#9 The Pitfalls of Scaling
Hi DTC folks,
This week, we'll look at the pitfalls of scaling too fast and the critical role of customer retention in driving sustainable growth.
Crucial piece of advice for brands experiencing their first wave of growth
Imagine this...
Your brand is riding a wave of success.
Sales are booming, and your brand is gaining traction.
VCs offer you money to amplify that success by significantly increasing your advertising spend. The appeal is undeniable-you're on a high and you want to keep the momentum going. Plus, you'll have the money to invest.
So, why not go all in?
Here's what often unfolds over the next 6 months:
Initially, everything seems great. Your ads are performing well because your brand is trending, and customer acquisition costs (CAC) are low. However, this honeymoon phase doesn't last forever. Organic growth begins to wane, as it inevitably does in any growth cycle.
As a result, the once impressive performance of your ads starts to fade. The actual value these ads were adding becomes questionable, likely overstated by optimistic weekly reports.
Before long, your CAC increases dramatically. What once took a few months to see a return on investment now stretches to 12 months or more.
As a consequence, your cash reserves dwindle rapidly, putting your business in a precarious position.
I think a lot of brands can relate to that.
I have the following piece of advice for you:
1) Sustain Organic Growth:
2) Monitor CAC & LTV Cohorts Closely
3) Avoid Over-Scaling Too Quickly
4) Protect First-Order Profitability
5) Plan for Long-Term Sustainability
?? Our calendar is open if you want to discuss this for your brand.
You have to think of customer retention as compound interest
Consider the following example:
You earn $50,000 a year for your entire working life.
Your savings rate will also remain constant at 5%.
This equates to $208.33 in monthly investable savings.
You save for 45 years, a typical working career.
If you saved this money but never invested it, you'd end up with a total retirement fund of $112,500. Think of this as the classic customer acquisition only scenario with 0% customer retention. One-time customers only.
That's only $4,500 in annual retirement income, assuming a 4% withdrawal rate.
Not exactly living high on the hog.
Now the magic happens....
The only variable we're going to change for the first calculation is the rate of return on our savings.
Instead of zero percent appreciation, we're going to assume a 9.8% compounded rate of return (the average return of an index fund) on your money.
Believe it or not, this will take your savings from $112,500 to a staggering $2,035,947 over the same period of time.
This is the magic of compounding and the difference between companies with high customer retention rates and those without.
Top line and profit can easily be 20x higher.
And compounding, and therefore retention, is very sensitive to small changes. So any small improvement can have a huge impact on your medium to long-term performance.
I can only encourage you: work on your customer retention. It pays off exponentially compared to any other metric.
That’s it for this edition!
Any questions or topics you'd like to see me cover in the future? Just shoot me a DM or an email!
Cheers,
Alex
Product Enthusiast | Data Analyst at Zerocac
8 个月Scaling too fast and neglecting retention can harm growth. Excited for more DTC strategies. Can you cover acquisition costs?
Coaches/Agencies: I will help turn your Instagram & YouTube into a lead generating machine | 100M+ views | Book a Content Consultation with me below????
8 个月Well said!
High-end tech-teams for startups | Idea to Exit Product Partner | Co-founder at VeryCreatives
8 个月Great post! I love the focus on customer retention. Keeping customers happy can be more valuable than getting new ones.?
I'll Help You Sell Your Business and Maximize Your Exit | Bootstrapped and Exited Founder | Husband | 3x Father
8 个月Finding the right balance between growth and retention is key. Looking forward to your strategies.
Sales and Marketing at CBF Labels
8 个月Customer retention is definitely the backbone of long-term growth.?