Revenue alone is not enough to estimate product strength of a consumer brand
When we first started looking at consumer brands in Blume in early ’22, thanks to Apurva Dixit who joined us to drive our focus on consumer brands / d2c, we used annualised revenues upwards of $500k / ?3.5crs (25-30L+ monthly net revenue) as a criteria for diving deeper into a pitch. We saw revenues of 25L+ and CM2 +ve as some signals of early PMF and product strength / customer validation. We told brands that were lower than this number, to hit us up when they neared or reached this benchmark. Was it perfect? Oh no, but did it help us filter startups that were more appropriate for our stage? You bet.
That sieve for startup pitches soon turned out to be less finer than we thought. We started seeing more and more startups that were pitching us, at 50L+ monthly revenue and soon 100L+ monthly revenue. One reason was that Marketplaces like Amazon and Flipkart (and Myntra for apparel) were driving considerable revenue for consumer brands, far more than their own website did.
We then said we would now use $1m / ?8crs annualised revenues as a criteria, and started using the sieve of ?1cr / month as a revenue benchmark for early signs of PMF and product strength. Now even that sieve has proved ineffective, as startups riding on Quick Commerce’s growth and benefiting from access to Blinkit, Instamart, are coming to us with monthly revenues of ?1.5-2crs+. Quite a few of these are not CM2 +ve as well.
What does increased revenue led by marketplaces / QCommerce indicate?
One challege is that I dont know if the increased revenue is an indicator of the product’s intrinsic strength, or early access to Quick Commerce / preferential access to Marketplaces. Is the revenue led more by distribution than PMF-led growth? Especially when the platform is not intrinsically native to your product genre - for instance, for a food brand, Blinkit is more native than an Amazon. For an electronics brand, Amazon may be more native than a Blinkit. So when I see an electronics brand where Blinkit is 50% of revenues, I worry. Clearly Blinkit is trying to drive up AOVs and is using the electronics brand to support this strategy. Tomorrow it may move to another category and drop it suddenly.
There is a parallel to this in Zynga and how it rode Facebook’s growth, until one day in 2012, Facebook decided to end the partnership. Now I dont necessarily see such a dramatic turn of play here, but at some point QCommerce and Marketplace platforms are going to a) suddenly change their strategy b) increase their commission to extract their pound of flesh c) use the data they have to build private labels etc.
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3 signals that matter
So in this context of distribution access driving revenue growth, what signals matter to determine product strength and PMF? One could be own website revenue and offline growth, and seeing if that is increasing. That is insurance against any potential rugpull from the Marketplaces or QCommerce platforms. Second would be repeats, and seeing this manifest in CACs holding somewhat steady as a percentage of revenue (as the rising CAC for new users is balanced out by higher repeats and LTVs of the older cohorts). Finally margins, and if you are able to see sustained CM2 growth and are able to hold margins.
TLDR: Revenue alone isn’t enough to determine product strength and PMF. Yes, growing revenue is an important signal but it needs to seen along with own site revenue, repeats, stable or declining CACs and margins to arrive at a complete picture.
Grateful to Apurva Dixit for reading an early version of this post, and critiquing it.
Co-Founder, Fix Health | BITS Pilani
5 个月In case of products with infrequent use case eg: mattress, job hunt or even physiotherapy -- repeats isn't the correct metric to look at. What would you look at in those cases Sajith Pai ? In my opinion, efficacy for the JBTD would be key -- proxies being NPS, feedback, % of people reaching the intended goal.
Co-Founder @ Pannkh | Founder @ Zima Leto | Entrepreneurship, B.Tech. Computer Science
5 个月2. Investors can look into the ratings and reviews of the brands in marketplaces to get an idea of the performance and future scope of scaling those products into other markets. Significant positive ratings and reviews provide trust and comfort to the end customer and can do the same for the investors as well. 3. Lifetime sales: This can also be one of the metrics, as brands with good enough lifetime sales (3 million USD+) give the idea that the brand has the ability to stay ahead of the trend over a longer period and is not a fluke in terms of identifying and executing the requirements. Sajith Pai I would like to know your point of view and possible solutions for brands as per the above challenges with respect to marketplaces, own website, and offline retail .
Co-Founder @ Pannkh | Founder @ Zima Leto | Entrepreneurship, B.Tech. Computer Science
5 个月Sharing my thought process for evaluating the PMF: 1. Investors can look into the aging of the brands. Most of the brands (specifically fashion) in the past have closed down in 3-8 years due to multiple reasons. Looking at brands beyond 8+ years can be one of the metrics as the advantages are that it can give the investor a fair amount of idea about the founders for their experience, resilience, and passion towards building the brand. It also guarantees that the founders would have also gone through multiple challenges over time and come out of those with possible solutions.
Co-Founder @ Pannkh | Founder @ Zima Leto | Entrepreneurship, B.Tech. Computer Science
5 个月3. If brands look to have their own website as the channel to grow sales, then there is a struggle to be profitable in the initial 1-2 years and LTV needs to be considered, which requires a good amount of capital for bearing the losses. 4. The CPM and CPC have increased on marketing channels such as Facebook or Google over the period of 3 years due to the emergence of multiple D2C brands, and most of them are targeting the same audience (which buys online). This has led to a rise in CAC over time. 5. If brands choose to go offline by opening EBO, then it will require significant capital for inventory and setup, which is not possible by their current cash flows and would require additional capital through equity as it will require 1-2 years initially to get the stores profitable. Also, considering the struggles of the offline space recently, it will be difficult to make money in a shorter period of time.
Co-Founder @ Pannkh | Founder @ Zima Leto | Entrepreneurship, B.Tech. Computer Science
5 个月Based on my experience, below are the observations from my point of view: 1. I totally agree with you on marketplaces changing their strategy suddenly or increasing the commission or using data to build their own private labels. This is already happening now with Myntra increasing the commissions significantly over the last 1 year or so and also using brands' data to develop their own brands (sometimes copying the exact styles as well). Ajio has not changed the commission structure but has changed the incremental discounting strategy and customer acquisition strategy, which has led to a significant drop in traffic on the website and drop in conversion rates. Also, we have observed that the traffic has been routed to the private labels and selected brands to grow them. 2. Due to sudden changes in strategy, the marketplace brands have accumulated extra inventory, and the marketplaces expect the brands to spend heavily on marketing on platforms and give extra discounts to grow in the channels. This has taken a hit on cash flows and P&L for brands in the last year.