March 28, 2023

Unprofitability of the Undifferentiated Middle

Here's what "the undifferentiated middle" looks like when you evaluate metrics down to profitability at a customer level.

There are problems when you increase price points to cover cost of goods increases.

Here, we see that rebuy rates decreased from 35.0% to 32.5%. That's a consequence to increasing prices to cover cost of goods increases.

We see that units per repurchaser decreased from 5.00 per year to 4.57 per year. When the customer purchases, the customer buys fewer items to compensate for higher prices.

We see that the price per item purchased increased from $30.00 to $34.50 ... covering the cost of goods sold per item from $12.00 to $16.50. In this case, the brand simply passed the cost increase along to the customer.

However, the mix of fewer units times a higher price yields an increase in spend ... from $150 per year to $157.50. So yes, this brand got those who purchased to spend more. Unfortunately, fewer customers purchased ... so the math is about to fail.

Under the 2021 business model, we generate $52.50 of demand per customer ... under the 2023 business model we generate $51.19 of demand per customer (rebuy rate * spend per repurchaser gets us to $51.19). The higher cost of goods sold sinks the p&l, leaving us with $9.93 of profit today vs. $14.13 two years ago.

This is where the undifferentiated middle leaves us when we have a cost of goods increase.

No loyalty program fixes this.

A robust customer acquisition program fixes this challenge ... but you need a lot more new customers than you initially think.

This is why we turn to categories ... we have categories that yield more profit than average and have minimal cost of goods increases. Those become categories we have to feature, especially among new customers who may become attached to those categories going forward.

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