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.
- 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.
- 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 come up with an alternate customer acquisition program (I've been barking about this for seven years).
- You change your merchandise assortment to encourage frequent repurchase or you find a way to generate recurring income (i.e. subscriptions).
- You find a way to minimize variable costs (gonna be hard).
- You find a way to trim fixed costs (works for awhile).