Peloton – A Marvel at Customer Acquisition, Brand-Building, and Its Untapped Opportunities

A couple years ago, I dug into the Blue Apron S-1 here. People seemed to liked the way I broke down what wasn’t always explicit in their filing. I figured it’s time to do another breakdown. 

The one similarity they both have is that their S-1’s seemed to be written to disclose only the info they wanted to share.  That’s where the similarities end, as we’ll get into. 

I believe in cutting to the chase and then I’ll get into the nitty gritty. So here’s my summary take on Peloton:

Peloton essentially acquires its customers for free – meaning, their gross margin on the sale of their bikes covers their customer acquisition costs. Not just of their media costs. But of their fully-loaded marketing costs, inclusive of people and showroom expenses.  

They have 500K+ ridiculously fanatical customers who seem to be churning out at less than 1% per month.  We’ll dig in to this figure, but even if the figure is 5% per month, which I don’t believe it is, it’s one of the highest retention rates I’ve seen in a subscription business (comparable to DirecTV in its heyday and Netflix). And certainly remarkable for a fitness biz where the average lifetime is 3-6 months. 

Yes, they have $200MM (and growing) of Operating Expenses they have to cover.  They’ll need to increase their subscriber base by 50%-100% to cover those expenses, which will likely go up as they continue to scale.  Or they increase revenue/margin dollars per customer.  THERE ARE AT LEAST 2 UNTAPPED OPPORTUNITIES THAT ARE NO-BRAINERS FOR THEM TO DO SO.  MORE BELOW…

If/when the economy turns south, my guess is that they’ll dial back their acquisition machine, cut staff, and dial back new major higher-investment initiatives.  The question is whether those 500K subscribers continue to pay their $40/month.  Based on my experience at Beachbody during the Recession, I have some thoughts here. 

-Bottom line, Peloton has built a following that is ripe for much further monetization, and the Company likely can navigate a downturn in the economy and/or new customer growth

Now Digging In…Let me get a couple things out of the way

What I did NOT like about the S-1.  

I’m a big fan of Peloton as a consumer and more broadly about the business based on what I found and was able to decipher thru the S-1 (not to mention what I’ve seen over the past few years).  But rather than start with a love-fest, I’d rather address some of the negatives first.

First, the LTV figure they provided – based on subscription revenues only. 

This is just a silly figure they’ve put out there.  It doesn’t have context and frankly is based on an expected time period that isn’t realistic.  In trying to show a massive figure, I think they hurt their credibility.  It just doesn’t seem like they needed to do so.  But here’s what they did:

It’s based on the monthly fee ($39), gross subs added, expected lifetime (more in a second), and an adjusted subscription margin.  Btw, the number of “Adjusted” figures in the S-1 is a bit too much.  You can see my calc’s below – the numbers tie out, but it kinda gives you a headache trying to reconcile what they’re referring to. 

As for the lifetime in the calc below, it’s based on the monthly churn.  1 divided by the churn to be precise.  In a business with 8% monthly churn the lifetime would 1/.08=12+ months.  Based on the churn figures Peloton has provided (which overall do NOT seem to be radically inflated) – less than 1% – the average lifetime is ~160 months, which translates to 13+ years. 

I just don’t see the point in making this assumption.  I’m a massive Peloton fan myself but there’s no way I can conceive of being a subscriber for 13 years.  Now, it’s highly possible that they generate the same amount of money from me and other subscribers over a shorter period of time, but using 160+ months as the expected lifetime is, well, not believable.  Now, they don’t actually say 160 months – they just describe the calc. But that’s what it’s based on. 

And as you can see in the below, customers who were acquired in 2019 are expected to generate over $1 billion in revenues over their lifetime.  Over 13 years. 

Um, ok. 

A couple other points about the above.  I’ve backed into the estimated gross subs added and churn based on figures they provided.  You can see the delta from my calc of LTV to what they provided – it’s ~5%.  I’m good with that margin of error.

Similarly, on a per subscriber basis, my calc of the # of subs is essentially identical. 

That $3,593 says that over the course of 13 years, these customers will generate $3,593 of margin dollars. 

One word on the margin % calculation. It’s one of their “Adjusted” figures, backing out Depreciation & Amortization, as well as stock compensation expense.  Both adjustments are not unusual.  But they also back out the costs they’ve incurred for “Content costs for past use” – as below.  Basically, they used content they didn’t have the rights to. Or as they say, it was “alleged past use.”  I’m not sure why it’s alleged.  Since everything is recorded, it should be part of the record to prove one way or another.  These fees below are $45MM over the past 3 years.  Really, they sound like fines and shouldn’t give anyone the warm-and-fuzzies. 

But these costs have also been backed out of subscription costs and increase subscription margin by 9 percentage points (not 9%, but percentage points) in 2019.  Meaning, subscription margin increased from 51% to 60% as a result of backing these out.  Whether these will continue is anyone’s guess.

What else that I didn’t love:

No real detail on cohorts – counts, LTV, churn.  All are at the aggregated level.  I take a stab at reconciling their figures below.  It would appear the numbers in the S-1 are at least directionally representative. If that’s the case, then why not share more detail? If your cohorts really are that strong, then share the data – most everyone else doesn’t.  They’d stand out even more if they would do so.  

This awful definition of Churn:

Particularly in a fast-growing business (subs are literally 5x from 2017 and 2x the 2018 figures), taking the current period’s cancellations relative to the beginning of period subs figures – well, it doesn’t tell you much. Who is cancelling? Are they recent subs or older ones? This is why cohort figures are so important.

The quarterly figures provide at least a small bit more visibility into what’s happening, but not at the level of detail that most of us would prefer. And as I alluded to above, the typical thinking is – if you aren’t sharing the info, what are you trying to hide? And from the other side, sharing the info is such a strong sign of confidence.

Later in this post, I do my best to make sense of their numbers. There seems to be a recent trend of increasing cancels – both absolute and percentage-wise, but it’s not a crazy figure. At least not yet. And they still have some pretty strong fundamentals we’ll get into.

-Content Costs for Past Use – I mentioned this above, but it deserves an additional call-out. Essentially, Peloton has paid fees (fines) for using content (presumably music) without having the rights to do so. To the tune of $45MM over the past 3 years. Which doesn’t include at least some of the $19MM in litigation expenses.

I don’t like it for a few reasons: a) anyone who has any IP knows what a pain it is to enforce it – IP rights are only as good as the oftentimes-deep pockets you need to pursue those breaching those right; b) there’s a much bigger lawsuit by more content rights owners, seeking $150 million in damages. Who knows what amounts will be paid and/or whether that’ll show up as cash fines or stock ownership for those parties. But given Peloton’s history, it’s reasonable to expect some amounts will be paid out.

Almost 2,000 employees.  Wowza! That’s a lot of people.  Sure they have ~80 showrooms, and this is a billion dollar biz, but that’s a lot of people.

This wasn’t in the S-1, but it’s posts like this which can be indications of operational issues. There were 235 comments, many describing a similar experience. Not good. There will always be exceptions. No one is perfect. And as much as my personal installation experience (of the bike, not the treadmill) was outstanding, this doesn’t sound like the exception. This type of stuff can be the result of growth outpacing operational support. It just better get addressed very quickly.

Okay, now to the positives.

Customer Acquisition:

I mentioned at the top that they essentially acquire customers for free.  Basically, the margin they make on their bikes and treadmill covers their sales and marketing costs.  What’s particularly amazing is that these costs include people and rent.  In most performance marketing businesses, we look at media costs and then exclude the costs of people.  But Peloton is essentially breakeven for each bike/treadmill they sell.

Below are my estimates of revenue, calc’ed gross profit and CPA (based on my new subs figures above) – all on a per-customer basis.  You can see the comparison of my figures to those provided in the S-1.  It’s a pretty good match.

Now, I wouldn’t say this is unheard of in fitness businesses. To be breakeven on day 0.  I’ve done it in businesses I’ve been involved with and seen it with my clients.  But it’s still pretty awesome when it does happen. 

The implication is that everything they generate afterwards is margin.  Or you could say they don’t make any money until the next sale.  But it’s still better than the majority of venture-funded businesses that go in the hole for 6-18 months before being breakeven on a per-customer basis.  Peloton is breakeven on a per customer basis pretty much on Day 0. 

Subscription Revenues and the Rest of the Economic Model

Whether you believe the fees for use of prior content is in the past or they’ll continue to incur these fees, their Adjusted 2019 subscription margin was somewhere between $92MM and $108MM.  That’s pretty good.  Until you look at the nearly $200M of OpEx they incurred – a combination of R&D and G&A. 

In this case below, I don’t think it’s unreasonable to back out stock-based comp expense nor D&A, especially when considering the business’ going-forward model. 

$179 million in non-sales and marketing expense is pretty hefty, at 20% of revenues.  And of course, that’s for the full year. It’s very likely their run rate figures are even higher as they continue to invest in their business. As for the 20% figure, for Peloton and with their model, it doesn’t seem so crazy.  But what are the implications and what is it going to take to get to breakeven?

Looking at the figures below, assuming $179 million in OpEx, that implies they’ll need 753K subscribers to pay $39 per month for the year.  But they’ll likely incur greater OpEx to get there. 

If we look at their current base of 511k, with no net change in subs, and paying $39 per month for the year, they’ll generate $121 million in gross margin.  That leaves $58 million left to cover. 

Somewhere in this model, there has to be greater efficiency and leverage.

Can Peloton get to 753K subscribers and beyond?

What is going to take to get there?

What happens if they don’t grow?

I’ve got a few thoughts. 

The last two lines in the above table are calc’s showing that if Peloton can generate another $100 in margin dollars per customer, how many would they need to cover that $58 million.  It’s simple math. They’d need 576K subs.  A bit more than they have today. 

And if they could generate another $200 of margin dollars per customers? That’ 288K customers. 

Now you’re probably wondering how feasible it is to get the annual revenue from subscribers to increase from $468 ($39*12) to $568?

I do NOT believe it comes from converting Bike buyers into Treadmill buyers.  But rather…

  1. Apparel – the “Other” revenue line reflected ~$15 million in revenues in 2019.  That’s a massive opportunity waiting to be capitalized on.  Frankly, during my time at Beachbody, we didn’t sell much apparel either.  But when customers are fanatical about a health and fitness product – as they were with P90X and Insanity – and certainly as they are with Peloton, they love being walking billboards for the brand.  “Oh, this Peloton sweatshirt? Oh, I forgot I’m wearing it.  But yea, I have a Peloton. I looooove it. Did you have one? Let me tell you all about it…”

It’s a no-brainer in my estimation.  Now, if they put together a referral program a la Morning Brew, and turn those customers into referrers and compensate them with apparel, that might not generate apparel revenues, but it’s a customer acquisition channel that is a ton cheaper than the current $1000 they pay to acquire a customer. 

You don’t think a customer wouldn’t be absolutely thrilled to get a Peloton sweatshirt or cycling shirts or tank for every customer they referred?

Okay, so I combined 2 point in there – apparel and customer referrals. Yes, they get a ton of word-of-mouth benefit already that is driving referrals. I’d think that compensating customers with a piece of apparel would move the needle further.

2. Supplements – this is the MONSTER opportunity that I think Peloton has waiting in the wings. I have zero info on whether they’re spending any time here.  But think about it.  A rabid customer based that is obsessed with the brand, the trainers, and with being healthier. 

Pills, powders, shakes, bars.  Generally high margin, another source of recurring revenues.  And an entirely reasonable way to generate another $100+ of margin dollars per customer. 

Both of these draw on one of the big wins that Peloton has achieved.  I’ll get to that just below, but I first wanted to share why I think Peloton can win.

Sorry, the marketer in me can’t help but mention untapped opportunity #3:

3. Email – they could do it better.  Frankly, they haven’t needed to.  Communicating with their customers via email extremely well, especially after the purchase, hasn’t been a necessity.  But if/when they really emphasize product sales like the above, they’ll need to get it dialed in.  It’ll happen. Just a matter of time.

Ok, why Peloton can win…

The Peloton Family is Real

I posted this a couple days ago on Twitter.  Look at the post below.  It had 5,000+ likes and over 250 comments.  The fact that a customer shared difficulties about their personal life in the Peloton Facebook group and received such love, both from the community and from Peloton itself, speaks volumes about the brand. 

Major props to the Peloton team for the hand-written card and apparel they sent. 

This type of thing doesn’t happen overnight.  And when you think about competitive advantage, this is huge.

They have nailed the Customer Experience

Here’s a list of what they nail:
-The bike
-The instructors
-The tablet
-The quality of the streams
-The workouts themselves
-The music
-The leaderboard
-Sync’ing with Spotify
-The Facebook group
-The shout-outs for anniversary rides
-Hours upon hours of new content every day

The list goes on and on. So many of the core areas that make a difference. Peloton isn’t top-notch at everything. But they do more than almost everybody at the sheer count of things they nail. It’s for this reason that they are able to use the graphic at the very top of this page describing themselves not just as one thing. But as many things.
I’ll give them their due. They create a customer experience unlike almost anyone else.

Increasing workouts per cohort

This graphic below is pretty unreal. 

For starters, it may not sound like much to get customers to workout 10x per month.  Every 3 days doesn’t seem that much.  2+ times per week.  But there are very few fitness companies that get their customers to do so.  At home!

And then to see the count of workouts increasing for a given cohort over time – that means customers are working out more per month each year.  Again, this is remarkable. 

How are they doing it? Well, they now suggest a workout when you finish a ride – upper body, core, stretching.  An extra 5-10 minutes.  Does this mean that the nature of the current workout count is different than those in prior years? Yes.  But it also highlights something that Peloton has been doing for years.

They announce anniversary rides when their folks hit a special number.  50, 100, 500, 1,000.  Could customers cheat? Yes. Can they do shorter rides versus longer rides? Yes.  But Peloton and their customers don’t care. And don’t care to keep track.  No one asks whether someone did 100 20-minute rides or 45 minute rides.  It’s all about engagement and support.   

The Churn Figures Seem Real

I took a stab at trying to back into the churn figures.

Walking thru the chart below, I note which line items were provided in the S-1.  I then calc’ed the incremental subs each quarter (line A) and calc’ed the monthly rev / subscriber just to make sure the numbers made sense. 

I think looked at their Connected Fitness Product Revenues (basically sales of bikes and treadmills), and then based on some average revenue per customer figures I’ve estimated, I back into the Implied New Customers (line B). 

For the most part, line A and B are pretty close.  Q3/Q4 2019 (the March and June quarters) show the highest variance.  To the extent more recent sales have skewed towards the Treadmill and the AOV is higher, that would explain some of the difference.  It’s also possible that the Digital Subscribers (those with a subscription but without a bike/treadmill) is increasing.  Or, as I mention below, churn may be increasing. 

Using Line B, I show CAC, which mirrors what I’d done above – basically a $1K cost to acquire a customer. 

In Line C, I look at the difference between A and B.  This is a proxy for churn – the new customers are higher than the incremental subs.  Presumably most buyers become subscribers, so the difference is likely churn.  The one potentially worrisome metric is if the Q3/Q4 figures on line C are in fact churn.  In count, those are the highest absolute figures on the line, though still directionally in line as a % of the base.  It’s just a question of which cohort those people are connected to.

Finally, I calculate churn based on the methodology they describe in the S-1.  I don’t have monthly subs figures so I just took the average of the beginning and ending of the quarter, multiplied by the churn percent at the top.  You can see the difference b/w this churn (line D) vs. the one above (line C).  Again, not perfect, but pretty close.    

Yes, it’s possible churn is increasing, albeit with a noticeably larger base.  But for the most part, my calc’s seem in line with the figures the company shared.

Btw, I’ve seen some mention that the Company figures don’t take into account those on an installment plan.  There have been comments suggesting that these customers are not able to cancel their subscription just yet. And when they finish their installment billing (up to 39 months for the bike, 24 months for the treadmill), we’ll see higher cancels. From everything I’ve read, the subscription is NOT tied to the installment plan, so a customer isn’t locked in to the subscription should they want to cancel that part.  Nor does Subscription Revs include the installment payments.  As such, it doesn’t appear that there is mixing and matching, nor do these installment payment customers seem to be skewing the churn figures one way or another necessarily.
(Update: In July 2018, Peloton ended an offer whereby the subscription revenue was either prepaid and/or bundled in to the purchase of the bike. Those plans lasted from 12-39 months. The current offer allows for financing of the bike itself and the subscription is offered separately. There is no info as to how many/what percentage of new subscribers took the bundled installment plan. But it should be noted that some of these customers really haven’t had the ability to churn out, but their revenues are being recognized over time and the subscriber counts continue to include these customers.)

As for the final reason I think Peloton can win…

Have you ever spoken to a Peloton customer?

‘nuf said.  They’re beyond passionate.  And loyal. 

The Bigger Win

What is it that Peloton has achieved?

They’ve acquired a massive number of customers. Of fans. Of devotees. 

Of customers who will fly from wherever they live to do their anniversary ride in the NYC studio. Hopefully with their favorite trainer.  And snapping a pic while they’re at it. 

Of customers who love that they can click a button on their screen when a favorite song plays, and that song sync’s with their Spotify account. 

Over the past few years, they established a foundation of half of a millioin loyal paying customers. That’s a very very asset to have created.

What happens when the market turns?

I’m guessing a few things:

– Sales of bikes and treadmills will drop. This seems like an obvious statement – again, based on the growth we experienced at Beachbody, it’s not entirely a given. But for now, let’s assume it to be true. If the company is watching its numbers closely, they dial back customer acquisition spend.  Let’s assume it goes to zero.  It won’t, but even if it did.  New customer acquisition was operating at breakeven.  It wasn’t adding margin dollars.  But obviously adding new customers into the mix.

-How many customers stay on for $39/month?  I was at Beachbody from 2007 thru 2015.  We grew in a meaningful way thru the Recession, presumably because people gave up their gym memberships to buy a $60-$120 program.  Let’s call it $100 they paid.  Peloton customers are on the hook for $500/year.  Are people going to stay on? And what happens to those that are on installment plans? To date, according to the S-1, bad debt has not been meaningful.  Unless I missed it, they didn’t disclose any figures.  But it will go up. 

-It’s not clear just how much leverage they will get with their current OpEx and how much additional overhead is required to add 250K new subscribers.  

-But if the economy goes south, they likely won’t get that additional 250K and will likely cut staff to consolidate around higher-margin opportunities.  

$200 million of non-sales and marketing OpEx is huge.  Their current employees don’t want to hear it, but realistically, cutting back on R&D and tightening up with those 2,000 employees, is something they’ll need to do. 

But with coffers potentially of over $600 million post-IPO, tightening up as needed on acquisition and/or G&A, and expanding its offering into additional high-margin categories (ingestibles in particular), Peloton appears in position to grow.  And certainly to withstand a market downturn. 

Having 500,000+ active customers is a huge advantage. It’s a pretty good bet that if offered more, they’ll take it.

If all else fails, those 500,000 will come to the Company’s rescue. 

That’s what families do. 

And make no mistake, they’ve got a huge Peloton family.   

Do Performance Marketers Intentionally Ignore Brand?

In one of 2PM‘s recent Member Brief’s, (article is here – behind a paywall), he describes the reaction to his Brand-First Strategy. (In a nutshell, it’s an outgrowth of the growing CAC’s, at least in bigger digital channels. And that those who’ve used aggressive performance marketing strategies are struggling a bit to continue their growth. The Brand-First Strategy is more focused on content to build a community, then leading to commerce. Build the audience, then sell to them. I have separate thoughts on the specific strategy which I’ll save for a different post (it makes sense, it’s just expensive and only a few handfuls have executed well).

Back to the 2PM article. In it, he references a side conversation that occurred after his piece. There, he quotes Tonal’s founder Nate Bosshard as saying, “Seems like a straw man argument. What marketing executive has ever said “ignore brand?”

As a good friend of mine would say, I don’t think that’s the right question.

Instead, my experience with performance marketers over the years has been that’s it’s not that they SAY “ignore brand”.  It’s just that they IGNORE THE BRAND.  Not all of them of course, but I think it’s fair to say that it’s more often than not. And I find it’s not intentionally doing so, which is what I took from Nate’s comment above. Rather, it’s that so many of them have gotten so focused on growing a business, loving the process, getting customers, driving sales – that “brand” just doesn’t come up. 

To be clear, for me, “brand” really is about paying attention to and taking care of the product and the customer.  Which is crazy to think that so many people don’t really pay attention to either. They may say they do, but really they just love making money – often at the expense of brand. By the way, I’m nowhere close to perfect in this regard and am not trying to take a self-righteous approach here as you’ll see in the next paragraph.

When I was at Beachbody, so many of our decisions were driven in large part by the nearer-term, quantitative results – whether of an A/B test or otherwise.  I’ll give you an example of something I did which in retrospect was understandable intellectually but short-sighted from the brand side. Early on in my time there, I made a decision to remove an extra set of handles for our resistance bands from a box so customers would have 1 set of handles, not two, for the 3 bands we provided. It made us more money, and I simply figured customers could switch handles between bands. Great short-term financial decision. Horrible for the customer – those handles were brutal to take on and off.  (My bad if that affected you.) That might seem like such a simple and basic example, but it reflects the thinking that occurs in so many businesses today – save money but at the expense of the customer’s experience.
After I left Beachbody in 2015 to build my consulting business, I began speaking about bridging performance marketing and brand. More often, I was talking to bootstrapped entrepreneurs much more so than to venture-backed businesses.  So that brings a slightly different type of thinking – much more financially-driven because they don”t have the level of outside funding.  What i found is that the “brand” conversation fell on deaf ears. They just didn’t want to or just couldn’t hear it – given their mindset and priorities.  

Which is what has led me to focus so much more on this idea of crafting an incredible customer experience.  Done well, it can benefit both the performance marketing needs as well as help to build the brand.  So even if you’re not bought in to the brand conversation (at least not today), and you see that crafting an incredible experience satisfies your performance marketing sensibilities (customer acquisition and retention, most notably), then that’s fine.  And then if you’ve done it well, in a year or so, the brand should have started to build, and you’re happy you went down this path. 

As an example, Dollar Beard Club (now The Beard Club) did this well – by tapping into identity and community (what it means to be a bearded man) in their Facebook video ads.  Clearly performance marketing-driven AND it help to build their brand.  

There are plenty of other examples:
-Loot Crate and Nerd Fitness do a similar job of tapping into identity and community
-Supreme New York leverages scarcity and its Thursday morning drops to drive the real-life frenzy to help customer acquisition and repeat orders
-Rover uses information transparency so that dog owners have a sense of comfort of knowing where their dog has been, benefiting both its customer acquisition and retention goals
-NOBULL creates content to engage with its customers and to drive product launches
-For Warby Parker and Stitch Fix, their business model itself was based on creating a new and different customer experience, so it served a performance marketing goal and concurrently helped to build the brand.

No one is perfect, and there are of course examples of the above companies doing things that didn’t serve either a performance or brand-driven goal. But I would argue that these businesses have realized that building their brand is not at odds with their performance marketing goals. They are not mutually exclusive but can entirely co-exist.

What that means is they’ve managed to achieve impressive financial results (both top AND bottom-line) as the brand grew. And arguably, it was their attention to brand (again, product and customer), while matched with a performance marketing set of constraints, that lead to these outcomes.

And so in thinking about Nate’s original comment, these companies clearly did the opposite of saying they wanted to ignore the brand. They were intentional about making it a priority.

As for others, it’s a rare company that says they actively want to ignore the brand. And to those who just do so – whether believing it’s not important or they can’t afford it – I’d offer some of the above as examples and inspiration to start doing so.

If you’re interested in seeing further examples and contexts of where to create incredible customer experiences, I’m in the midst of writing a book on the topic. You can see some of my thinking here. I also share my eCommerce Framework, which ends with a lengthy section on the categories and companies (70+ in total) that I’m featuring in my book.

A final note here. I’ve found that many performance marketers fear that focusing on brand means that they’re now a brand marketer. Which sounds like a big insult to brand marketers. But it’s not the label but rather the feeling that they’ll be doing things that aren’t measurable, or at least not as measurable as what they’re accustomed to. Again, I would simply say to start by trying to create an experience in the context of the performance marketing goals. That doesn’t mean spend a bunch of money and don’t track it. But to the extent you can be intentional about what you’re trying to create longer-term and you use those goals with your acquisition or retention goals, you’ll be much farther down the path of building a successful and sustainable business (er, brand).

Serving the Underserved Creates THEIR Experience

In a literal way, inclusivity is the opposite of exclusivity.  And so, while being exclusive means something is for a select group, inclusivity, particularly for marketers, doesn’t necessarily have to about trying to include everyone. At times, companies can simply target people who have been underserved.  Especially when we think about one of the big no-no’s in marketing – that of trying to be all things to all people – it’s important to understand this distinction and not make the presumption that inclusivity is going against that adage.  The below examples demonstrate how engaging and enrolling audiences that have been ignored, in a sense crafting a great experience for the underserved, can yield great results.

Sephora: Clueless Shoppers are Welcome

Plenty of industries are filled with employees who like to make sure (potential) customers know just how “knowledgeable” the employee is, often at the expense of the customer.  For my part, I grew up a cycling fan and wouldn’t have enough time to list off the number of times I felt so belittled because an employee in a cycling store was seemingly offended by what he considered an offensively-simple question.

The beauty industry has a similar dynamic.

For its part, the beauty brand Sephora has done an exceptionally good job of making the beauty-shopping experience actually feel inclusive, not snobbish. Blogger Alicia Jessop has described Sephora as the equivalent to women of what a hardware store is for many men[1]. Just as men often go into hardware stores and browse without having any specific product in mind, women often shop at Sephora with that similar sense of discovery, exploration, and accessibility.

It’s fair to say that most everyone has gone into a store where there was a certain product domain they knew nothing about, then either tried to portray they knew something they didn’t, or they didn’t want to acknowledge that they knew nothing.  Unless we are just plain lucky, it’s a rare occasion that we leave with the right product and certainly none the wiser.

One of the primary reasons we as consumers behave this way is an expectation of how the “expert”, in this case a store employee, is going to respond.  Prior experience has led many of us to be intimidated in environments where there is a lot of domain expertise or technical skill.

But Sephora, while obviously not perfect, mitigates this effect in several ways.

The most obvious way is the store layout.   Unlike department stores where all the merchandise is behind a counter and only accessible by employees, Sephora has put product front and center, so that customers can touch and try products without having to ask anyone.  There is no gatekeeper to get past or to ask what might be an ignorant question.  Instead, customers have free reign to products at Sephora – to touch, hold, and try at their leisure.  This may seem like a minor detail, but given the department store dominance in beauty and just the fact that a customer doesn’t have to speak to someone to try something that grabs their attention – these have been big changes in the beauty industry.

Next, when customers do need help, Sephora staff are there to serve them.  Training is an important aspect of Sephora’s employee onboarding, whether on the customer service side or the technical side (how to help a customer select makeup that suits them as well as applying it).  Training is done at the store level but also through Sephora University, the center for the company’s training.  While creating its own training center, aka the University, is an advantage that a massive company like Sephora can afford to do, putting attention to how employees treat customers is something that any business can do, whether big or small.

It’s important to acknowledge that no business is remotely perfect. In researching Sephora, there were plenty of examples I heard about sub-par, off-brand experiences.  Particularly in retail, where the inherently imperfect human interaction drives a good part of the experience, perfection isn’t the goal.  Being a ton better than everyone else is.  On a consistent basis.  At the same time, setting up aspects of the business, such as the store’s design, that are not dependent on how an employee chooses to behave, can shift that burden and reinforce the bigger experience that is trying to be delivered.

As we all know, a company’s brand isn’t simply created from one component of the business.  It is built everywhere.  And in Sephora’s case, creating a welcoming, interactive and fun environment, whether through the store design or its employees’ attitudes, has been a key to their success.  It affects customers in the store, their likelihood of making a purchase, and certainly the stories they tell (primarily positive in Sephora’s case), which drives the chances they return and/or how they influence others to do so.

Gwynnie Bee: Serving Plus-Sized Women

When the apparel and accessories business Stitch Fix launched, they initially didn’t target plus-size women (anywhere from size 10-14 and up, depending on whose arbitrary definition you want to choose from).  It was a business decision that Stitch Fix (a former client of mine) made, amongst others that also included not serving men or kids, all of which they do now.

This isn’t about right or wrong for Stitch Fix, but their success and focus on its core group of customers, meant that there were opportunities for others to target those that weren’t being served.  Stitch Fix was not the only subscription business focused on delivering these same products to women, but in being one of the earliest and certainly the largest (most recently topping $1 billion in revenues and 2+ million active clients), who they were and were not serving was much more visible.

So as Stitch Fix was building its business, and to a certain extent educating the broader market on what they offered, Gwynnie Bee launched at a similar time, exclusively serving plus-sized women. Not that Stitch Fix played into the stereotypes that are all-too-often found in beauty magazines, but the fact that they didn’t stock apparel for plus-size women gave Gwynnie Bee the opportunity to highlight how it was differentiated from the category leader in Stitch Fix.  Gwynnie Bee was specifically offering clothes for a group that are not always served by apparel retailers.  To this day, beauty magazines constantly reinforce the idea that skinny is better.  To its credit, Gwynnie Bee embraced its target customer, and didn’t try to show size 2 women on its site.

Body image is admittedly a sensitive topic; and yet from a practical side, the reality is that many women in the US fall under the plus-sized definition.  So while Gwynnie Bee was targeting an underserved and perhaps niche category, theirs was by no means a group with small numbers.

(It’s interesting to note that Stitch Fix eventually did serve plus-size women, in addition to men and children.  And Gwynnie Bee announced in early 2018 that to be considered truly inclusive, they were not remaining exclusive to plus-sized women.)

There are plenty of other examples on servicing what isn’t considered mainstream; certain shops target “big and tall” men, some restaurants are “family friendly,” while others are clearly designed for couples.

In all of these cases, whether Sephora, Gwynnie Bee, or others, inclusivity isn’t about trying to be everything to everyone. It’s about targeting a particular group of people, especially those who may be underserved.  And then making them feel warm, understood, and served in the manner which we’d all want to be treated.


[1] Jessop, Alicia. “What’s Good Wednesday: Why Women Love Sephora.” August 22, 2012.

3 Pillars for Ensuring Your Company is Built for Scale

(This is the second in a 3-part series where I share some of my “secrets” to scaling a performance marketing business. If you missed part 1, you can find it here.)

Scale doesn’t happen unless something is working. It sounds obvious, but the reason I start with that point is that if you don’t have a working offer and channel (again, you can see Part 1 of this series), then this post would be moot.  Thus, I’m assuming you have something that’s working.

The next step is about making sure attention is put in the right places. Some is foundational work, some is true operations. And whether you’re at $5mm, $50mm or over $100mm, it’s a bit of a relative question about putting in the foundations for the next level of scale.

So, what constitutes building that foundation? Well, fundamentally, I’m a believer that focusing on the below 3 areas can dramatically increase the chances of scalability and sustainability of a business.
1. Customer LTV
2. Brand
3. Operational Excellence

Customer LTV
I’ve written about the importance of knowing the value of your customer and having a robust unit economics model numerous times. I walk thru the actual model here and go over some additional basics here.

I’ll hit only the key points now:
1. There are 2 primary reasons you need to understand customer LTV and your unit economics model:
a) to manage your media. If you’re running paid media of any form and don’t know the value of a customer, you’re headed for trouble. You need to know how much you generate from a customer, what your goals are (% margin, breakeven by a certain day, etc.), and then that helps you back into your target CPA.
b) to identify the key levers in your model and where to deploy resources for improvement, testing, etc. Knowing your baseline metrics and goals is one thing. Great companies believe that they are never fully-optimized and so have a constant testing program. But everyone is resource-constrained, so knowing where to deploy resources is crucial.
2. Someone on the team must be accountable for maximizing customer LTV, and as a result, the target CPA. That doesn’t mean they do so at the exclusion of the brand (see the next main section), nor does it mean they do everything on their own. But someone must “own” customer LTV. You’re not going to get better at the pace you want if you don’t do so.

3. Customer LTV is a combination of revenues AND costs. It’s more fun and sexier to focus on the former. But if you reduce the latter, that goes straight to more dollars you can put to customer acquisition. Here’s are a couple of my posts about optimizing revenues and costs.

4. G&A, investments, capex, etc. should NOT be a part of your unit economics model. The point of the model is to capture the revenues and marginal/incurred costs associated with those revenues. You don’t need to hire a new person for each incremental order. Sure, at some point, you do need to make those types of commitments, but that doesn’t mean they should be included in that model.

5. Who has checked the data that is behind the assumptions in your model?

If you want to build a business that is scalable and sustainable, you need to focus on brand. Again, look at the patterns. There will always be exceptions, but I’m a believer in playing the odds when it comes to things like brand. And more great companies have put attention towards building theirs.

Having a brand mindset also provides the necessary counterbalance when you are driving so hard on Customer LTV. It can be easy to be so exclusively focused on Customer LTV that you lose sight of what truly serves the customer.

I’ll give you an example from my early days at Beachbody. In one of our offers, we sold 3 bands with 2 handles. In my supposed genius at the time, the math said that if you pulled out 1 of those handles, we’d save money. The math isn’t rocket science. But the move entirely ignored the customer experience – it’s not easy to switch handles from one band to another. Now, I doubt that this decision had a significant impact on the brand experience, but it’s a simple example of how an action might save you money and increase customer LTV while being pretty crappy for the customer. My bad….

I’ve become so much more focused on brand over the past couple years because it’s been noticeably absent from conversations I’ve had with performance marketers (another area I’ve posted about previously). Ultimately, the “brand” conversation is about customer experience. How are you serving them, how do you treat them, what experience does a customer have of your business? As much as we want to drive what the brand means, our customers are the ones who have the final say.

Brand is not simply a logo, fonts, or an ad you run. Your brand reflects the values and perspectives you stand for. The logo is simply a representation of those values, but the logo isn’t the brand. It’s easy to get these mixed up.

A strong brand means a higher company valuation. It means connection with customers, which leads to more repeat customers as well as word of mouth (which is another term for a $0 CPA).

At the same time, the difference is telling in the way that performance marketers vs. traditional brand folks look at brand and sales. Performance marketers believe that sales drives creation of the brand. While traditional brand folks believe that you create the brand, which in turn drives sales. I can’t say for sure who is right and who is wrong. But many people can’t afford to build the brand while ignoring sales.

Which is why the term “branded response” has gotten in vogue. The phrase reflects that it is no longer either/or, but “and” – brand and performance need to be built concurrently. We’ve seen this become particularly prevalent as e-commerce players have used video – Facebook and TV – to build their businesses. The goal is to drive response, but without feeling like the ShamWow! (Btw, Vince made 8 figures off that product, so there’s a good measure of respect behind what might’ve felt like a jab at the ShamWow…)

At the same time, especially if you’re in a consumer business, and a subscription one, the quality of your product and service can be a huge difference in how your customers experience and think about your brand. Just as many marketers ignore brand entirely, too many ignore the importance of the quality they are delivering, believing that good marketing will always win. True, good marketing is helpful. Good marketing + exceptional product – that can be a game-changer.

Where is brand created? The answer, for good and for bad, is that our brands are created everywhere. At every touch point and interaction. Pre-purchase, post-purchase, in the product, name a place. That can be daunting but it’s also the reality. Alignment across the company of what the brand stands for, how you expect to treat customers, vendors, or stakeholders, is crucial if you want to have a consistent experience at all the touch points. And to build something that is defining and long-lasting.

Operational Excellence
To scale, you need to build a machine that runs as effectively and efficiently as possible. At scale, the organization needs to run well so that it’s no longer a couple people getting things done, scrambling to take care of those last customers. Similarly, no longer is everyone in the same room nor even same building. Which means building out the org, internal processes, systems, and beyond.

It’s at this point where the importance of bringing in people who have “been there and done that” is so important. In a company’s early days, you can figure things out real time because often the scope of the issues that arise is manageable. But as the business becomes more complex, sophisticated and expansive in scale, it’s just not practical that the original team can manage these issues.

Not to say that people can’t evolve into these more expansive roles. At the CEO level, Bill Gates and Mark Zuckerberg provide great examples of founders who have transitioned into professional CEO’s of huge entities. But a) they are the exception, not the rule; b) you must be honest about different members’ real strengths; and c) simply because of the expanding scope and needs of the business, new people will need to be brought in no matter what. And if the existing folks on your team aren’t delivering with the new needs, it doesn’t serve anyone to hold them in those roles too long. I’ve seen plenty of examples where those people continue at the company and have a great career. And I’ve seen times where the culture shifts, their ego gets in their way, or there’s just another dynamic that they exit the company.

Operational excellence is such a broad phrase, but here are a handful of questions I ask clients when evaluating this area of their business.
• How well is the company led? (It sounds simple, this gets to the heart of building a business.)
• How well does the company run? (This is different than the first question – I like asking it because if there is supposedly good leadership but things don’t run so well – that’s a disconnect to investigate.)
• Can each functional area in the business point to improvements they’ve made in the past 12 months when it comes to vendor pricing or new / redundant vendors?
• Can you point to certain areas where things used to break but no longer do (increase in order volume, technology issues, quality of data, new hire onboarding, financial statements being produced more quickly, etc.)?
• When something breaks and a flood of customers call to find out what’s happening, do they a) get thru; b) get a reasonable answer with reasonable expectations. (I like a customer service question, especially when something breaks, as it goes to how front-line employees and workers have been communicated to, trained, etc. on what the brand stands for.)
• Is there a single person accountable for the different areas in the business, and do they and their teams have specific KPI’s / performance targets they are trying to hit?
Just asking these basic questions can start to reveal areas of opportunities.

Even if you keep your business focused in certain areas, but as the business sees financial growth, the number of moving parts increases. That could be as simple as more customers buying the same product (which has operational, technological and customer service implications) or more products you sell (the same as the prior issues, but you get to add product development, sourcing, etc.). It can also include new services, new geographies, or new partners, to name a few.

Regardless, each time the business changes or grows, it comes with its own issues. Some of these appear over time and may require step-function changes. At some point, your technology platform may require an overhaul, your office space may no longer be sufficient; or you may need to add a location with your fulfillment partner.

Operational excellence comes with a methodical and organized approach to breaking down the business, assigning specific people to be accountable for those areas, and then setting targets for them to achieve.

Typically, the break points for growth happen at $10MM, $25MM, $50MM, $100MM, and $500MM. Not to say there aren’t challenges along the way, but those levels are when a lot of businesses run into challenges. Knowing they are coming, planning for the next stages of growth, and then managing through as it’s happening are all just components of growth. The good thing is that it’s likely that others have gone through similar issues, and there’s a lot you can model off.

And really, much of this approach of focusing on Customer LTV, Brand, and Operational Excellence, is based on seeing what has worked (and hasn’t worked) at many companies to formulate an approach towards managing scale.

Stay tuned for the final part of this series, where I’ll focus on Next Level Media Management. It’s an area dear to my heart and allows me to share my learnings from managing over a half a billion dollars at media spend. Regardless of your scale, my goal is to provide some actionable insights.

As always, please let me know any thoughts or comments you have on the above.