The Casper Problem: DTC Long Run Unit Economics & Shifting to the Numerator

Saw this interesting post. Felt a little salesy at the end, but had some interesting insights for those of us in the eCom space:

"The Casper Problem: DTC Long Run Unit Economics & Shifting to the Numerator

The next era of DTC is upon us. Channel arbitrage is over and the poor metrics and performance by recent public listings of DTC companies like Allbirds, Figs, Hims, and Casper reflect the decreasing returns to scale inherent in the direct-to-consumer business model. It is no longer viable to ride the coattails of another platform’s growth engine. Additionally, traditional brick-and-mortar brands were catapulted forward by COVID. Because the barriers to entry for creating a DTC company are now remarkably low, it has never been more difficult to scale a brand. The DTC brands that will win in the next decade will have to master their return on investment across their marketing, product, and customer service organizations.

DTC is in a transition. Companies are shifting their LTV/CAC equation focus from the denominator to the numerator. The age of landing new customers through channel arbitrage or riding the s-curve of platform growth is over. Brands need to realize that avoiding the Casper Problem and driving sustainable LTV/CACs in the face of increasing privacy-related headwinds is paramount to their survival.

Walking through the Casper Problem:

  • The rise of dropshipping and ability to easily start an ecommerce store with Shopify made it easy for anyone to find an overseas manufacture (often one that also made the product for a competitor)

    • Lower barriers to entry = more competition = more supply of mattresses to the US Consumer = lower prices
  • Facebook Ads removed the complexity in running advertisements that could intelligently and programmatically target the vast majority of Americans

    • More demand for advertising keywords = higher ad prices
    • Although SKAdNetwork, Unified ID 2.0, FB Conversion API, and FLoC/Google’s new replacement Topics API are expected to help ease the IDFA headwinds, currently small brands are lagging big brands in terms of seeing results around conversion and attribution modeling²

We all see the problem, increased supply driving higher discounting and thus lower pricing paired with more demand for advertising keywords in a category is a return on investment death spiral. It should be assumed that every product category will eventually become competitive and long run unit economics will converge at some economically efficient equilibrium for a category. Still, some brands are able to achieve above-average unit economics and margins for a sustained period of time. Absent a monopolistic market, successful brands simply can deliver market leading value to their customers. This can be in the form of great customer service, a differentiated offering, unique messaging, being the…"

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