The Impact of Consumer Confidence on DTC

[00:00:00] Richard: Welcome to the E-Commerce Playbook Podcast. I'm Richard Gaffin the senior copywriter here at Common Thread Collective . And I'm joined as always or at least this is the beginning of what will happen in perpetuity which is that I'm joined by Mr. Taylor Holiday, the CEO and managing partner here at CTC . Taylor how are you?

[00:00:45] Taylor: Doing well, Richard. Happy to be here with you.

[00:00:47] Richard: Likewise. I'm happy to be here with you man. So the dynamic here for those of you who probably listen to our first podcast with Andrew, I'll essentially be interviewing Taylor.

I'm a guy, I don't know anything. Taylor's gonna tell me everything that I need to know and I'll be guiding that conversation. But where we wanna start today is something Taylor, you've been talking about on Twitter. What was that last week? This week?

[00:01:09] Taylor: Yeah. About one week ago today. Yeah.

[00:01:11] Richard: Okay. And talking about the correlation between the Consumer Confidence Index and MER. So for those of you who don't know, the Consumer Confidence Index hit an all time low as I understand it back in July of this year. So meaning in sort of the simplest form that consumers are just less confident, less likely to spend. That's sort of the most basic way to define that.

But there's a very clear correlation with MER going down as well. So starting out again at the lowest level here. Taylor, what is the Consumer Confidence Index?

[00:01:41] Taylor: Yeah. So it's simply put an indication of the Individual household consumers view or sentiment about the future based on a specific set of questions.

So based on their expectations about the general economy, about unemployment and their capability of saving. Because having a confidence in the ability to save in the future will lead to a higher prediction of spending. So confidence in their basically general financial situation. This is a survey and more or less indicates whether someone is m ore or less prone to save or to spend money going to the future.

If they think that money's gonna be scarce in the future, they're more likely to save, less likely to spend. But if they think that it's going to be healthy in the future, they're more likely to spend now and less apt to worry about saving.

And so that is an idea that we had seen pop up. We'd heard of this, you know, but it's not something that was really on our radar until, this news cycle hit in July that it had bottomed. And reached like an all time low in its history of measurements.

We knew there was like some hard things going on in the general economy. The stock market broadly the tech sector, extremely our sector pretty heavily. But this idea that consumer confidence was at an all time low in July was alarming. And so it set off a series for us of conversations that began internally that parate into what do we think the relationship is between this indication and the ability to get consumers to spend which is ultimately what our marketing dollars are supposed to do.

They're intended to get users to spend. So the question was is that harder now? And is there a way that we could determine that that is measurably more difficult in this moment?

[00:03:15] Richard: So let's play a quick round then of sort of defend that tweet . So I'm looking at your tweet here. This is from September 13 this is just talking about the correlation generally. And your theory if consumers are less confident, it's going to take more marketing resources to sell them products. And then the responses sort of vary from people having their mind blown to people sort of saying something along the lines of uh, like, no duh. So to those people for whom, the correlation between MER and consumer confidence seems obvious. What's the kind of insight? Or what are you seeing here that's interesting that they not?

[00:03:50] Taylor: So the thing where I call bullshit on the no duh ,is nobody's adjusting their forecast accordingly.

[00:03:55] Richard: Yeah yeah.

[00:03:55] Taylor: Here's what I mean ,is that nobody came to us as an agency and was like, hey guys, we noticed the consumer confidence index is much lower. So we're okay with 20% lower ROAS this month. We understand why that would be occurring and that makes sense to us. No duh, that's gonna occur. Don't worry about your ROAS being down.

So nobody is actually applying even if it's logically easy to understand the idea that if consumer confidence is down, it's gonna be harder to get people to spend. The actually allowing that to affect your business strategy and corresponding forecast is not a thing that I think is actually translating.

I guess the difference between, yeah eating vegetables is healthy and actually eating your vegetables. And I think that's what we're trying to highlight is the beginning of the conversation is to say, maybe we all need to think differently about the expectation in this moment as we develop a forecast and a model going forward.

it's a battle we've waged a lot, which is that so much of people's performance expectations for their business is anchored in a comparison between time. So they wanna know how they're doing this year versus last year. And one of the things I really fundamentally believe is that these are arbitrary comparisons that are really not useful. Because they assert something about the similarity of the environment in which the data's being created. As if they were the same.

And so to compare July of 2022, the lowest consumer confidence level of all time and use July of 2021 as a gauge is just a bizarre activity if we really think about it.

[00:05:32] Richard: So what should you be doing instead then? Everybody does it and they don't seem like they're stopping anytime soon like how do you change that?

[00:05:38] Taylor: What I want us to think about is the inputs that generate the outputs. What we're trying to illustrate with this idea that it's going to take more marketing resources to sell products. The practical output of that is less efficient advertising.

You have to do more to get less action, okay? That's very practically gonna lead to a lower ROAS or a lower return on the investment of your ad spend. So as you build a model for your forecast in this month, let's say historically or last year you ran at a three to one or last month you were running at a 3.2 to one.

What I'm saying is that it's might be worth and what our data is showing, Is considering the present or the most recent data point of consumer sentiment. And Steve even went so far as to forecast it, to model out what the next month might be based on the data. And use that to inform how you think about your efficiency in the next period of time.

So you're moving out of like the data from last year being applied to this year and you're saying what is the surrounding context of this moment now and how does that adjust the inputs, namely the efficiency of our ad spend over the coming 30 days to make a more informed decision about what we expect?

[00:06:47] Richard: Yeah, that makes sense. So one other thing that you point out here kind of deep into the thread. Which I thought was interesting, maybe I thought it was more interesting than it actually is. So MER is down like 10 point half percent maybe year over year and that correlates really tightly with the confidence index. But revenue is down like 3%.

So those things aren't moving together. It's relatively flat. What does that mean?

[00:07:10] Taylor: Yeah. Okay. So this is an interesting question, right? Because again this is why my hypothesis is what it is and I wanna acknowledge that correlation is not causation, okay? In other words, I'm not saying that the consumer confidence index is causing MER. I'm saying that our data shows that these two numbers have moved together in a corollary fashion.

There's a relationship, maybe not a causal one. And so we're beginning then to hypothesize. So I acknowledge I'm out now on a limb of hypothesis and you should check this and validate it yourself and wrestle throw whatever you want. But the idea is not that consumers are not spending.

Confidence is a sentiment, right? Like the confidence index is not a measure of the output of GDP or something .Like it's not a volume sales measure. It's a sentiment. So in other words, you have more work to do to overcome my objection. So it's not to say that you can't do it and in many cases, if you think about the behavior of a business, they are driving towards a revenue goal.

And what they will sacrifice in the name of that revenue goal is usually more often than not. The variable and efficiency against that volume output. Very few businesses are like, nah, the volume doesn't really matter as long as you maintain the efficiency.

Almost everybody wants to see their top line revenue continue to grow. That is a very deeply entrenched behavior. It's not everywhere, but I would say in most cases that's the case. So they will keep pushing against that revenue goal. And what they'll sacrifice along the way is the efficiency. And so what we're seeing is that again a d spend efficiency goes down, means you spend more to get the same output.

It doesn't necessarily mean you sacrifice the output.

[00:08:42] Richard: Right. The thing that came to mind for me was that the revenue staying flat and then MER dropping is potentially indicative of this sort of phenomenon that we're seeing, which is that the sentiment is low. But the actual behaviors are not necessarily what we would usually correlate with recession type behaviors. Right?

[00:08:59] Taylor: Okay.

[00:08:59] Richard: People are still buying at the same rate or more than they used to. Unemployment is not skyrocketing in the way that it has in like the seventies or in the, you know, late two thousands. And this is maybe like these data points or whatever are the indicator for us in the e-commerce world of like, this is how that really weird moment is playing out specifically in this time for us.

[00:09:19] Taylor: So I, I think this is the great ambiguity of this moment is that there are a bunch of conflicting signals. You have like you described sentiment low but actual behavior consistent. So it's almost as if we're apprehensive but we actually haven't altered our behavior. Generally right? We have inflation on pricing and then we have extreme supply excess, which is generally a deflationary principle. In other words, everybody has too much inventory, right? But yet we're sitting in an inflationary consumer moment, right?

So we have all these retailers with too much product. And yet pricing's gone up for consumers but yet everybody's slashing pricing to liquidate inventory like these things are true. At the same time, in our eCommerce flow. The jobs market is incredibly strong. We live this in the eCommerce world. It's still crazy competitive for talent in this world and yet we've seen reports about consumer debt growing and savings diminishing. It's like there's this weird confluence of attributes in this moment, we have freight declining significantly and freight output overseas dropping tremendously. So the cost of goods down but nobody needs to order inventory right now, so they're not really taking advantage of it and they're holding inventory that they paid too much for.

There's like all this weirdness in the pot that makes it I think challenging. And what's interesting even about the graph is that we're sitting here talking about how we reached it at all time low but the very most recent data point that we published this, is actually trend line up. The last two months from a bottom out in July have been increasing consumer sentiment. Gas prices are down. The general economic news is good. Now we're sitting here today on September 21st and the stock market was destroyed because there was another fed increase in rates today. And so markets down there 500 points.

So I don't know we've gotta see. I can't wait to see the most recent September print because it's another indication to us about what is happening and how we think about Q4.

[00:11:10] Richard: So, I'm not sure when this actual episode is gonna be dropped. It could be probably a couple of weeks. This week which is the week of the 19th, we're putting out an article about what your e-commerce strategy should be for Black Friday.

And the reason I bring us up here is because we frame it in terms of what's happening with the Consumer Confidence Index and the general sort of macro environment. I think the question on everybody's minds as I understand it, as you move towards Black Friday, is something along the lines of, will this work again.

Is Black Friday going to happen? What is it gonna look like relative to previous Black Fridays? The last two it's come through for us but there've been two highly unusual circumstances. Beginning of Covid, end of Covid and now we're in this weird moment where sentiment and behavior are sort of seem disconnected from each other.

And maybe this is a question that nobody can actually answer in fact it is. But what do you think you should be preparing for on Black Friday this year, given sort of current circumstance.

[00:12:02] Taylor: Okay so this is actually a fundamental belief of mine. if you've ever read any of my writing on the anti-fragile eCommerce playbook. One of the things that I believe in these moments is it reinforces the idea that you should relinquish your attempts at predicting the future and build the kind of business that can win regardless of what the future is, right?

So sometimes we get chased down the rabbit hole. It's similar to the attribution rabbit hole where we're chasing an answer that doesn't actually exist. And instead what we need to say is well w hat if consumer confidence drops a bunch, what if it goes through the roof? How am I prepared or able to take advantage of either scenario?

So I'll give you an example of a very practical way that I think brands should do this. Is when you think about forecasting, it is very tempting to build one forecast. To build what you believe to be let's call it the 50th percentile outcome. On the future based on what has been occurring and you put together one number. I would encourage more than ever to build three numbers.

And I would use your historical data to build the 50th percentile outcome. Then I would build a 30th percentile outcome and make sure that you're okay if that one happens. Then I would build the 70th percentile outcome and say, just go through the exercise as a company of saying, if this is true what breaks do we run out of this skew? Do we not have enough customer service support? Do we have the available credit for the add volume that we wanna run? Do we have enough creative to support it? What will break in that scenario?

And vice versa if it's only 30%. What do we do then? Like one of the things that we do in Bamboo Earth a lot , is we build what we call like a safety sale.

Okay. Which is we have in the plan for the last week of the month. The offer we run, if we're light on the revenue outcome that we needed. To try to make up the gap. Right? And so you plan for the downside right. And I think that what I see a lot is businesses are like, they have one outcome in mind as if they're sure that's what's going to happen and the whole organization orients around this thing and suddenly it doesn't actually become a practical reality and they have no next step.

They don't know where to go from that moment. And I'd say now more than ever, the way to become more anti-fragile to become better in any environment is to have a plan that allows for whatever . I understand you can't change some things like inventory or maybe full-time employee staffing but like maybe variable staffing matters. Maybe having where you'll go to fill up the warehouse to get more warehouse labor if you need it or you'll have a relationship with a partner that can source talent quickly if you needed it. Like whatever it is, build those contingencies maybe more than you would normally. The current environment is incredibly vulnerable.

[00:14:35] Richard: Yeah. It's interesting. It's like one of those things where when you step back from it and I'm referring here to like the single forecast model. Which is like the single non flexible forecast model. So you step back from it, it seems like everybody's doing it. It's kind of an emperors new closed situation. Or at least it feels like it like .

Obviously that seems like the wrong way to go about it. And yet everybody does. And maybe this is getting too broad here but like why is that? And what's the fix?

You mentioned obviously like cost, inventory that kind of thing. So I would imagine that plays a role but what's going on internally that causes that to happen?

[00:15:07] Taylor: It depends on the level of the organization. So, In large organization budgets are set at the beginning of the year and their approval process for them is many layers deep. It goes all the way generally to a board or to executive teams that meet at non-consistent intervals.

And so just the practicality of changing expectations in an organization like that is very slow. And so just get obligated to the number. And there are organizations that have good rhythms about building LES like latest estimates every month and adjusting those against budget. But in some cases it's like the goal for the year was 50% revenue increase and we're just gonna keep ramming our head into the 50% revenue increase until the next board meeting and budget comes out you know?

And so that tends to be one is just like a bureaucratic systemic system problem that I see a lot that makes it really difficult to shape goals or they bought that inventory. It's like that inventory's here. And our production timeline requires that like we have to now try and sell it. Another one is that on the smaller level when you're dealing with entrepreneurs, they tend to be delusionally optimistic as a valuable trait. I'll say this sometimes like entrepreneurship is like a wholly illogical behavior. Like you know, the failure rates are incredibly high. You have to have a reason to believe that people are gonna like your thing more than every other thing in the world in some cases.

And so it's by definition not an activity that people get into logically. They get into it with like naive optimism about their ability to change the world and in some cases they do. But in a lot of cases they fail. So that same emotional or mental framework gets applied to financial forecasting, usually from entrepreneurs. Which is that they're overly optimistic about the future and they don't consider the downside enough.

Because considering the downside usually involves sitting in really hard decisions. So in other words, it's really fun and exciting to talk about like what happens if it goes 30% better? But sitting around with your executive team and having a conversation that goes what happens if it goes 30% worse? No you know what that might include firing some of the people in that room. And so how do you have that conversation? How do you actually like discuss that as a team in a way that doesn't make people uneasy or afraid or worried.

And so as leaders there's this temptation to always be representing the upside and the possibility. Cause you gotta give people a vision. And if you're sort of nervous and some ways it's a lie. But cuz I think people are more willing to join you in the insecurity then you feel like as a leader sometimes. But the temptation is to not tell them that it could go really, really bad. Because no one wants to be on the sinking ship the play in your head is that everyone's gonna start looking for jobs the second you tell them that your forecast might miss by 50%, you know?

[00:17:37] Richard: Yeah.

[00:17:37] Taylor: And so there's all there's fear, there's insecurity, there's emotion in the process this is a very human exercise.

This is not like a machine computer that's out there spitting out forecasts for people. They're like people .We go and do it. It's like, a bunch of people with feelings and hopes and dreams that go into a room and write down a number about what they want the future to be like. And that tends to be an exercise that I see. Failed to spend enough time on the downside.

[00:17:58] Richard: Yeah, no, that makes sense. I mean my experience of it has been that psychological phenomenon where fantasizing about a thing your brain gives you about the same amount of reward as the thing actually coming true would. And so definitely I've been like in rooms where people are making projections where, it just feels better to put a big number on the table.

Right. And everybody feels good about it.

[00:18:20] Taylor: Imagine I say to you Richard, how many new subscribers are winning gate to this podcast in the next 30? There's no party that wants to come and tell me like, Taylor is zero. We're gonna get zero. And then I'm gonna be like, well why are we doing you like. So there's all this temptation baked into telling me something really awesome.

I might allocate more resources to you, I might give you more authority. There's all sorts of incentives in saying the really good thing is gonna happen, you know? The accountabilities along the way I think are where there's an interesting sort of relationship between who writes the number and then who's responsible for the number and making sure those are the same thing.

[00:18:53] Richard: Yeah. Let's bring it back to the topic at hand then real quick. So, to recap, the consumer confidence index is going down, MER is also going down. What that means is people are spending more for the same amount of revenue essentially. You had mentioned before. People sort of sacrificing efficiency because like we've been talking about, they have these top line numbers to hit that they're running after.

What would you suggest people do other than that, in light of the current economic situation?

[00:19:17] Taylor: So yeah, there's so many different situations here. Because in some cases I think that actually could be the right decision. The mistake that I think people also make a lot is that they assume that there's a perfect inverse relationship between the reduction of spend and the increase in efficiency.

Okay, so lemme just state that again cause I think it's a really important point. Media buyers I watch on our team a lot do this too, which is like, oh, I have an efficiency problem, I'll just simply reduce spend and efficiency will go up. Well, those things are not perfectly inversely correlated. And you can actually create the worst possible situation, which is you lower the spend and the efficiency still sucks.

So now you have less top line and less efficiency, less overall margin and less customers. Because here's the important part about thinking about especially as we head into Q4 is September's new customers, October's existing customers that bottom part of your revenue stack.

And what we know about LTV is that your customers are worth the most to you in their lifetime in the subsequent 30 days after purchase. So all of the customers that you acquired in September and October, they're contributing meaningfully to your revenue in Black Friday and Cyber Monday and those key moments.

And so if you pull back right now, there can be great future costs to that behavior. Even in the name of short term efficiency. And so that's a capitalization question which is just like, what can you afford to do? Can you afford to plow into inefficient growth in the name of building that customer file going forward?

Or from a cash standpoint do you need to make sure that you are generating contribution, meaning like net positive dollars with every sale? Then you have to make decisions according to that. And so I think part of it is, like if you're a business that has a ton of LTV. The difference between my LTV to CAT from like five to one over two years to like 4.3 to one. Is a very different thing than like, if I'm not first order profitable, I have zero LTV and I make no money ever.

Like those are very different scenarios and that you're playing with as a business. And so if you're a business like when we ran FC Goods and t here is no LTV and you have to be first order profitable. Like you can never sacrifice that line. That's the difference between a rule and a law.

A law is like if you break it, you go to jail. A rule is like you break it, you go to your room, right? Like Those are the different things. I try to draw those distinctions for my kids and our house, right?. It's like, there's a difference between running a red light and like they didn't listen to me, when they're brushing their teeth on time or something. And I think this is the same thing which is that if you have a business that you have to be profitable or you run out of cash, that's a law. You can't break it. You have to behave accordingly. But if it's like no this is just like margin of profit, then I would say default to the customer acquisition and the top line revenue growth.

[00:21:59] Richard: Yeah, that makes sense. Well actually I guess on this topic, is there anything else that you wanted to hit on? That you haven't said that needs to be said.

[00:22:05] Taylor: The only thing I would say is that macro indicators the dangers that they become a crutch.

Okay, is that they become the reason you can't succeed. And what I want to say is that I'm both putting this data forward to make people aware of the reality in which they are attempting to succeed but also our clients have expectations of us that it's like we have to succeed in light of that reality.

So we have to begin to think harder about the creative message and maybe that ad that would've worked in a different environment. It requires a little more in this one. Maybe we have to go deeper, further. It's just harder to accomplish the same task in this moment, in the way that running in the wind is, I guess, right?

Like, it's like you just have to do it. And so I think there's attention here to both acknowledge it so that you can build your expectations and behavior appropriately but not acknowledge it or look at it as a reason then to just go, well my results are gonna be shitty.

[00:22:58] Richard: Taylor. Appreciate your time. Thank you as always for joining me. Everybody out there listening make sure to leave a review that really helps us and we appreciate listening to the eCommerce Playbook podcast. And we'll see you next week.