February 09, 2022

Business Stages

The Start Up:  I typically view e-commerce brands with annual sales between $1 and $10,000,000 as being in startup mode. These businesses frequently lose money, but are surprisingly good at customer acquisition - generating word of mouth that results in low-cost / no-cost new customers. These businesses typically have a small merchandise assortment, with customers being a fan of a small number of items.

$10,000,000 - $30,000,000:  Things change here. The free flow of new customers comes to an end. The company needs to spend money to find new customers, and the return on investment isn't all that bad. The merchandise assortment begins to grow as somebody at the company figures out that average order values increase as the size of the assortment increases. Merchandise productivity increases due to the increase in the assortment.

$30,000,000 - $100,000,000:  Now we have trouble. Customer acquisition becomes ever-more expensive. The brand learns that there is a law of diminishing returns ... spend more, get more, but at an ever-decreasing rate. The easy growth associated with increasing the size of the merchandising assortment comes to an end as well. The company realizes that the Management Team that took the company through two very difficult stages may not be the team that takes this company north of $100,000,000. From a math standpoint, the customer acquisition program is "optimized" according to the numbers folks - and by optimized, I mean that the company cannot spend more money without a significant drain on the profit and loss statement.

$100,000,000 - $500,000,000: The company becomes a "brand". It has to become a brand to stand for something. Whereas the products sold were the "brand" before the company hit $30,000,000 in sales, now the company becomes a brand in an effort to sell more. When the company cracks the code (think about Duluth Trading Company a decade ago), merchandise productivity skyrockets, causing the p&l to leverage favorably. The company can reinvest money in advertising that works, allowing for more new customers and rapid growth.

After $500,000,000: The "brand lift" eventually quiets down. This is the point where bureaucracy takes over. The gifted, growth-oriented individuals are moved aside as the core business is fully optimized for profit generation. The business will peak, for a fully optimized business really can't grow because it would not longer be optimized, correct? All it takes is a modest drop in merchandise productivity, a drop that is inevitable, for panic to set in. How the brand handles this first major drop in merchandise productivity determines how long the business can remain strong.

Contraction: When I have demographic data at my disposal, it is common to see a brand that has a customer base that ages 0.7 years for every year that passes. In other words, if the customer base was 35 years old in 2012, the customer base will be 42 years old in 2022. Eventually the "brand" disconnects from younger generations ... why would a 24 year old want to buy merchandise that caters to a 54 year old? You'll know that the disconnect is in full force when your merchandise productivity is flat or increasing and you cannot simultaneously acquire enough new customers to meet your sales objectives. It's not uncommon for a mature brand in contraction to create a spinoff that provides a path to the future ... J. Crew's Madewell comes to mind. A business in contraction is well served by birthing predecessors. Too often, Management takes the opposite approach - trying to reinvent the core brand. That approach "can" work, but it is hard work, folks. The alternative (birthing predecessor brands) is equally hard work.

Each business stage requires different approaches ... approaches often derived from new Management teams brought in to push the company over each hurdle. If your "brand" is stalled, it might be time to think about the next business stage.

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