What Drives D2C Brand Valuations?

 $50M on $1.4B

$50M on $1.4B

Customer equity is the north star of every consumer brand.

This is true even for brands still operating primarily as wholesale suppliers to the retail channel. They may not understand or fully appreciate yet that the enterprise value of any consumer business is simply a multiple of (end) customer equity -- but hyper-growth D2C brands like Warby Parker and Casper prove the point.

Brands that operate as retailers controlling the consumer relationship trade at high revenue multiples rather than low EBITDA or cash flow multiples.

Select D2C valuations:

  • In October 2018, AllBirds raised $50M in new funding on a $1.4B market cap.

  • In August, Movado acquired MVMT for $100M up front and up to $200M total on trailing revenues of $71M.

  • In spite of a 28% share price drop YTD, Samsonite trades at 9X revenue on the strength of its Tumi brand.

  • In March, Warby Parker raised $75M in pre-IPO funding on a $1.75B market cap.

What is customer equity? Simply put, customer equity is the lifetime (past, present and future) profit generated by all customers (shoppers) over time.

If customer equity is the measure of consumer brand value, customer experience is the driver. Customer equity is created through customer experiences that attract the right shoppers and retain them over the long term.

There is expansive analysis on the impact of marketing on customer equity. This makes sense, as marketing is one of the key drivers of variable cost and customer lifetime tenure. There’s no shortage of technology focused on digital marketing. Chief Martec tracks the top 6,829 marketing technology vendors in its annual Supergraphic.

Ultimately though, it’s our products and services, approach to customer engagement and differentiated customer experience that drive customer equity -- impacting customer retention and churn, and the ongoing cost of acquisition for each customer relationship. Customer experience is what builds brand equity and reputation, and shifts acquisition and retention from (higher) direct marketing expense to (lower) indirect costs, improving margins, customer equity, and enterprise value.

Every aspect of commerce operations impacts customer experience and in turn customer equity -- informing strategic questions:

  • Which customers deserve (return-justified on a lifetime value basis) more aggressive promotions and shipping offers?

  • Which product categories and product lines drive the greatest customer equity? Are we prioritizing inventory dollars according to customer equity metrics? Are we accounting for customer equity in our product development and assortment expansion considerations?

  • Which geographic markets drive the greatest customer equity? How do we cost effectively move the right inventory closer to our top customer equity regions? Where should we open our next fulfillment node?

  • Which operational exceptions, from cart conversion to doorstep delivery, detract most from customer equity?

  • How can we offer more compelling shipping offers, product unboxing experience, or value added service to increase customer equity without jeopardizing our profit per order and per customer?

It is common (and easier) to think about operations as a downstream concern that becomes relevant once the brand is scaling as marketing drives demand.

But prioritizing marketing and demand over operational metrics and execution results in spending too little (or too much) on a given order or customer. More critically, without a handle on operational measures, you’ll risk disappointing customers even as you spend critical variable marketing dollars acquiring and retaining them.

Prioritizing operations can reduce the capital costs of growth, allowing brands to self-fund their way to scale. A growing number of D2C brands have cracked the code on profitable growth from day one -- by relentlessly scrutinizing every penny and second of their commerce operations.

 
Eric Best