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Rough sea for consumer startups — how to cope with it! Part 2

Written by Marcau’s David Hug and Andrea Annese, with the collaboration of Luca Michas and Rudi Skogman

In Part 1 of this article, we tried to analyze the current consumer market and how startups operating in this space need to rethink their strategies in the face of a situation we have not been used to in the last 10 years.

It has become apparent that, while inflation rates have skyrocketed and the cost of basic services like food and transportation have reached record highs, consumers are increasingly looking for cheaper alternatives and changing their brand preferences more frequently than before. On the flipside, consumer-facing startups find themselves in a peculiar situation where they need to explore new acquisition strategies, rethink revenue models, and improve user experience due to increased CAC in traditional channels and new customer habits.

In Part 2, we will explore the experiences navigating the current market conditions of two startups founders from our Ringier Digital Ventures Portfolio. Luca Michas from Yamo and Rudi Skogman from Blok will share their insights on the challenges they have faced, as well as their strategies for adapting to changing consumer habits and to the uncertain economic environment.

How has the current market affected Yamo and Blok’s customers’ behavior?
“Consumers are reconciling their financial caution with their consumption and spending impulse by being much more selective about their brand and product preferences”. This is the opening answer from Luca, which also hints how some segments like baby and kids food are more resilient to uncertain economic situations. On the other hand, this is not the case for the private residential real-estate as confirmed by Rudi: “The rising interest rates drive people to postpone decisions and make them unsure of their own financial future. At the same time the prices of their own homes have come down in the past 12 months leaving less money to buy a new apartment even if the prices are lower in general[…]The change after the start of the war in March was almost instant”. The constant variable in their words is that there is less wallet space for luxuries as people are more cautious in high-ticket purchases in each category.

How has the current market affected your company instead? Based on what KPI did you notice these changes? Did you change your KPI scorecard accordingly?
According to both founders there is a big problem in acquiring new customers, both in terms of acquisition cost and in conversion rates. For Yamo, “big advertising platforms like Google, Facebook [are] increasing their media prices”, which caused an increase in CAC to “almost all e-commerce businesses”. For Blok’s proptech market instead, “we’ve noticed that our own conversion started going down dramatically” reflecting “market statistics that show that the housing market volumes [in Finland] are down 50–60% YoY”. Consequently both founders are focusing on monitoring the conversion value chain, from CPM, CPC and CVR . More generally, Rudi points out the importance of balancing revenues and costs to withstand this peculiar circumstance.

What measures have you taken to meet the challenges?
Very interestingly both companies have acted on their revenue streams, pursuing long term diversification strategies and aiming at increasing retention and LTV.
Rudi : “We’ve done 2 things specifically — Cut costs […] and diversify our revenue streams, making sure we’re not dependent solely on one place for all our revenue. This is still work in progress but has helped us already tremendously as we’ve been able to grow revenues from a new product in a new stream from 0 to 600k ARR in a matter of months.”

Luca: “ […] we focused a lot on retention and LTV. From a product point of view, we are working on improving the quality and our service even more with different measures. But we also adapted the D2C business model itself, offering more attractive pricing for customers who want to commit to a 3 or 5 box plan. We are creating a win-win situation both for the customer and for us. The customer profits from cheaper product prices, and we secure higher customer lifetime revenues with the first purchase.”

Looking ahead to 2023, what environment are you expecting? And how are you preparing for it?
When thinking about the immediate future, uncertainty is often the first thing that comes to mind. With so many macro factors at play, such as the reactions of central banks to rising interest rates and ongoing international conflicts, it is difficult to make reliable predictions. It is thus not surprising that both Luca and Rudi are focusing on their core business, strengthening current revenue streams, and rekindling partnerships, while approaching the immediate future with caution.

Rudi: “ I expect 2023 to be as bad or worse than 2022. Most likely towards the end of 2023 we’ll start seeing some light at the end of the tunnel but until then […] buckle up! We’re preparing for 2023 by strengthening our revenue diversification efforts and making sure we’re using all possible channels for revenue creation. At the same time we want to build new lasting partnerships with larger players in the market to mutually benefit from the synergies created.”

Luca: “In the coming year, we expect continued uncertainty in the market and then either a stronger slump in the markets or a slow recovery, depending on what the Fed decides and how the war in Ukraine develops. For us this means: caution is the mother of wisdom. We will postpone exciting opportunities that have the potential to distract the organization too much until further notice. In concrete terms, this means that focusing on the core issues is absolutely essential for us.”

Has the relationship with your investors changed over time? What are your expectations of investors in the current period?
The purpose of a VC investment is not only the one of re-filling accounts, investors have also the duty to support founders, opening doors in their network, providing strategic advice and, especially, they need to be the right sparring partner for founders. But in challenging times startups leaders need even more, they need empathy and support, even for small decisions. As Luca points out: “especially in stormier times, founders experience countless small to medium-sized challenges and dramas within the startup on a weekly basis. Empathy, i.e. understanding of the business but also the personal situation of the founders is immensely important in such times. Compassion is then the next level of this. Being there for founding teams when things become tough is crucial. Can the founder call you at 10 in the evening, even if just to vent?”. It is important also to remember that VCs are navigating the same waters as their investees and open communication and shared knowledge have never been as important as today on both sides.
Quoting Rudi: “ Our investors have supported us tremendously through this tough year and always had our back.[…] They are in an equally tight spot to companies. The fundraising market from LP’s has gotten a lot worse as well, so it’s understandable that investors are very careful in making new investment decisions and/or supporting all of their portfolio companies. I would however really wish that investors generally would make sure that most of their portfolio would make it through this market because the companies that do make it out alive will be stronger than ever as competition will have died and markets will again be booming.”

While there is already much food for thought from these conversations up to this point, we could not leave our founders without asking them a very important final question.

What advice would you give to early-stage founders trying to build a consumer-oriented startup while navigating this rough sea?
TLDR: Focus on product market fit and try to extend your runway as much as possible!

Rudi: “ I would say that most consumers will be trying to cut down on spending next year so anything that offers a lot of value at a low cost is likely to succeed. Concentrate on customer experience and customer satisfaction. Luxuries are off the list for now, so I would advice to steer clear of that space for the near future.”

Luca: “ Focus 100% on your product market fit. This means building a product that your target audience loves and will tell their friends about. Don’t scale too early. Understand what the flywheel of your product is. Think about how you would build the business without external capital. What would you do if you received venture funding? How would you invest it? What could you do differently/better with the money? Think about “product-led growth”, find your niche where you can build the best product and grow out of it.”

With Christmas just around the corner, we were very grateful for the gift Luca and Rudi gave us by sharing with us their valuable experience gained on their boat in the rough seas of the consumer environment. For the uncertain year of 2023, it’ll be crucial to understand the changes in consumer behavior while focusing on core activities. Also, support from the right investor will continue to be essential for startups, and we at Marcau Partners, who’ve been involved with consumer-facing companies for decades, can’t wait to hear from you. If you’re building a consumer-focused startup, don’t hesitate to contact us!

Have a happy holidays season and we’ll see you in 2023!

Rough sea for consumer startups — how to cope with it! Part 2 was originally published in Marcau Partners on Medium, where people are continuing the conversation by highlighting and responding to this story.

Rough sea for consumer startups — how to cope with it!

As consumers change their consumption habits and navigate through challenging times, consumer-facing startups need to rethink how they reach new customers and how they engage with existing ones.

Written By Marcau’s David Hug and Andrea Annese

The world is changing
When the pandemic officially began in November 2019, few people could have predicted the long series of events that have changed our lives and the economic environment in ways not seen in decades. The global economy began to show scary signs of a downturn, the geopolitical balance swung from west to east, while interest rates skyrocketed and a recession seemed just around the corner. So it’s not surprising that anxiety about the future has increased, with more than 60% of consumers around the world not expecting the economy to recover in the near term. Meanwhile, the Consumer Confidence Index (CCI) has reached its lowest level since 2008.

Inflation and changing of attitudes

Consumers’ fears of recession and cost-of-living increases are more than justified when you look at current inflation rates across Europe. Even in the strongest economies, rates are over 10%, far above the ideal 2% target set by ECB.

What does this mean for consumers?
Figures like these concretely change the lives of consumers in their daily activities and strongly influence their purchasing power and attitudes. Let’s just remember that the cost of basic services such as housing, energy, food, and transportation has reached record highs, sometimes exceeding 20% per year.

In addition, over the past three years, consumers have been in a constant state of crisis and have changed their consumption habits, preferring to replace spending rather than simply reducing it:

• The brand loyalty: traditional scheme has been disrupted by COVID, with 75% of consumers changing their brand preferences amid latest global developments.
• Cheaper alternatives: premium offers have left space to high value for money products in essential segments, with 48% of consumers shifting to cheaper alternatives.
• Brand Purpose: notwithstanding the problems in the affordability of premium prices for sustainable products, consumers will not sacrifice sustainability. They are increasing their spending in alternatives, like in second hands and refurbished products while reducing expenses into top brands not doing enough, or harming, the planet. Brand purpose is among the most important drivers when consumers decide to try a new brand.

What does this mean for consumer-facing companies? — some food for thought

The complicated times we went through and those we see on the horizon have affected businesses in the same way they have done with consumers. Lockdowns due to the COVID crisis, the global supply chain inefficiency, the resource scarcity and the latest changes in consumers’ spending habits, will force B2C companies to rethink their strategies. But what is the best way to face this new environment? On the one hand, companies need to reduce cost pressures without compromising the perceived value of their offerings; on the other, they want to keep prices competitive. As if this complex equation were not complicated enough, consumers facing business will have to cope with a new variable:

The tried and tested “Massively BUY customers through paid marketing, than SEO and CRM” is out of its equilibrium.

Digital advertising paid channels’ cost have presented a tremendous upward trend during last quarters. CPM (cost per thousand) has surged up to 185% on TitTok, and similar numbers can be presented for Facebook, Instagram and even Google, with a 75% year over year increase in its programmatic display CPM.

Aside from higher costs, digital advertising campaigns are also becoming less effective at targeting the right audience as customers become better at avoiding unwanted ads and more concerned about how their data is used (see for instance Apple’s new data policy ).

What to do next? It is time to discard old thought patterns and tread new paths. Be creative!

Here some of the lessons Marcau Partners learnt supporting Ringier Digital Ventures, specialized in consumer-facing start-ups.

1. How to reach new customers and engage existing ones

• Diversify customers acquisition channels from the start: reducing the dependency on Meta, Google and the rest of the paid ads mafia not only can reduce cost, but it can contribute to an easier scaling process for new (and established) businesses.
• Focus more on content marketing: it’s incredible how quickly content can go viral these days. Creating engaging content on a consistent and programmed schedule can go a long way toward reaching a large audience in a quick and cost-effective way. One of the best example of this strategy can be admired on Teta’s TikTok profile. One of the first videos posted on the platform got viral attracting thousands of viewers, for free and in record time!
• Affiliate programs: It’s undeniable that affiliate promo codes (also known as “coupons”, “discount codes” or “gift codes”) are a powerful way to incentivize people to engage with your brand. We all love a good deal from time to time, don’t we? The opportunities offered by thousands of micro-influencers on social media are endless these days, and the chances of your promo codes going viral and reaching thousands of viewers are very high. Sometimes, influencers become even more than just affiliate, they become true brand ambassadors, like the fit-army of micro-influencers sponsoring the Portuguese Prozis.
• Leverage customer-generated content: Get your customers to sell the products themselves by making them a part of it. Supporting your best customers and making them feel important can have two important effects: First, it increases brand value and second, there’s the added chance that your products will go viral. A good way to pursue this strategy is to offer areas on your channels (websites/social channels/etc.) where customers and fans can show how they use the products, or create a community of brand ambassadors. The best example of this strategy is GoPro: At least six thousand GoPro-tagged videos are uploaded to YouTube every day!
• Build proprietary channels: Today’s world offers a wide variety of relatively inexpensive ways to build your own channels to attract customers.The oldest and probably the best known is the newsletter ( owned or in partnership).
  More and more companies also rely on proprietary podcast next to sponsoring third parties’ ones. Masters and Vanguard from Shopify and Open Account by Umpqua Bank are two great examples of this strategy from the startup ecosystem.
• The craft of good SEO is often underestimated or neglected: The daily search queries on online search portals harbor huge opportunities. If you have done your SEO homework properly and have a clear strategy, you will certainly have seen what it means to be on the first page for matching key words and not on the second or third.
• Explore new channels: when digital ads are out of the question, other channels must be explored. Following the same pattern of aiming at virality through original content on social media, the same can be tested in traditional media channels. Be creative and reach customers where they spend most of their time: reading blogs, watching TV, reading newsletters. Again, content is king.
  Our Ringier Digital Ventures portfolio company Carvolution is using paid content in cooperation with media houses to promote its services. This way of advertising offers more room for explanation, delivers more insights for the potential customer and qualifies the potential click. This channel became one of the main driver for new leads.
  Here are other examples of alternative paid channels:
• Content-Cooperation with media companies
• Cooperation with other brands that have matching touch points with your potential customers or overlapping demographics. Spotify has always mastered this technique, creating amazing partnerships with Starbucks and with Uber, among the others.
• Out of Home: outdoor advertising is recovering very well from the pandemic and it is going far beyond billboards. It is worth to mention at-home health test kit brand LetsGetChecked that set up a giant couch in New York City’s Flatiron Plaza, to promote its kits. Another interesting case can be admired looking at Casavo’s offline campaigns in Italian streets, where the company created a piece of street art in the heart of the Milan city center. The beauty of OOH is that it cannot be overlooked by skipping, fast-forwarding or paying more to avoid ads. But, most importantly, it perfectly fits GenZ and GenY profiles.
• Even TV could be an alternative

2. How to improve the underlying business

In times when customer acquisition costs are skyrocketing, it is important to focus on building the right scorecard with a larger variety of KPIs.

• Average Basket Size: Shopping carts with a certain size and a high CM1 margin offer more breathing space for customer acquisition. Regularly review the size of your shopping carts and give customers the opportunity to buy more than a single product from you. A wider shopping cart assortment not only means a higher ARPA, but also increases the likelihood that customers will fall in love with your products and come back again for them. Bundles, mixed packages, and personalized recommendations are popular ways to achieve better cart size.
• Average Contrubution Margin: Focus on a good margin from day one and if there are higher and lower margin products in your offering — try to bundle them. For example, combine physical and digital products. In our Ringier Digital Ventures portfolio, Makerist (as part of The Creative Club) gives the customer the opportunity to buy e-books with do-it-yourself instructions and the necessary materials on the same platform.
• Life time value (LTV): Even if you are already profitable (after marketing) with the first purchase transaction with the customer, it is important to work on the life time value.

How can consumers oriented businesses improve their customers’ LTV? Here are some points to pay attention to:

• Business model: one-time vs. subscription. Yamo, from our Ringier Digital Ventures portfolio, offered both one-off transactions and subscriptions on its website in the past. Management had the courage to take a bold step and offer only subscriptions. In order to be able to offer something suitable to as many customers as possible, three plans with different durations and price points were drawn up. The hypothesis derived from previous customer behavior was that 80% would choose the shortest option (with the lowest customer commitment). The (ad)venture paid off: 50% of customers have opted for the shortest option since the changeover, 30% for the medium option and 20% for the longest option. They were happy to accept the corresponding price reductions. For Yamo, this behavior brings a major advantage in the form of a higher LTV on the first purchase.
• Re-ordering: make sure the process is as seamless as possible and avoid thousands of clicks. To simplify this procedure, add a one-click reorder feature so customers don’t have to search again for the product they want.
• Top of mind awareness: stay present with the customer (between possible transactions)
• Pricing: test the right strategy to get the necessary commitment from the customer.
• UX: 88% of customers are less likely to return to a website after a poor UX. It is therefore important to provide them with a smooth, error-free and amazing journey. Make sure your offering includes the best features from top performing marketplaces: browsing history, one-click social login, wishlists, related product recommendations, rewards programs, order status tracking, to name a few.

What’s next?

There is no escaping the fact that we are facing a unique combination of new patterns in the consumers environment, but it is in times of change that new opportunities arise. It is a good moment for mental reframing, to get out of the comfort zone and seize new opportunities!

Since we at Marcau Partners have been involved with consumer-facing businesses for decades, we thought it would be really helpful to share our experiences along with those of our founders. So hold on, part 2 of “Rough sea for consumer start-ups — how to cope with it” is coming soon!

Rough sea for consumer startups — how to cope with it! was originally published in Marcau Partners on Medium, where people are continuing the conversation by highlighting and responding to this story.