Remarkable Retail

Understanding Warby Parker and the Power of Customer-Based Valuation with special guest Daniel McCarthy

Episode Summary

As pioneering digitally-native brands Warby Parker and Allbirds prepare to go public--and the fortunes of other highflying disruptor retailers like Peloton and Chewy ebb and flow--we get the chance to dissect how to make sense of key customer metrics with Daniel McCarthy, professor of marketing at Emory's Goizueta Business School, co-founder of Theta Equity Partners and pioneering thought leader on customer-based corporate valuation. It's a fast-paced MasterClass on how the cost of acquisition, retention rates and other customer cohort data provide valuable insight on the long-term prospects of any brand. We also learn whether Dan is bullish on Warby Parker, why we may not work so hard to chase "shifty" customers (or as Steve likes to call them "promiscuous" shoppers) and drop more than a few puns.

Episode Notes

As pioneering digitally-native brands Warby Parker and Allbirds prepare to go public--and the fortunes of other highflying disruptor retailers like Peloton and Chewy ebb and flow--we get the chance to dissect how to make sense of key customer metrics with Daniel McCarthy, professor of marketing at Emory's Goizueta Business School, co-founder of Theta Equity Partners and pioneering thought leader on customer-based corporate valuation. It's a fast-paced MasterClass on how the cost of acquisition, retention rates and other customer cohort data provide valuable insight on the long-term prospects of any brand. We also learn whether Dan is bullish on Warby Parker, why we may not work so hard to chase "shifty" customers (or as Steve likes to call them "promiscuous" shoppers) and drop more than a few puns.


But first we open up the episode with our quick takes on recent retail news that caught out attention, starting first with even more Amazon news than usual, including their new line of private brand televisions, plans to hire 125,000 distribution center staff, raise hourly wages and pay college tuition for their workers. We also dig into spending per trip information from NPD, monthly US Commerce data that shows consumers continue to shop like crazy, troubles at Casper, Walmart+ hitting 32 million members and the sad story of Sears closing its last Illinois store.

NOTE: We're now back to regular weekly episodes.

Also check out our newish   YouTube channel.

Daniel McCarthy is an Assistant Professor of Marketing at Emory University's Goizueta School of Business. His research specialty is the application of leading-edge statistical methodology to contemporary empirical marketing problems. His research interests include customer lifetime value, limited data problems, and the marketing/finance interface.

He popularized “customer-based corporate valuation” (CBCV), a methodology that drives any traditional valuation model off of the underlying behaviors of the target company's customers. His work has been featured in major media outlets such as the Harvard Business Review, Wall Street Journal, FT, Fortune, Barron’s, Inc Magazine, the Economist, and CNBC. His research has been accepted and published in top-tier academic journals and has won numerous research awards.

In addition to his roles and responsibilities at Emory, Dan co-founded and was Chief Statistician for Zodiac, a predictive customer analytics SaaS firm. Nike acquired Zodiac in March 2018. Dan has since co-founded Theta Equity Partners to revolutionize how firms (e.g., private equity, venture capital, and operating companies directly) value companies through CBCV

Steve Dennis is an advisor, keynote speaker and author on strategic growth and business innovation. You can learn more about Steve on his       website.    The expanded and revised edition of his bestselling book  Remarkable Retail: How To Win & Keep Customers in the Age of Disruption is now available at  Amazon or just about anywhere else books are sold. Steve regularly shares his insights in his role as a      Forbes senior contributor and on       Twitter and       LinkedIn. You can also check out his speaker "sizzle" reel      here.


Michael LeBlanc  is the Founder & President of M.E. LeBlanc & Company Inc and a Senior Advisor to Retail Council of Canada as part of his advisory and consulting practice.   He brings 25+ years of brand/retail/marketing & eCommerce leadership experience, and has been on the front lines of retail industry change for his entire career.  Michael is the producer and host of a network of leading podcasts including Canada’s top retail industry podcast,       The Voice of Retail, plus        Global E-Commerce Tech Talks  and       The Food Professor  with Dr. Sylvain Charlebois.  You can learn more about Michael       here  or on       LinkedIn. 


 

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Episode Transcription

Michael LeBlanc 

Welcome to the Remarkable Retail podcast, season three, episode eight. I'm Michael LeBlanc.

Steve Dennis 

And I'm Steve Dennis.

Michael LeBlanc 

Well, Steve, great to be back on the mic with you again. Now, once again to remind our listeners and viewers that we're now weekly. So, this is great, we get to catch up. So much is happening. You know, we got so much to talk about, we got great guests. And speaking of great guests, we have an amazing guest in this episode, Daniel McCarthy, Assistant Professor of Marketing at Emory University, Goizueta Business School out of Wharton. He came out of Wharton with more degrees than a thermometer, this guy, how did you get, how did you get to know Dan? Or how did you come across him?

Steve Dennis 

It was kind of a two-step process. I've been interested, because I'm a geek like that, in the unit economics of some of these digitally native vertical brands. And I ran into an article that was dissecting the meal service, Blue Apron’s cost of customer acquisition, and retention, and all these kinds of things. And it was a tour de force that this guy had kind of backed into from public data. And I thought it was really fascinating. I didn't pay much attention to who had written it. And then, I don't know a year later or something, I was talking to Peter Fader from Wharton, and he mentioned this PhD student of his, Dan McCarthy, and he said, ‘Oh, he did this Blue Apron thing. And he's doing all this interesting analysis on customer lifetime value’. And I'm like, ‘Wait a minute, that's, you know, that's the guy’. And so anyway, then we've subsequently had several conversations, and I've been following his work for about the last I guess about the three years, something like that. So good guy, really unique perspective.

Michael LeBlanc 

Yeah, it's a great discussion. And we'll get to that a bit later. But let's jump into news of the week. So as is the case, in many of our episodes, let's start talking about Amazon, couple things on the go there, televisions, tuition, and hiring. So, speak to what you're heard about all through all three of those. 

Steve Dennis 

Well not too surprisingly, Amazon announced they're going to be doing their own, own private brand TV. It's just a continuation of this strategy of developing their own, their own products. I think this is maybe the first step into some bigger ticket items, you know, higher dollar items where they can have great technology and an attractive price point and use it to target. So, who knows, maybe eventually they'll be coming out with the Amazon car, or Amazon refrigerator, or whatever. But yeah, televisions. 

And then, as we seem to have just about every week, we've got news of Amazon's hiring, they announced 125,000 new jobs in the US on top of what we talked about, I think a couple of weeks ago about these technology jobs and administrative jobs, they're adding,

Michael LeBlanc

Yeah,

Steve Dennis

Raising their wages, offering tuition to some of their players. So, I think, or some of their team members. So, you know, it's just part of this hiring crunch that I think is going on where it's just a war for talent and, and people have to retailers have to keep kind of upping the ante to be able to keep and retain people.

Michael LeBlanc 

in Canada as well, they announced 15,000 new hires. Now we should refer our listeners back to our interview with Brad stone, who wrote that such great books on Amazon, and he makes the point that well, yes, at the warehouse level anyway, they have, in some ways on purpose, tremendous turnover. So, it's not a net number, right? I mean, 

Steve Dennis

Right. 

Michael LeBlanc

I can't remember if he told us a percentage, you know, listen in some mass merchants, you're 50% turnover at the store floor. So, let's assume it's, 

Steve Dennis

Yeah, 

Michael LeBlanc

Double digits, you're not really hiring that many people you're, you're replenishing to some degree, right?

Steve Dennis 

Certainly, if you look at their overall growth, they, they keep just adding 

Michael LeBlanc

Undeniably

Steve Dennis

Huge numbers, more distribution centers, you know, you name it, but yeah, it's, it's not, it's not a net number, that would be a lot more helpful if they would quote that occasionally.

Michael LeBlanc 

Let's move on to NPD. So, put out a report talking about consumers still spending more per trip, which is interesting, right? Because we knew,

Steve Dennis

Right,

Michael LeBlanc

That was happening in the Covid era, I want to go less, I'm gonna have bigger baskets. But yet there seems to be and I'm not sure, I'd love to hear your opinion. Is this a change in consumer behavior? Or are we still in the pandemic era enough that people haven't quite got back to their normal behavior? What do you think?

Steve Dennis 

Well, I'll give you a bold ‘I'm not sure’. It's, it is a bit surprising to me for the reasons you, you mentioned, we've still got this dynamic of certain, certain parts of the US for sure where there aren't a lot of people vaccinated relatively speaking, and there does seem to be some pullback from going out. So, it could be mostly a COVID phenomenon, but at the same time, a lot of the folks like Walmart and Target and others that benefited from this consolidation, you know, maybe more people to said, ‘You know what, this is just more convenient to go get a lot of stuff all at the same place. I don't necessarily have to go to three or four, four places’. 

So, I don't know, I expected it to revert more back to where we were before but with the tick up and COVID maybe that's, that's still kind of an overhang. But you know if you look at the spending numbers for the past month that were released earlier this week, overall consumer spending in the US was up 20% on a two-year basis so that's very, very robust. I mean seems like just about everybody has spending a lot more money.

Michael LeBlanc

Yeah, 

Steve Dennis

How much that factors into to this distribution I you know, I don't know but certainly at this point, the consumer is out there spending, spending money,

Michael LeBlanc 

You know, I was trying to unpack those numbers a bit because we're trying to do the same thing here in Canada and this was my week here last week was my time to talk to all the many, many executives I talked to, to create a report every quarter for Retail Council of Canada. And a couple observations came out about numbers like that. One, there's some inflationary pricing baked into some of those numbers,

Steve Dennis

Yes,

Michael LeBlanc

So, we are now seeing in Canada and that number came at highest inflation number in 18 years I see 4, 4.5% in the US. So, you know the sales numbers I think there's inflation, inflationary pressures baked in. I think there's also unintentional up, up selling so I'll give you an example. So, I wanted to get a printer for my daughter, and she wanted a laser color printer which is you know not your cheap and cheerful one, and I found a nice one online from reviews that was about 350, 375 Canadian. So, I went to Staples, it doesn't exist, just it's gone like they have no inventory and then I checked everywhere there's no inventory anywhere. So, I wound up buying a $700 unit. And why did I buy a $700 unit? You know talking to the retailers they're like there's a shortage of a lot of stuff from,

Steve Dennis

Interesting 

Michael LeBlanc

Chips in that and they're saying we are seeing some, some choices made at the, at the store shelf so to speak, or virtual shelf, that really, I'm substituting and I'm substituting up not down, 

Steve Dennis

Right more likely to do that.

Michael LeBlanc

Because that's all there is. Let's talk about Casper. So our friends at Casper have been on a wild, wild ride but that ride seems to be for some of them over. They’re making some big changes that don't look so positive.

Steve Dennis 

Yeah, you know Casper is a, it's been an interesting business they were, they were really one of the first kind of breakout digitally native vertical brands you know, that got to $100 million pretty quickly they were one of the first to go public and had talked about opening as many as 800 stores, which I thought when they announced that was, was pretty crazy, but it doesn't look like they're even going to get to 80. It's a business that has just struggled to make money. They laid off a bunch of the C suite people last week, or in the last week, reduced a bunch of people at headquarters. And so, you know it's really a brand that I think has been more hype than substance. Gross margins have been challenging the entire time they've spent a ton on marketing really created a business that looks to be pretty profit proof and it's particularly interesting now, I mean there's a lot of competition but you'd think with the effects of COVID with more traffic going online without having to pay for it and with the home industry on fire this will be a time where they'd be lighting it up, but I think, I think some of their, their spending and just sheer competition has, has caught up with them.

Michael LeBlanc 

And let's talk about Walmart 30, they announced 32 million plus, their Walmart Plus Program, 32 million members. And they've, they've ebbed and flowed on a Prime like Plus Program loyalty thing with benefits for years, they seem to have you know 32 million people they seem to have nailed something here what do you, what do you think about their program and its relative success?

Steve Dennis 

I suppose you can look at this as a glass is half full or glass is half empty. Glass is half empty is there way, way short of where Prime is. You know, Prime I think in the US is 160, 175 million numbers or, or something like that. So, they've got a long way to go if the goal is to kind of level up against, against Prime but you know, 32 million is a very sizable number and, 

Michael LeBlanc

It’s the population of Canada by the way.

Steve Dennis

Yeah, so in this country. Yeah. And it's happened in a relatively short amount of time. It gives them a lot of data, you know, much more of a one-to-one relationship with customers in addition to the Prime like benefits at least on the on the delivery side. So, I think it's, I think it's impressive.

Michael LeBlanc 

So, I guess you're getting ready to make a, you and your former colleagues at Sears getting ready to make a pilgrimage to a store in Illinois. It's a, I'm sure it's an emotional moment for you. Sears is closings their last. Sears closing its final Illinois store as you've described it many times, which is kind of in and of itself at otology. The longest, longest liquidation sale in retail history. What do you? What are your thoughts? 

Steve Dennis 

Well, every once in a while I get messages from people who say, ‘Wait, Sears still has stores’. I think a lot of people think that that Sears shut their doors several years ago. I think they're down to like 40 or 50 Sears stores and a similar, roughly similar number of Kmart stores. But yeah, the Woodfield mall store as Schaumburg, Illinois actually opened 50 years ago. And it is the store that was closest to the Sears headquarters. So, when I lived in Chicago, I worked for Sears all these years ago, that was the store,

Michael LeBlanc

Sears Tower 

Steve Dennis

I was in the most. And that was where we tested a lot of things. And the Woodfield Mall is a huge, huge mall, I don't know where it ranks in terms of sales revenue in the US, it's got to be top 30, top 40 mal. So yeah, it's, it's kind of an end of an era for a company that, you know, started in Chicago has been based in Chicago all this time to not have any stores in the state of Illinois. It's quite remarkable, really so, in a bad way. So yeah, I mean, it just sort of begs the question when you can't, can't have a store, like Woodfield be productive, how much longer are these several dozen stores going to be around? So yeah, it's just Weekend at Bernie's, just dragging, dragging the corpse around a little bit longer. I guess.

Michael LeBlanc 

If you're listening to this on our podcast, thank you, first of all, lots of people are and be sure and leave us a review because that helps us get to more people. We also have a YouTube channel. And on that YouTube channel, it's our conversation. But there's bonus, we call it bonus content, because you and I talk about the news of the day for longer than we put on to the podcast just for the for length. So, there's lots of fun, extra bonus, for bonus content on our YouTube channel. So be sure and tune in. 

Daniel McCarthy is our guest. And he really is fascinating discussion. So, without further ado, let's get to it. 

Steve Dennis 

Well, Michael, and I are delighted to welcome Dan McCarthy, to the podcast and Dan, rather than us trying to do an introduction for you, we love to have the guests just tell us a little bit about themselves and their professional journey, journey. And then we'll jump into some of the more substantive questions.

Daniel McCarthy 

It sounds great. So, I'm an Assistant Professor of Marketing at Emory University, my main area of focus is really predicting what customers will do, and then translating that into implications for the health of firms. Typically, the other hat that I wear is not as an academic, but as an entrepreneur, I've co-founded a business called Theta Equity Partners. We basically use the same sort of predictive models for customers, but we use it to help understand, how healthy are these businesses, and if you're a private equity firm, or hedge fund or a venture capital firm, and you're looking at that, that latest company that has come on your plate will basically help you understand the unit economic health of the firm, and, and how that all that rolls up into the overall valuation. 

Daniel McCarthy 

So, it's basically the, the topic of my PhD dissertation, which is customer based corporate valuation. So, yeah, that's about where, about where I am in terms of where I'd been, I'd actually had co-founded a prior business called Zodiac that again, use the same sort of customer models. I'm basically a one trick pony, but I really like that one trick. So, yeah, but at Zodiac, we basically use the models to help marketers make customer acquisition retention decisions. So, again, same models, different use case, we grew the business and sold it to Nike in March of 2018, before founding that, so that's a basic little bit about me, you know, can

Steve Dennis 

Can you just kind of at the very high level, help us understand what this idea of customer corporate base valuation is, and just, you know, some of the fundamental principles of customer lifetime value and some of the other techniques you use that would be different than maybe, way things, things people might be familiar with her have used in their jobs.

Daniel McCarthy 

Blue Apron is a really good example of how the framework can be useful. Basically, these days, more often than not, companies are going public. And they kind of have two main characteristics. They're growing really quickly. And they're losing money. And the big question is, which of those businesses is actually going to hold value over the long term. And so, one of the big questions First off is, is there a path to profitability, and if so, how quickly are they going to get there, and I view this as basically a way to really nicely answer that question. And the reason why is because when we think about basically what, what drives operating leverage over time, it's the ability to make more money after you've acquired a customer than how much you spent when you brought that customer in in the first place. 

Daniel McCarthy 

And a lot of these businesses that we'll look at, they'll have to basically expense all of the money that they're spending to acquire customers today. And they're going to get this value from those customers into the future. And so the big question is, well, how long into the future is that going to be and how much how much profit is that going to bring, if you have a business that doesn't have a whole lot of repeat buying behavior, and they don't make a whole lot of profit off those purchases, you spent all that money up front, you're not going to get a whole lot in the back end. You know, conversely, if you had another business that did a lot of repeat purchas-, a lot of repeat purchasing. Actually, their historical profitability may look similar to that first company. But we can see that over the long run, they should be able to compound revenue growth much more easily and those repeat orders are probably a lot more profitable than the, the initial one that you had spent all that money to bring the customer in in the first place. 

Daniel McCarthy 

So, yeah, so (inaudible) in some ways, it's just kind of a way to formalize all that. And it kind of recognizes this basic accounting identity, that all the revenue has to come from customers. And so, if we just have a formal model that lays out, this is the flow of customer acquisitions over time, this is how long they'll stay after they've been acquired, you know, order, frequency, basket size, and then the profitability of those orders. It allows us to basically do the same thing that the bankers probably had been doing before. But we can do it more accurately, because we have this diagnostic set of best-in-class marketing science models to make the predictions. And we get for free that, that look at the underlying unit economic health of the firm, as viewed through, you know, the customer lifetime value, you know, customer acquisition costs framework,

Michael LeBlanc 

it was pulled on a couple of threads in that, in that narrative. First of all, how did you come to build or have this perspective, you know, what, what, in your background lead you to this model, did you try other models and find them unfulfilling and on predictive or what is it that led you to develop and focus in this area of, of expertise?

Daniel McCarthy

It's a good question, because I probably wouldn't have been so interested in this if I didn't spend six years working at a hedge fund. So actually, before all of the, before the PhD, before Zodiac and all that, I've been on the buy side, working for a fundamental investment fund. And we basically looked at a lot of businesses, and it's kind of the traditional thing where you roll up their sleeves, you speak to the management team, you look at the competitive dynamics in the industry, and then you build out some really big spreadsheet.

Michael LeBlanc 

SWOT analysis thrown in maybe for, for a good PowerPoint slide. And

Daniel McCarthy 

Yeah, especially, you know, with the people that I work with, they were former McKinsey consultants. And so yeah, they did a lot of that sort of thing. And, and so yeah, I kind of had this predisposition towards valuation. When I went to Wharton, I, actually, I finished with a PhD in statistics, not even in marketing. But in the, in the second year of the program, someone said, you know, you should really speak with this guy, Pete fader who, you know, Steve, you were mentioning, and we really kicked it off. But I really don't think that if, if I didn't have both the, the hedge fund background, and, you know, I wasn't going for a statistics PhD, I wouldn't have really, this wouldn't have been a natural step at all, he was really the fact that, you know, I'm just like a prediction guy who happened to have worked at a hedge fund for a while. Here, that's kind of what, what led me to it.

Michael LeBlanc

Yeah. Can I ask, the, the next question in kind of a funny way, why would anybody look any other way at companies? I mean, you know, when I think about, Steve, and I talk about this often on the podcast, when, when these results come out in the market is like, you know, gob smacked that these great results or disappointed I mean, you know, some of these things seem maybe obvious, and the way that they've been looking at companies, it seems hasn't changed. Why, why do people not adopt, what seems to be a very, okay, how much money you're going to make, and unit economics still matters. Is it, is it like Aswath talks about it at Stern, you know, story stock versus performance stock, like, give me a broader context. But why this model is, is not the model that, that uniformly is, is we see in the media, for example.

Daniel McCarthy 

So, first, I definitely, I think that 10 years from now, it is going to be the model. Yes, I think we're getting there. I think the reason why we haven't seen it yet has been first, just that it's impossible to do sometimes. And there's a few reasons why, you know, one would be, when we think about a company like Nordstrom, you know, JCPenney, they spent most of their existence, selling through stores, and, and oftentimes the customers making the purchases, bought in cash. And they may not have had a great CRM system. And if they don't have, basically, if you're kind of even somewhat similar to those examples, you won't actually even know how many customers you have. 

And so when you think about, well, what is my CAC, you know, how much am I spending to acquire customers, if you don't have how many customers you acquired, you can't even get started so, so I think you know, back in the day, lot more of their purchase behavior is very easily trackable, especially when we move to all these direct to consumer businesses, then we have perfect deniability data is there and so we can actually carry out the analysis but even there will run into problems if the companies don't disclose any data in their SEC filings. So even if they do, they are a direct to consumer brand. We can only run with whatever we're able to find and so, so if they don't provide anything in their SEC filings, then, you know, we can have this great framework, but we don't have any data to apply it to. So, I think we're kind of hitting that sweet spot where, you know, for one, we do have, like, they have the availability, and everyone realizes how important this is. And so the companies, whether it's that they feel they have a compulsion to disclose it, because if they don't, they're gonna get hammered by their own officers or, you know, they just want to show off

Michael LeBlanc 

Right. For Steve or you or whoever.

Daniel McCarthy 

Yeah, so, I think, whatever the reason might be I, you know, that's, I'll leave that to people better than me. And they're just disclosing this stuff a lot more frequently than before. 

Michael LeBlanc 

Right. 

Daniel McCarthy 

So yeah, so now we can finally do this with a lot more regularity than we ever could before.

Steve Dennis 

I was gonna say it's interesting. You know, I spent a few years at Neiman Marcus, one of the things that was just a huge advantage to to your point was, we were able to uniquely identify a very high percentage of our customers transactions, because we had such high spending on our own credit card and we had a very big direct business and we had a lot of clienteling through our point of sale system. And so our ability to do this kind of analysis was much greater than your typical retailer. So I was, kind of, mad that I didn't realize that that was something unique, but I got pretty well versed in some of these techniques. And when I started to work more with these digitally native brands, some of this way of thinking was just something I was pretty comfortable with. But, but I think, yeah, it's been, there hasn't been a lot of, a lot of, ability from the outside, to look in.

Michael LeBlanc 

What's the gold standard for this, using your models, whether it's your academic models, or your models and your, in Theta or your private businesses, who's who, what's the gold standard in all this I, when I think of retailers, I think someone like a Costco who, you know, license plates do to the membership, every single transaction. And that's more common that's baked into their business, but from your clients when they use it who's gold standard?

Daniel McCarthy 

the gold standard in terms of like the ability to attract customers and run the models, usually the it's shooting fish in a barrel with subscription firms. Right there. Obviously, if you're a subscriber of like, we know who you are, we know that when you obviously we know when you were acquired, but we know exactly when you turned to. And that's really convenient. So, yeah, so usually in a setting like that, it's really easy, you know, so we have this great trackability. From a modeling perspective, usually, there's not a whole lot of variation in spend and purchase frequency, we need to worry about, you know, the concept of a major holiday period or some other spike because of a big promotion that's run, you know, those just don't happen as frequently because you just kind of get your thing once a month, or whatever it is. So, yeah, so that simplifies the problem greatly. 

Daniel McCarthy 

And actually, you know, Steve, you mentioned Blue Apron, I think there was a good example in not quite perfectly subscription based, but enough for this subscription flavor that, that the models work really, really well. And then obviously, the other component to it is, if we had all that data using the full granular transaction log, even better, you know, so a lot of the work of data. Thankfully, these targets will put the full transaction log in the data room. Basically, the data room is where all the, all the data resides in traditional financials and otherwise. So, yeah, so there we can build an even more granular model, because we have even more granular transactional behavior data.

Steve Dennis 

So let, let's, maybe, you know, we talked about Blue Apron a little bit, but there have been quite a few companies that have been in the news lately. Either because they've filed their IPOs or the restaurants for an IPO like Warby Parker and all birds or peloton I know has gotten a lot of press recently. Could you maybe talk about some of those companies that you've been following? And what you, how would you apply this, this lens to thinking about their, their evaluation and prospects? And any observations you might have that our listeners might find interesting?

aniel McCarthy 

Yeah, so maybe just about more we Parker, because I think they're, they had dropped the rest one really recently in just within the past week or two. You know, so they're kind of, they're the poster child of the direct to consumer, digitally native vertical brands business,

Michael LeBlanc 

And born out of, out of Oregon as well. Right. So, there's a, there's a real connection there for you, professionally, right. 

Daniel McCarthy 

Yeah, that's right. Yeah. You know, we've, we've seen in that, I believe Pete's spoken with, you know, with the founders, so, you know, definite and thankfully, they built a really nice business. So, yeah, they're not, they're not profitable yet, but at least you know, the economics actually look pretty good. So, you know, we're in the process of finalizing this really deep dive that we did into them. Specifically, you know, the way that we carried it out is basically the same way we carry out any analysis. And that is that, kind of, step number one is to first do that same ol' exercise of saying, Well, how much are they spending to bring customers in, and then how much are they getting after they've been acquired and then you're kind of looking at the volume of customers that they're able to bring in over time, and see how that's been. That's been changing. 

Daniel McCarthy 

And, and the nice thing here is, you know, Warby, they provided so much data in their filing that we can really feel pretty confident about our conclusions. Yeah, I'd say one of the bottom-line figures that we found is when they spend money to acquire customers, they earn a rate of return of about 300% on that, on that customer. So, that's kind of comparing the acquisition spend, which we estimated in 2020, to be on the order of 55 bucks, then they're making back a whole bunch of money and contribution profit terms after acquisition. Yeah, so they're not profitable. But the reason why is, yeah, they're still in growth mode, they still need to acquire a whole bunch more customers. And when we do this unit economic calculation, you we're not baking in all the fixed costs overhead that is required to, kind of, stand up the business and bring those customers in. So, what it would suggest is that they would have a nice, clear path to profitability, as long as they're able to kind of maintain this level of union economic performance, you know, for the next few million customers that they acquire,

Daniel McCarthy 

How would your model flex if they decided they were going to use all that fresh ammunition and start buying competitors in their space, because it feels like there's going to be consolidation in that space to me, is he

Daniel McCarthy 

Yeah, my competitors, that we would be helpful to have these same sort of measures for the competitors, you know, one thing we could do is we can basically change our assumptions about how much they're going to spend to acquire customers. And we can change our assumptions about how much repeat business that we'd expect from those customers. Yeah, so that would be kind of very easy to do mechanically speaking. But you know, we just really want to be mindful of like, what is reality and are those customers that they would be bringing in through an acquisition or otherwise, are they going to be fundamentally really different or not, so having some sort of empirical data that can help us pin that down, you know, we really wanted to make sure to kind of do that exercise before, you know, really kind of pounding our fists on the table.

Steve Dennis 

Two questions follow up. One is, a lot of folks have been talking about rent as a new cost of customer acquisition. And as you well know, and I'm sure most of our listeners know, a lot of these brands that thought they could grow and raise a lot of capital on the premise that didn't need stores are turning out and Warby Parker is a great example, to be opening quite a lot of stores. How do you, what do you think that gets in general, that idea that that rent is, kind of, this new cost of customer acquisition and how would you factor or do you factor that line of thinking into this analysis?

Daniel McCarthy 

I believe it was Jason Goldberg, who, he said that the store is basically like a giant billboard that can kind of bring the customers in. And certainly, when we think about Warby Parker, in particular, if someone goes into a Warby Parker store, they can try on the glasses over there, and they may not need the, you know, the direct try on home kit, which can be more expensive saving, just kind of doing that comparison of acquisition through one channel versus the other, you can very clearly see, obviously, there's rent for the store. But, you know, assuming that you have a sufficient number of people who are coming in for the orders, like the aqua-, customer acquisition spend will certainly be just lower through stores than not, I think the, the tricky part is that it's hard to open your own stores. 

Daniel McCarthy 

Obviously, if you spend the, you know, $1 million, or $10 million on Facebook ads, yeah, assuming that you're able to, you know, to bring in good quality customers, you can just scale much more quickly. You know, finding great locations for stores is not trivial. So, it's just not something you can scale quite as quickly as, as purely online channels. So, I think that that is part of the trade be obviously Yeah, the other part of the trade, I guess, is, you know, what we've seen with COVID that, you know, I think this was kind of a black swan type of event that no one could have ever really predicted, but they got hit pretty hard, because he has you kind of alluded to, you know, they're actually you would think I thought that they were a direct business that had some stores, but actually they're more like a store business that has some direct that they got something like two thirds of the revenue through stores before the pandemic and so they really got walloped by COVID. But, but, you know, you can see from their quarterly said, you know, things are looking a lot better, especially in the most recent quarter or two. So, you know, hopefully, that's a sign that You know, things are starting to normalize for them.

Steve Dennis 

I mean, Warby Parker is really interesting company, I don't know how much we can generalize to some other companies. But the second question I had, as you try to think about long term value is I worked with one brand a bunch of years ago, where my concern was that early on, they basically found the perfect fit, kind of customer for them without having to spend a lot of money on customer acquisition. And then to get to that next stage of growth, they basically work more, going to have to go find customers and because they were mostly digital, they were paying more and more to acquire a customer. And the customers they were adding at the margin, tended to be less valuable, or more price sensitive, or they just didn't fit, you know, they, they were just kind of like going around the edges of customers that were a good fit for their model. And so my question is in how to choose the Warby Parker example, how do you know what the limit is of the sort of customer that's likely to shop at Warby Parker, and, and, and is there this risk of that decay rate, I guess, for lack of a better term or the maturity curve is beyond your current horizon, and therefore that might cause you to overvalue the company? Does that question make any sense?

Daniel McCarthy 

Yeah, it does. And you know, honestly, it as you're, kind of, saying pretty directly, it applies both to the stores and to the direct business, for the direct business. Oftentimes, the canary in the coal mine is the CAC starts creeping up that you're just having to work harder to bring those customers in. And so you, basically the thermometer there is, you know, the amount of marketing spend per customer required is just higher. But the fact that you have to work that hard, oftentimes implies like a double negative, that, we found that there's often a negative relationship between how valuable customers are after acquisition and how much you had to spend to bring them in. 

Daniel McCarthy 

So, when CAC tends to move up, the value of the customers often also tends to move down. Right? Because, again, if you're working so hard, maybe they want to be there. So, yeah, so for the direct business, I think that that would be the canary in the coal mine. I think the analog for in the store setting might be a little bit harder to identify, it could be some measure of foot traffic, for example. But yeah, I got to admit I'm, I'm more comfortable footing, you know, on the direct side of things, the other thing that could be a source of data, because again, it's kind of falling outside the range of the data, because it's saying like, it will point is the quality of your customers in the future, you know, at what point will it decline in some, you know, discontinuous way? Yeah, I think very smart survey work and help give you a hint of it. But, you know, surveys come with their own issues. 

Daniel McCarthy 

So, you really wouldn't want to lean too hard on them to help answer that question. But I think that that could be another thing in the case of Warby in particular, they've acquired about they said that they acquired about 6.6 million customers since their acquisition so that gives us a pretty clear number at least kind of from a gut check perspective like you know, we know how many people need glasses and so you know we kind of can, can compare you know, some measure of like the overall market sub-setted down to the people who we think would be a better fit for Warby no pun intended and then just look at that 6.6 million say huh.

Steve Dennis 

I like the way you frame that question, Dan.

Michael LeBlanc 

Look I can see this I see where this is going there we go. Okay. We have the last, last kind of set of questions I can do a rapid-fire round with you, rapid fire and I'm going to throw out some companies and an idea and you give me your feedback based on how you think about them in their model. I think Chewy for example results. Okay, big tailwind and when they don't just acquire customer, they acquire a pet which is like an annuity. How do you think about Chewy?

Daniel McCarthy 

In general we've, we've found that pet businesses for whatever reason tend to be better from a unit economic perspective I think because people they like to be really variety seeking themselves but for their pets they like everything to be the same so you have the stories of people who will say we only have you know we only bought our dog one type of food until they died they literally just kept the food the same the entire time. Like we would never do that as humans.

Steve Dennis 

food conu-.

Michael LeBlanc 

It's like that Larson commercial. Okay, Canada Goose shifting from wholesale to direct to consumer, big ticket item. Any thoughts on a business like that?

Daniel McCarthy 

Yeah, and generally if you have a really, really great wholesale business Yeah, I think pivoting to direct, to cut out the middleman can make sense because but I think the key is that you have a lot of market power over the middlemen. You know, if you do that, I think you have the leverage over them to be able to win the portfolio and not, not get not get killed in the process. So, I don't know Exactly how the power dynamic is between the two, but I feel like that would kind of drive whether I think it's a good idea or not.

Michael LeBlanc 

Okay curate, which is HSN, QVC. A lot of their customer acquisition comes from the television. What do you think of that kind of based business?

Daniel McCarthy 

Yeah, they'll, they'll need to evolve. Yeah, I know they used to do a lot just purely over the phone. So, you know, they've,

Michael LeBlanc 

Yeah, yeah.

Daniel McCarthy 

they've done one evolution, but I think they'll need to do another big one.

Michael LeBlanc 

Okay, last one, RH great numbers recently from RH which, you know, which I think Steve might have predicted wasn't going to be so strong, but neither would I was I there just knocking the cover off the ball, their customer acquisition costs, look at their stores, they're, they're, they're massive. They're a huge investment. I guess it works out for them. Yeah?

Daniel McCarthy 

Yeah. I mean, certainly to the extent that we see people being comfortable going back into stores, you'd have to imagine that at least, you know, their share of the quality and their share the category couldn't, could improve. Yeah, I think there are concerns about people having pulled forward a lot of demand because of COVID to get all that stuff into their house and they're buying these new homes and if that slows down then yeah, yeah, but that's gonna slow down for the whole category. 

Steve Dennis 

So can I ask about one more, kind of, in that regard? Is Peloton because Peloton seems to me to be a brand that number one I I'm sure most it's got a subscription part to it. But from the equipment perspective, the, only most people aren't going to have two or three Peloton, right. So, we have this, this period where people are working out from home, maybe some extra cash because of stimulus because they're not going out. And we see this big surge in Peloton sales. And now it seems like it's a little bit dicey your profit proposition. Any comments on, on their business are certainly getting a lot of news lately.

Daniel McCarthy 

Yeah, to me, the big question with them is how big the applicable market is, you know, how many people are going to be adopting over the next few years. And some of the analysts' forecasts for how many people are going to adopt over the next 10 years are insane. I mean, it's like predictions of 50 million new customer adoptions like we're just not going to see that so they'd have to mark the bike down like crazy I think to be able to get enough people in the door but yet they mark the bike down then the economics get a lot worse not only because they're gonna make less profit off the the hardware sale which you know, they're making a lot of, a lot of their CLV is coming from profit off the, the equipment, but also it implies that they're going to bring in these more marginal shifty customers, they're gonna be more prone to leaving. So, right now, they have this insanely low churn rate. As soon as they start really, really lowering the price, you got to imagine that, that their, their turn is going to have to move up. Yes, exactly how that plays out. I think that that to me is one of the big questions. So interesting.

Michael LeBlanc 

And I love that term, shifty customers I want to, I'm going to use that

Steve Dennis 

I call them promiscuous shoppers.

Michael LeBlanc 

It's like a loss prevention episode. Weill listen, Dan, you know, we love to have guests that help our listeners see the future, I think we've seen the future of, of this model. I mean, as you say, it's hard to imagine any other way as we think about looking at companies in the future. So, thanks so much for joining us and sharing both your background, your approach and, and some quick insights as an ad hoc, and it was really, really a treat to listen and learn more about your process and models. So, thank you.

Daniel McCarthy 

And thank you for thinking of me. So, yeah, great to, great to be on the show. And if any, if anyone has any questions, I'm pretty active on social media, LinkedIn, and Twitter. So, definitely, please, please don't be a stranger.

Michael LeBlanc 

If you like what you heard, please follow us on Apple, Spotify, Amazon Music or your favorite podcast platforms so we can catch up with all our great interviews. Subscribe, so that just automatically shows up, tell your friends and also new insights, and new episodes will show up every week. So, tell your friends because that will help us share the word, the good, the good, the good wisdom. Now be sure and check out, and be sure to check us out on our new YouTube channel. Not so new anymore, get a couple episodes up there and just look for Remarkable Retail.

Steve Dennis 

And I'm Steve Dennis, you can check out more of my work at my website, stevenpdennis.com or on Forbes, or on Twitter. And please check out my second edition of my book Remarkable Retail: How to Win and Keep Customers in the Age of Disruption, available just about everywhere books are sold. 

Michael LeBlanc 

And I'm Michael LeBlanc, producer and host of The Voice of Retail podcast and a bunch of other stuff. You can find me on LinkedIn, learn about me on meleblanc.co. Alright Steve, great episode. Look forward to chatting again next week. Be safe and have a great rest of your day.

Steve Dennis 

Thank you.

SUMMARY KEYWORDS

customers, stores, people, business, spend, models, question, companies, acquire, customer acquisition, direct, warby parker, big, acquisition, number, data, steve, profitability, profit, week