?? #85: What a trade war means for DTC

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In this issue: Putting politics aside to understand how a trade war with China, Canada, and Mexico could affect DTC brands - and what to do about it.

"Gentlemen! You can't fight in here, this is the trade war room!" ??

Trump, tariffs, and you

To recap: on Tuesday Feb 4 at midnight, 25% tariffs on all goods exported from Canada and Mexico into the US will begin, along with a variety of other changes. Full explainer legal details here.?

My official prediction is that these tariffs are a bluff that Trump with withdraw. They have all the marks of a classic terribly-played poker bluff: absurd reasoning, urgent deadlines, and huge numbers. I don't think Trump will go through with tariffs on Canada or Mexico. As of this morning, Mexican President Claudia Sheinbaum says the Mexican tariffs are delayed by one month after she agreed to deploy thousands of troops to the border to "address drug trafficking."

However, lame-duck Trudeau (he resigns in March) has nothing to lose. He could refuse whatever absurd demand Trump makes, which would infuriate the president and set this trade war off for real. What does that mean for us??

If you aren't familiar with Section 321, learn about that first. The tariff change removes Section 321, which is actually more important than the tariffs themselves - it might kill Temu and Shein. But that's a topic for another issue. I do not think this is a bluff, I think the 321 loophole is dead for real.

If you are using the Section 321 $800 loophole to avoid tariffs and customs via Canadian and Mexican warehouses, the game is over. This video explains more.?Now, this is a marketing newsletter, not a logistics newsletter.

Let's explore how a trade war with Canada and Mexico could affect DTC marketers.??

All's fair in love and trade wars

Nearly half of all US imports come from Canada, Mexico, and China. Tariffs will generate hundreds of billions in revenue for the government, but will eliminate hundreds of thousands of jobs, disrupt supply chains, and most importantly, raise consumer prices. Inflation recently hit a 40-year high - can we handle it getting even worse?

Canadian and Mexican tariffs will mostly affect energy, food, and automotive sectors. Food is the key here: Mexico is the biggest exporter of produce, fruit and nuts to the US. So actually, groceries WILL get more expensive if Trump institutes tariffs on Mexico. This is untenable: food costs just hit a 30-year high for Americans.??

The math is a little fuzzy, but lots of people smarter than me say that tariffs (and their accompanying changes, like a proposed reduced income tax) would not put more money into consumers wallets. This is bad for DTC.??

My prediction: tariffs would slow marketing revenue growth for DTC brands across the board, which will manifest as reduced efficiency across conversion metrics. This combination of inflation and increased food costs brought on by tariffs will eat away at Americans' disposable income, which is what DTC relies on. Consumer confidence will drop. People will stop buying things and start stuffing dollars in their mattresses.??

If tariffs become a way of life I predict that: CACs will rise, time to purchase will rise, conversion lag will increase, conversion rates will drop, and AOVs will drop. CPMs might get cheaper as people pull spend, but conversions will flounder. So let's plan.?

Five tips for thriving under tariffs

1. Be more aggressive about retaining your best customers. I bet ninety percent of your revenue comes from ten percent of your customers. You cannot lose that lifeline. How can you keep this cohort alive? Most marketers are comfortable ignoring their most zealous customers because they're a "safe bet." This might not hold true in a recession. I estimate that I have spent more than $6,500 on my $200/month MUD/WTR habit over the last few years, and even I've paused that subscription a few times if I needed the budget back. There's no such thing as perfect loyalty - you need to make your best customers happy right now. I am anti-discount, but if anybody deserves it, it's your most loyal customers who already have incredible LTVs.??

2. Reduced consumer confidence will create hesitation at checkout - de-risk that process. The Consumer Confidence Index is your best friend for studying macroeconomic impacts on your brand. "Should I really be spending this money?" Your customers will ask. What can you do to add the perception of value and de-risk the sale? Late night infomercials are a master of this. "Buy one get one free money back guarantee!" What does this look like for your brands? Keep those conversion rates stable.??

3. Your CACs will increase: focus on aggressive benchmarking. Lower consumer confidence = lower buying momentum = higher customer acquisition costs. Can you ad account survive a 10%-15% CAC increase? If not, you need to ruthlessly apply benchmarks on what performance is acceptable across all your ads. Flexibility isn't acceptable. Even if you're crushing it, you need to understand when your CACs are starting to dip into dangerous territory. Be diligent about this: you need benchmarks on every product and every ad. Want help with this? Email me, we're working on a tool around benchmarking that you might like.?

4. As profitability on first order wanes, LTV becomes more critical than ever. You know what, I'm about to say it: I don't care if you're profitable on first order or not. What I do care about is your strategy for finding profitability. Not everybody has to be profitable on first order. If you can convert enough of your first-time purchasers into second- or third-time purchasers, you can justify wildly overpaying for new customer CACs. What's your plan for driving "profitable" behaviors? Do you have your customers cohorted by their number of purchases? Do you have a system in place for driving second or third orders via email segmentation? Do you boost first or second-time purchase AOV on-site to reduce the load on your CACs? Do you have a loyalty program to lock in repeat purchasers to drive volume? Are your subscription offerings running at the right cadence to front-load LTV without damaging customer experience? In times of expensive acquisition, it's better to spend less on advertising if it means you'll be more profitable in the long run.?Speaking of the long run...?

5. Stop making shitty products that are held up by good marketing. If a recession happens and consumers feel pressure on their wallets, they will not be happy if they feel like they've wasted their money. They want to feel like they're getting "value" off spending their hard-earned cash, regardless of their income level. (Everybody should read HBR, by the way.) If you sell a product that gets a high level of returns or a low repurchase rate (when your goal actually is many repurchases) then it's time to do some soul-searching. What's wrong with the customer experience? Are you actually acquiring the right customers? Why aren't they buying again, or why are they returning the product? Customer surveys, 1-1 interviews, and detailed feedback sessions with your best (and worst) customers will reveal issues with your product you never knew existed. Solving these and creating a well-loved, defensible product will actually create a "moat" around your brand, easing CACs and improving loyalty among your customers - see point #1.?

Bottom line: a trade war is bad for business, but it's probably a bluff. Let's talk next week and see what happens. Either way, the advice above is good for any economic environment, and I don't see CACs ever getting cheaper.?

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?? JOB: Head of Growth and Marketing // POPCHEW // NYC: a venture-backed fast food brand seeking to "build the defining food brand of the next century." No pressure??

?? JOB: Director, Marketing Science // PHD (agency) // NYC: get big client experience at a big NYC agency.?

?? JOB: Director of Paid Search // TOV Furniture // Brooklyn: Mid-century modern, anyone?

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