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As Headwinds Mount, Lifetime Value will Become Ecommerce’s ‘North Star’

As headwinds mount the customer lifetime value will be the key to ecommerce success.

The ecommerce pandemic party is officially over. Following two lockdown-induced boom years, online retailers that were once investor and media darlings – Peloton, Stitch Fix, Rent the Runway, Poshmark, to name just a few — are now struggling for survival. As a looming recession causes investors and consumers alike to tighten their belts, the name of the game is no longer “growth” but “resilience.” Online retailers must prove that their business can go the distance without the performance-enhancing drugs of third-party cookies and government-funded consumer spending.

Jake Cook, Co-founder and CEO, Tadpull
Jake Cook, Co-founder and CEO, Tadpull

“My thesis is this will be a little bit like after the dot.com bubble burst” in the late 1990s-early 2000s, said Jake Cook, Co-founder and CEO of ecommerce services solution Tadpull. “Just like Airbnb was built out of a financial crisis, I think we’ll see some really interesting, resilient ecommerce companies pop up out of the ashes of this. But the ones that were living on vanity metrics and not really watching lifetime value, not really keeping track of their inventory margins, those businesses are going to struggle.”

Tadpull employs data science to helps brands build predictable, profitable growth, and as such does a lot of work in due diligence, helping private equity investors assess whether an ecommerce business is a solid bet. Cook sat down with Retail TouchPoints to share what separates the strong from the weak in the tumultuous world of ecommerce today.

Retail TouchPoints: So what are the traits that indicate a resilient ecommerce business?

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Jake Cook: In this post-iOS world, the first thing to look for is how much of the traffic or users were acquired through, say, Instagram or Facebook ads. If that’s a lot — sometimes we see as much 70% to 80% — then there’s a lot of risk, because those audiences are getting harder and harder to perform against. For one of our customers, we’ve seen cost per impression go up 55% in the last two years.

With the best-performing sites, give or take around 60% of people are coming directly to the website or they’re coming through a search engine query. You might have 10% or 15% with paid ads, 10% to 15% with email and SMS and a little bit of influencers, but when that direct SEO makes up about two-thirds of the traffic, those tend to be really steady, high-performing websites that are pretty resilient.

We’ve had a decade of access to the most powerful targeting engine in the history of humankind — with Facebook and Instagram you could do cross-device, you had affinities, you could do lookalike audiences, you could do all this crazy targeting. But now all that’s kind of gone out the window.

RTP: There are a lot of headwinds macroeconomically right now for investors and also for ecommerce-based businesses. What are you seeing in terms of their impact?

Cook: What I’ve seen, at least with our clients, is that customer lifetime value is the North Star. So if [a company is] acquiring big groups of customers that aren’t going to be profitable — meaning they buy a lot, return a lot, only buy if there’s a big discount — they might be able to move a lot of inventory, but they’re going to pay kind of a double tax and probably pay a lot with ads.

I think we might see some interesting bankruptcies in Q1, Q2 2023 when that Q4 2022 lift isn’t there — the ones that, so to say, got hooked on the opiate of paid ads, that were acquiring bad customers, weren’t making margin and were just going after market share or VC [venture capital] funding. What’s interesting is how much of this speculative funding with VC is really just about amping up for growth. Private equity [PE] works a little differently, because they’re going to really look at EBITDA, profits, they’ll go a little bit deeper on that type of stuff. It’s actually a bit shocking how much PE drives a lot of the modern investing landscape.

But the thing is, we’re still very much in the early innings of ecommerce, especially when you look at business-to-business where we have these two really interesting trends converging. First of all, the baby boomers are retiring at an unprecedented rate. That’s no surprise, but there’s a lot of people that when they are retiring, they’re done, and there’s a mindset with that around not wanting to bother with something like digital transformation. For example, maybe I’ve run a plumbing supply company for 30 years, my kids aren’t interested in taking over, I don’t really have a succession plan — there’s no real incentive for me to want to figure out how to sell online.

And then on the other side of that, you have Gen Z and millennials that are very accustomed to a seamless mobile experience. So they expect to go on, find that a plumber, place the order, know it’s shipped, have all the same experiences they have on Amazon. There’s a lot of opportunity in B2B ecommerce right now.

RTP: Where do you see opportunity on the B2C side of ecommerce, which tends to be a bit more advanced?

Cook: In B2C, I think it really comes down to this idea of owning, not renting. What I mean by that is owning your data; you can’t rent it from Facebook or Google anymore. And part of owning that data is merging lots of different datasets together. On my nights and weekends I teach courses in data science and ecommerce, and that’s a big thing that I really try to impress upon my students — if you go on to lead analytics teams, you have to have really good, clean data [that’s] very organized. If you have that, you can run machine learning and all this other new tech that creates a nice moat around the business. You’re not renting that.

RTP: The idea that we’re still in the early innings of ecommerce is a little unexpected because we’re a couple decades into this whole internet thing now, and it’s getting pretty crowded. What do you think are the keys to standing out as competition increases?

Cook: The modern cloud has created all these amazing opportunities to start a business. In one of my classes, their midterm is to create their own website, and they can have their own site up in like 30 minutes. I’m an old man in internet years; I remember when that took days to do.

It’s been an incredible leveling of [historical] barriers, but when you remove those barriers, it creates a lot more competition. So while it’s never easier to build a website, it’s also never been harder to make it scale and perform. And people got really used to Facebook and Instagram, where I put $1 in and I get four or five bucks back, but that’s not working anymore. The tide is going out a little bit and it’s a lot harder to perform.

RTP: If social advertising isn’t the linchpin it once was, what are you seeing that works?

Cook: What I see working really well is email and SMS. You’ve got be a little bit careful with SMS though, because you can ruin it. SMS requires some restraint by the marketing team to not just use it like a hammer, otherwise they’ll ruin it like they did email.

For example, if we know customers in a particular group are going to buy every 47 days, let’s not send them a text or bug them on email for the first 35 days. This is where statistics are great; they will reveal patterns, and then you’ve just got to change the strategy based on the pattern.

Brands that have the cultural mindset to respect their customers, get good data and have good product can really effectively use these channels that they own and not have to pay an ad tax.

RTP: I feel like the overarching theme here is just zeroing in a little bit better on your customer than brands have had to do over the last decade or so.

Cook: I couldn’t agree more, and the other part of that is doing it in an ethical and transparent way [with regard to] why you’re collecting their data. For one of our clients, a shoe company called Oboz, we’re working on designing experiences that really show customers [the value of sharing their data]. So say we have a customer that’s really into trail running and they wear a size eight. It’s about turning around and telling them, “Hey, we have a brand-new trail-running shoe coming out, and we’re in a good in-stock position on size eight.”

There are some cool opportunities to create really great experiences, but it’s going to come down to customer-centricity and really focusing on who your best customers are. How do you reward that loyalty and how do you not creep them out with the data you collect but still provide a personalized experience? It’s gonna be a fun couple of years.

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