As the tailwind of COVID moves past a turbulent business cycle, D2C brands and businesses are now earnestly looking at profitability numbers. It’s a challenge to build a consistent upward trend. A few factors that impact profitability is what the diverse panel at D2CIndia 2022 dives deep into. 

The digital age makes it easy to burn money and it simultaneously makes it difficult to build and sustain a profitable brand. Founders are most of the time diving through an increasingly competitive landscape to constantly find ways to build a consistent and steady upward trend. 

Here are a few factors that impact the profitability of D2C brands:-

Average Order Value 

The best FMCG companies have struggled with it and continue to - be it online or offline. It’s one of the most important performance metrics to run a healthy e-commerce business. Basically, it measures every rupee a customer spends in a single transaction. In order to determine the Average Order Value, simply divide your total revenue by the total number of orders. Here’s what our panel had to say about their D2C business model and how they work towards increasing it as each has a different need to fulfill in the market.

Siddharth Dungarwal, Founder, Snitch.co.in said, “AOV wouldn’t make sense if you have a small value proposition with all the performance marketing/ marketing that we do at Snitch. How we tweaked it to our benefit is by offering bundled products/ combos. There are two parts to it. In the D2C world, customization can make a lot of difference because one consumer has endless options to go to and it’s up to you how you make them stay at your site and convert. Pamper them with some incentive or offer discounts because that will increase your Average Order Value. Secondly, we upsell with free deliveries after a threshold - which is a little above the cost of a single product - which increases the order value.” He here has managed to strike a balance between free shipping and AOV. 

Lifetime Value

People say that it's seven times more expensive to acquire a new customer than it is to retain one. So for most brands, it's important to look at what is the retention strategy right when they are thinking about the acquisition strategy itself. 

Sushant Goel, CEO, and Co-founder, Third Wave Coffee stated, “Before even looking at the LTV, we see if the customer is coming back to us. If a customer is coming back to us the second time, that’s the metric to measure our NPS. If they aren’t, there’s no question of evaluating the LTV, subscription, or any other metric. If we see them coming the second time, we focus on increasing the engagement time and then think about subscriptions. Subscription is a double-edged sword as very few of your loyal customers would come to you and subscribe and will probably remain with you for a fairly long period of time through your journey. The challenge however is that paying customers forms for a very small percentage of customers. So the idea is to be clever with your product mix, how we package the subscription.” 

Third Wave Coffee was an offline brand before and then it turned out to be an online brand. The brand played it differently with its subscription offering and it helped the brand. It started by not letting the customer go to its competitor which meant it would lock them in by offering a pack of 10 cappuccinos and not attaching that to any time limit due to lack of stores. It worked out beautifully for Third Wave Coffee with 10 percent of the customer base coming to them on a daily basis by subscribing to a cappuccino pack. So the appealing factor with them was the flexibility of using the product leading to a larger LTV. 

“For any D2C founders, before even thinking about LTV - which is a very difficult thing to measure, they should focus on thinking about how to bring the customer back,” Goel further added.

Further to that, filtering or segmenting your TG is the foremost thing to do. If your product/ brand is engaging with the right prospect who is likely to prove to be beneficial in the long run, it makes a lot more sense to spend on acquiring them. The second thing would be to devise a strategy to engage those customers because you know their history and behavioral pattern and then use that to create a personalized pitch for those customers which can reduce your cost. Also, it’s important to keep amending your strategies from time to time and experiment constantly to devise better ways of selling. 

Post Sales Service 

PSS is another key area for online as well as offline D2C brands as the consumer is constantly exposed to a world of new brands, offers, and discounts on an everyday basis. Post sales can help build trust and loyalty toward a brand. Veena Ashiya, Founder, Monrow Shoes and Siddharth Dungarwal share their experiences:

 “It’s important for us to understand the consumer journey of a footwear brand. For e.g. when to check if they like the fit or not, when is the right time to nudge them for a repeat purchase. So for us, the 3rd day of purchase is when we check if the fit is right, a month later we check the NPS score and after maybe 3 months they’d want to look for a new pair of shoes. It’s important to know this journey as we can ask the right questions at the right time,” stated Ashiya.

“For us, post-sales would mean creating stickiness for our brand. Consumers these days have abundant apparel, or skincare brands to try and explore. Hence, we focus on how to build consistency by upselling and cross-selling - to increase the Average Order Value and LTV,” Dungarwal further added.

Delivery Costs 

Businesses of every nature require a cost-efficient way to deliver their products as, in the increasingly dynamic digital and the emerging D2C sector, it is that crucial element that adds up to the overall customer experience and loyalty. A D2C brand might have a great website and app, a lucrative business model, etc. but if the delivery costs are high or exchanges/returns take up time, or the delivery network isn’t as solid, there are chances that your customer's interest might dwindle along the way. 

There are so many factors that play a role in how successful or unsuccessful the delivery mechanism of a brand is. For e.g product/ package size, courier costs, delivery network, manufacturing center versus shipping geographies, and so on. Read on to learn about what the founders have to share about the two ends of the perspectives. 

Sahil Mehta, Director, Emmbros Overseas Lifestyle Pvt Ltd said, delivery costs are crucial for them as it has a direct connection to their profitability. This means even a rupee saved on shipping costs is directly added to their net profit. 

“We’ve done a very deep study in the last few days where we tried to analyze the cheapest, effective and best way to transport our goods to our customers - B2B, B2C, retailers - so we sell in different sizes and shapes. We realized that we reduce the touchpoints. Our manufacturing happens in Kerala and our warehouse is in Goa. Earlier we had to take it from Kerala to Goa to the consumer. Now we are finding out ways how we can ship it to consumers directly from Kerala. We are also finding out to stock our products in different warehouses across the country as it drastically reduces the transportation costs and we can provide 24 hours shipping services which is a big draw to the customer. That becomes economical as logistics costs are usually cheaper when the transit is to and from a metro,” he explained.

“So we’ve identified one or two logistics companies accordingly who would be the ideal partners who will stock their products and support 24 hours delivery. This also downsizes their packaging team in-house which saves costs,” he added.

For Sairaj Dhond, Founder and CEO, of Wakao Foods things work differently. He said, “There isn't much we can do in terms of being charged by weight. We try and adjust between single and combo products so that it shifts in the same wright slab. We do have digital warehouses in different states but the problem with that is that it’s expensive to transport products from there to different states. There are many inventory-based companies that can centralize orders for brands which helps in saving costs as the brand only pays for the local costs.”

Hence, for D2C or online brands, every cut in the shipping cost is the direct profit which isn’t going anywhere. These brands also need to focus on finding the right delivery/ logistics partner who can adapt to their delivery framework where brands can also save money by sending bulk orders as opposed to separate products.

Returns and Exchanges 

Returns are like a termite. One cannot remove it from the system but only create tools to control them. 

“As a bootstrapped company we take returns and exchanges very seriously. We make sure our images clearly reflect the product - especially in the fashion industry. The products must match the size chart uploaded on the website. Right communication with your customer through the buyer’s journey is very critical - right from the time they discover to the time they purchase. Lastly, delivery speed is yet another important factor - faster the delivery, happier the customer,” said Dungarwal.

 Another factor to build stickiness around your brand is the content creation across online and offline mediums - written feedback/ testimonials, reviews and content on social media platforms, instructions on how to use the product on WhatsApp, etc. are a few ways that can help in reducing returns and exchanges.

 “This is the one question that all our investors keep asking. However, in a lifestyle category returns and exchanges are a part of the cycle. In our experience, the research and investment that we’ve done to standardize Monroe Shoes have helped. What I mean is if a shoe typically fits into say a 38 of One Monrow shoe, you will fit in a 38 of any Monrow shoe. That itself is a very big defense we’ve built against returns,” Ashiya mentioned.

Another method she very strongly sheds light on is doing detailed and thorough research on customer reviews back on returns - reasons for returns - can offer a lot of insights on why are your customers returning. One of her lessons was that it’s important to showcase different skin tones on the product page as opposed to showing the product on a fair-skinned model as it allows customers of different skin tones to get some sort of an idea as to how the product would look on their skin. She also emphasized on hitting some level of standardization of the product - if sized based - will deliver exactly what is promised to the customer. Lastly, having one-on-one communication with the customers who are returning the product can be the best way to know what needs to be worked upon.

The founders also observed that Indians largely and generally are increasingly discerning when it comes to quality and which is why brands need to invest in R&D and product quality is the key. 

Reducing RTOs - Using AI and Technology

While technology can rescue us a lot of times to remain accurate with our business, a sharp eye from founders might just eliminate the need to always rely on it. Sometimes it’s just about getting the basics right like how Ashiya from Monrow Shoes does it. 

She says, “I don’t think we need AI. All we need are genuine delivery boys who wouldn’t make false comments”. The best way to judge your delivery company is to look at the ratio of false attempts made on their dashboard. That says that the delivery company is okay with such false data. AI can come into the picture much later. First, we need the basic intelligence to be in place”

Mehta on the other hand shared that it is important to check for genuine orders by checking order addresses. The software can help detect that. 

CAC - Customer Acquisition Costs 

Data certainly has a huge role to play, however, the product is the first and the only pillar to increase repeat and profitability. If the product isn’t great, no amount of marketing and data can help. If a consumer is willing to buy a product for the first time, it means there’s a need and desire for it. If they buy it for the second time, it means the product-market fit is there. Until these two benchmarks aren’t achieved, data will not do anything.

“We are primarily an offline business and hence data plays an uneven crucial role for us because we don’t know who the consumer is. So we built a loyalty program early on in our journey and we saw 40 percent of our consumer base become a part of that program while also having the metrics to understand buying behavior. While data continues to remain central to crack growth and profitability, I think founders need to spend more time identifying their Total Addressable Market (TAM) and how large a business they want to build. Founders also need to think differently and deeply as what works in a Tier I city might not work in Tier II as India is a very diverse country. That should take priority over marketing spends,” said Goel.

While data can always offer insights on how to get better, founders need to keep an eye on things they should stop doing - which is also something that data can identify. This will save the business from plowing money into unproductive activities or functions - taking the focus on where to deploy your money and in which areas.