
Many retail and DTC brands began experimenting in 2022 with community networks like Geneva, Discord, and others to try and build real communities around conversations that are most pertinent to their brand values.
Some startups, like Thousand Fell, Mejuri and August, for example, are turning to a new chat tool called Geneva to foster so-called brand community. Geneva just launched out of beta this year, and has a number of ties to the DTC world.Modern Retail
This is one of the most experimental areas of all of eCommerce at this point, as there is really no established channel and/or playbook on how to do it. And similar to other organic marketing practices like SEO, there is an upfront investment required without immediate, short-term results.
The strategy, however, is clear – build a long-term customer channel with a lower CAC than paid channels. Companies investing into community are positioning for the mid to long term.
As ‘members’ of any retail/DTC community can come from any one of multiple possible channels – email, social media, even paid – there are some dimensions to it that can be ‘cost effective.’ The big cost is the ongoing moderation and management.
In that sense, it also become a part of a customer retention strategy. As we discussed above, repeat purchases is a key part of the model, so the ‘community strategy‘ may evolve to become more about retaining customers rather than acquiring new ones.
eCommerce Outlook – 2023 and Beyond
Cashflow – not profitability – will take centre stage in 2023. There is always a balance between things like revenues, costs, and profits, as some strategies are all-in on market share, while others are about survival during down markets. Staying cash positive month-to-month is essential to try and survive the lean months, while staying positioned to thrive when things eventually turn around.
Many retail-DTC brands are going to be in a struggle for survival in the early part of the year – beyond that it will likely depend on certain regional-local factors relative to consumer confidence, taxation, the supply chain, etc.
Logistics are getting progressively more complex for certain categories, and that complexity costs money (on the margin) and can hurt customer-satisfaction ratings. There will likely be a lot of emphasis on logistics, as we have seen companies like Shopify make several acquisitions in this area as part of their Shopify Fulfillment Network, allowing brands to store inventory and ship with Shopify directly (in the US and Canada).
Co-warehousing is a trend that dovetails with the logistics problem, as brands that are in the process of expanding into new markets can rent space ‘on-demand’ with flexible leases, similar to coworking.
If they haven’t been forced already, many DTC-only brands will seek out partners/networks to expand into wholesale. Platforms like Faire are primed to benefit from this shift in the business model.
Principally, the CAC story will drive a lot of activity in the broader eCommerce ecosystem, especially with agencies. The margins between success and failure are shrinking, and those who can create innovative ways to acquire customers – such as Video Ads or Live Shopping – will win.
Overall, the eCommerce-DTC business model is simple in some ways and very complex in others. There are a lot of moving pieces, so when the market shifts quickly – as we saw in 2022 – the effects can be rapid and exponential. It is a non-linear model where growth can go from boom to bust (or vice-versa) very rapidly. Those dynamics, combined, make for a very eventful 2023 and beyond where many new DTC brands will rise, and many others will fall