2022 is not like other years
As the run-up to Black Friday accelerates, the year’s major e-commerce event is now firmly in founders’ crosshairs. Black Friday is usually a byword for a sales bonanza: bargain deals for consumers means stronger revenues for online businesses.
But 2022 is not like other years; the wider macro-economic backdrop is impossible to ignore.
The UK has had 3 prime ministers (and chancellors) since July, including the architects of the ‘mini-budget’. That fiscal event spooked the markets and set off a chain of chaos, from soaring mortgage costs to a sterling slump. Meanwhile, inflation is at a forty year high. European energy bills have hit record levels. Interest rates continue to rise, with central banks around the world aggressively tightening monetary policy. Life is becoming more and more expensive for consumers. The war in Ukraine is approaching its 300th day, causing devastating ongoing humanitarian effects as well as additional supply and inflationary pressures. China is maintaining its “zero-covid” policy, using lockdowns to tackle even minor outbreaks, such as the one which forced the closure of the world’s largest iPhone factory. Whichever way you look at the ‘permacrisis’, it’s fair to say it’s not business as usual.
After a bumper pandemic period when many e-commerce businesses enjoyed Covid tailwinds, the gathering storm of conditions is rapidly changing market dynamics for early-stage businesses. On the commercial side, the cost of doing business is higher than ever. Such cost pressures will undoubtedly affect the depth of discounts businesses can offer. On the consumer side, research from the IPA suggests that 48% of people intend to have their Christmas shopping done before Black Friday, and a further 48% expect to spend none of their Christmas budget during the sales this year. More generally, 53% of Brits believe it will be a stressful Christmas this year due to the cost-of-living crisis.
However, there are still significant opportunities for ambitious founders. By almost any measure, the early 2020s have been extraordinarily challenging. It’s worth remembering that any business which has managed to weather the storm of these cascading crises has already proven its resilience to get to this point.
Now, we don't know what tomorrow's problems will be. Powerful currents are driving this cycle, and new question marks will arise as others fade. No matter how much time is spent scenario-planning and forecasting cash-flow, outlooks are being adjusted constantly. Anyone can strategise, but, as Mike Tyson once said, everyone has a plan until they get punched in the face. Uncertainty is the only certainty.
But start-up founders can make decisions in chaotic conditions faster and better than anyone else. There are key learnings from the way early-stage businesses are learning, adapting, and executing. 2022 is undoubtedly unique, but here are three ways in which Outfund’s portfolio founders are continuing to scale amid the slowdown:
Maintain marketing spend - be greedy when others are fearful
The temptation for some founders has been to cut marketing spend. Concerns around spiraling customer acquisition costs are understandable given wider cost pressures. During recessions, internal control often shifts from CMOs to CFOs, and ad spend is frequently the first thing to be cut from budgets.
However, many founders have refused to back down, and have instead doubled down on their marketing investment. This approach is backed up by extensive research, with history time and time again showing that recessions can offer significant opportunities for brands that sustain their marketing activities and budgets: post-2008, companies which maintained their marketing output had 3.5 times more brand visibility. Capital discipline has to be aligned with viable growth avenues. Strong earnings today drive healthy cash reserves tomorrow.
For some of the online businesses which Outfund supports, buzz-building campaigns and countdowns have helped to create anticipation with customer bases. One fashion business has ringfenced access to their website via a password which is exclusively accessible to the brand’s most loyal customers, adding to the sense of community and potential FOMO.
For many, though, consistent success hasn’t necessarily been groundbreaking: tightly-monitored, high-conversion funnels across performing channels with well-established audiences continue to drive performance. The most successful founders have paid daily attention to the data, ensuring spend is above a certain ROAS threshold that maintains profitability. One Outfund client in the cosmetics sector is spending approximately £20,000 per day on Facebook and Instagram campaigns, at a blended ROAS of above 2. Their marketing is all managed in-house, helping to keep the cost base efficient. On the other hand, a luxury furniture business continues to spend millions of pounds per month across Google, Facebook, radio, and TV, managed by a full-service agency and monitored by sophisticated attribution and performance software.
At an inflection point where the equity funding landscape is challenging and spending decisions demand close consideration, it makes sense to allocate scarce capital to where the return outlook is most promising. Many Outfund portfolio founders have accessed additional funding for marketing to ensure they’ve got the dry powder to keep their foot on the growth pedal. Crucially, ongoing spend has provided crucial larger data-sets and testing time to inform decision-making, nurture campaigns, and retargeting for November and December. Founders were able to buy traffic early at low cost (especially before the World Cup drove CPMs up) to help build their audience, and are now harnessing those learnings to sustain momentum into Christmas. As a result, a number of clients have enjoyed record revenue months through September and October, with November already off to a strong start.
Some of the most striking approaches to Black Friday have been built on an impressive willingness to think outside the box. One Outfund portfolio company, a B Corp, has an annual tradition of replacing Black Friday with ‘Green Friday’, a more sustainable alternative which involves donating a percentage of sales to environmental charities. This year, the brand will plant a tree for every sale they make. In a huge sea of promotions, such an initiative is well-aligned with the brand’s mission and green values, and is a great opportunity to communicate those values and engage with both their community and new climate-conscious customers.
Another founder in the sports sector is responding creatively to this winter’s unprecedented circumstances. To coincide with the FIFA World Cup, they’re launching their first out-of-home marketing campaign in London. Instead of fighting for expensive online eyeballs, they’re expecting a hyper-targeted network of billboards in strategic rail and roadside locations will be a cost-effective method of building brand awareness, driving online brand discovery, and ultimately increasing sales. Strategic initiatives and realignments like this will set successful founders apart.
Many Outfund portfolio founders aren’t attempting to reinvent the wheel. Instead, they’re sticking to reasonable outcomes within horizons they can control. One supplements business essentially refuses to meaningfully take part in Black Friday; their analysis of multi-year data showed that customers they acquired during November had the lowest repeat purchase rate and lifetime value. This year is no different: realising that they can’t profitably compete with bigger players with higher marketing budgets and stronger margin profiles, the founder is happy to stay out of the street fight, avoid a race to the bottom, and protect long-term growth. You cannot lose if you do not play. Of course, the response might be that you can’t win either, but, as Y Combinator emphasised in a message to founders earlier this year, “you can often pick up significant market share in an economic downturn by just staying alive”.
In a similar vein, another founder in the cosmetics sector employs the same ‘bundling’ discounting tactic every year to ensure they maximize their AOV (average order value) and protect their gross profit margin. Bundling involves customers only unlocking certain discounts or free items when a certain basket size is hit. Essentially, they’ve built campaigns that are centered around forcing a higher AOV to cover the cost of discount. These ‘spend and save’ campaigns are a great way to ensure customers are achieving a minimum AOV hurdle, protecting margins and ensuring revenue isn’t cannibalising cash-flow.
This capital discipline is a strong foundation for profitable growth. While retailers traditionally slash the price of goods in relentless pursuit of top-line sales, this Q4 there is a renewed emphasis on the bottom line. For many founders, there is additional focus on sustainable MRR, cashflow, runway, burn rate, customer churn rate, CAC: LTV ratios, and unit economics. No matter the context, these fundamentals remain vital. After all, the more things change, the more they stay the same.