You cannot scale your brand to profitability

The unit economics in ecommerce are becoming a bigger and bigger challenge

It doesn’t matter whether you’ve seen your sales zoom ahead during the pandemic or fall behind, the reality is that it’s never been less profitable to be an online brand on a per-order basis. 

This is set to become THE story in online retail as we come out of the fog of the pandemic. We saw a glimpse of this story start to unfold right before the pandemic hit. Those in the industry remember the exact moment. It was when Casper’s S-1 was released prior to the company going public.

THUD. It was written in small Times New Roman font on a plain text page in the company’s S-1 filing, but the message was loud and clear: You cannot scale your way to profitability as an online brand.

How can this be? We’re now a decade into the digitally native brand era and profitability remains an elusive goal. By cutting out the middleman (wholesale), brands and investors alike were fixated by the lofty gross margins vertically integrated brands can realize. But as we’ve learned, gross margin is “for show” and net margin is “for dough”.

Let’s meet the three culprits putting the pressure on every online brand’s profitability:

  1. Customer acquisition costs
  2. Competition
  3. Infrastructure costs

Culprit #1: Customer acquisition costs

The impact of the pandemic on ecommerce sales was so immediate that not even Amazon was prepared:

The cost to acquire customers shot up dramatically as a result of the sudden maturation of ecommerce as a sales channel, but this result was actually a totally reasonable outcome when viewing the situation at 10,000 ft. At ground level though, this was a sudden, seismic shift to absorb.

Our previous post, The year customer acquisition changed forever, drew the link between ecommerce’s share of total retail and rising CAC. It also detailed yet another “shaken snowglobe” moment for online brands: Apple’s iOS14 update. So, right on the heels of a jolt in CAC, we get the attribution rug pulled out from under us. Sheesh!

With the days of predictable, attributable CAC now essentially over, online brands have to decide whether to pay these elevated costs or try to cull together enough acquisitions from marketing channels outside of Facebook. Should you decide to pay the higher CAC, the pressure to increase your LTV will also be amplified. This means you need to start game planning for increasing the retention rates of your customer cohorts now.

Culprit #2: Competition

We live in a copycat world. While we might wish that others would find their own original idea to launch, the reality is that it’s just easier to copy. Due to lost-cost technology solutions like Shopify and the impact of contract supply chains dropping their minimum orders, it’s never been easier to launch an online brand. If you’re a successful new entrant to the digitally native brand landscape, you’ll have competition...and quickly. 

Online brands historically haven’t had to compete on price, so the impact of competition to date has purely been felt in higher CAC. However, with little white space left to target in a fragmented, siloed landscape and Amazon’s relentless drive towards brand parity, price is a lever many brands find themselves beginning to pull. 

This naturally impacts gross margins, but it also makes expansion into new product categories that much more difficult. Today’s customer craves uniqueness and is presented with no shortage of new brands to trial. Product category expansion seems like an easy solve for customer retention, but in practice is much harder to successfully navigate. With so many other options to choose from in adjacent product categories, brands would be wise to ensure their customers are actually receptive to them entering these categories before proceeding.

Culprit #3: infrastructure costs

This one’s all about inflation, plain and simple. Due to the rapid acceleration in online sales, the costs for servicing these orders is on the rise. 

3pl rents 📈

3pl labor costs 📈

Freight carrier costs 📈

The rate of growth has far outpaced the increase in capacity to service these orders, so the costs are passed along directly to the brands to bear. Having been nickeled and dimed for far too long by Amazon, FedEx and UPS see their profit opportunity and not even trying to feign interest in investing in increased capacity.

It looks like higher ecommerce infrastructure costs are here to stay. 

The way forward

The pressure these three culprits are putting on ecommerce unit economics is real and not subsiding. So what are online brands to do in this climate?

It’s important to note that the reason these culprits are so detrimental to the bottom line is that brands are left to tackle them alone. By partnering with other brands, self-sustaining ecosystems can emerge that will create efficiencies and synergies. As an industry, it’s time that we find ways to connect the highly fragmented, vertically integrated landscape in which digitally native brands operate.

At Honeycomb, our mission is to drive profitable growth for our network brands by increasing their share of wallet and also lowering their customer acquisition costs. We can’t wait to see what other solutions arise to allow brands to partner in order to ease the burden of these profit-busting culprits. 

A profitable future is within reach. Let’s keep building!

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