January 09, 2023

What Is Happening To Brands With A 29% Repurchase/Rebuy Rate?

We don't talk about it often because it isn't a lot of fun to talk about. But the business models we built in the first twenty years of e-commerce are crumbling.

It's not that anybody is failing, per se. It's that the business models were built on an assumption that customer acquisition would be cheap and easy.

Let's assume your customer base has a 29% repurchase rate (29% of 2021 buyers purchased again in 2022). If those customers purchase, they spend $200. Meanwhile, new/reactivated buyers spend $130 each.

Pretend your business has 100 customers at the start of the year. Pretend your business will acquire 71 new customers. Pretend you spend $3,000 a year on advertising. Pretend that 40% of sales flow-through to profit. Pretend that you have $1,500 a year in fixed costs. 

  • 100 Customers * 29% Rebuy Rate * $200 + 71 New/Reactivated * $130 = $15,030 sales.
  • $15,030 sales * 0.40 - $3,000 ad cost - $1,500 fixed costs = $1,512 EBT, 100 customers.
That's a nice business ... 10% pre-tax profit.

Then your friends at Facebook stop delivering for you. Oh sure, you'll blame Apple, it's their fault they shut down a portion of the surveillance economy that helped you earn a bonus check. But we all know the truth. We know we should never, never, never have depended upon third parties for bulk new customers at a low cost. Never. Ever.

So you lose 30% of your new customers. You cut your ad budget by 10%, trying to optimize the situation. Here's your new p&l.

  • 100 Customers * 29% Rebuy Rate * $200 + 50 New/Reactivated * $130 = $12,300 sales.
  • $12,300 sales * 0.40 - $2,700 ad cost - $1,500 fixed costs = $720 EBT, 79 customers.
Now you have a 6% pre-tax profit.

Worse, you only have 79 customers instead of 100. Let's run the situation forward another year.
  • 79 Customers * 29% Rebuy Rate * $200 + 50 New/Reactivated * $130 = $11,082 sales.
  • $11,082 sales * 0.40 - $2,700 ad cost - $1,500 fixed costs = $233 EBT, 73 customers.
You're down to 2% pre-tax profit. And just 73 customers.

See what's happening?

Now, if you don't have a viable customer acquisition plan that doesn't cost and arm and a leg, you are heading down a path that isn't ... viable.

All because customer acquisition became harder.

This is what is happening to brands with a 29% rebuy rate.

You fix the p&l several ways.
  1. You come up with an alternate customer acquisition program (I've been barking about this for seven years).
  2. You change your merchandise assortment to encourage frequent repurchase or you find a way to generate recurring income (i.e. subscriptions).
  3. You find a way to minimize variable costs (gonna be hard).
  4. You find a way to trim fixed costs (works for awhile).
Obviously you cannot go down the (3) (4) path for long. And you don't want to go down the path of (1) because if you did you would have made changes back in 2015-2016.

So (2) becomes your future.

This is what is happening to brands with a 29% rebuy rate.

P.S.:  This is where some of you tell me that you'll just increase your loyalty efforts, that you'll turn a 29% rebuy rate into a 39% rebuy rate or 49% rebuy rate. If that were true, what exactly stopped you from already doing that over the past twenty years? It's darn near impossible to move rebuy rates. How many of you had a captive customer audience who couldn't visit stores in 2020 and what happened to your rebuy rates during that time? That's a best case scenario (for e-commerce).

Which brings us back to (1)

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