May 28, 2019

Business Death Spiral

The topic came up last week, courtesy of an individual on Twitter who pointed out that a retail brand with a growing their BOPIS (buy online pickup in store) channel was a retail brand that was experiencing success.

And quite honestly, this business (I believe the business was Target) is experiencing a lot of short-term success. So that's a good thing!

For the next several posts, we're going to talk about businesses stuck in a death spiral, and we'll talk about how one gets out of a death spiral.

What are the first two signals that a business is stuck in a death spiral?
  1. It becomes hard to acquire customers, and the customers you acquire are more expensive than they previously were to acquire.
  2. The majority (or significant minority) of acquired customers are acquired via a channel that is struggling to survive.
Take your typical traditional retail brand. Say the brand used to acquire 1,000,000 new customers per year. Then malls began to die as customers shifted online and tenants told customers to avoid the store and instead shop online.

Old Scenario:  1,000,000 new customers, 900,000 via stores, 100,000 online.

New Scenario:  850,000 new customers, 650,000 via stores, 200,000 online.

This is a classic "death spiral" scenario (and catalogers know exactly what happens ... just replace stores with "co-op sourced catalog names" and you've got a disaster, right?).

In the short-term, you miss budgeted sales goals because you have too few new customers.

In the mid-term, you'll miss budgeted sales goals because you have an ever-decreasing number of new customers coupled with a lack of file momentum (last year's new customers are a small cohort and therefore they don't pay the brand back over the next 1-3 years).

In my Total Package projects (click here for project costs), this is the number one marketing-related finding. It comes up in a majority of catalog-centric projects. It comes up in a majority of retail-centric projects. And if Google/Facebook continue to be expensive, it's going to become an e-commerce issue as well.

More on this topic in the next post.

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