September Was Rough. What Does That Mean for Q4?

[00:00:00] Richard Gaffin: Hey folks, welcome to the E-Commerce Playbook Podcast. I'm your host, Richard Gaffin, director of Digital Product Strategy here at CTC and joining me as, as he always does, is Taylor Holiday, c e o, here at CTC Taylor, what's going on today?

[00:00:12] Taylor Holiday: Just glad to be outta September. Glad to be into October.

[00:00:16] Richard Gaffin: That's right. Yes. So what we're talking about today is our most recent DTC Index that we released.

Of course, the DTC index is a aggregation of the 300 plus e-commerce brands that is are in our. Platform stat and every week our data scientists, Steve pulls some trends and sends 'em out in a newsletter. And then we also update a series of graphs on, on our website that break down the, or 27 different specific e-commerce metrics measuring them year over year, 28 days and trailing 12 months.

So all that to say, what the DTC index has told us this week is that September was a bad month. And I think anecdotally that's something that's being talked, talked about in the e-commerce industry right now, but our data actually substantiates that. And the title of this particular our newsletter this week is Wake Me Up.

Or Rather, will Customers Wake Up when September ends? A little, a little shout out to Green Day there. And I think that's pretty much what everybody's feeling right now is that new customer acquisition is. Maybe not at an all time low, but it's not doing great. And the way we wanna, kinda wanna frame this is with an anecdote on Twitter from or on x from Sean Frank, who's the c e o of Ridge who I'll, I'll just kind of sort of read this and maybe summarize it a little bit.

But he says, meta performance grapevine, colon. This is unsubstantiated hearsay from a dozen brands in one-off. Convos performance was worse in September than August. The second half of September was worse than the first half. The last week was worse. Overall, people can't spend at CPA target or have to cut spend to hit target.

This points to the consumer being in a weird place. Maybe student loans are hitting, maybe consumers just softening. He mentions too that ridge has been mostly unaffected, but that's because they're ending a sweepstakes right now. So they have an artificial bump, but across, across spend levels, industry, et cetera.

This September looks 10% worse than last year. And so he offers an explanation potentially, which is a GDP, in, in decrease when adjusting for inflation driven by weakening consumer demand. So whether he's right or wrong about that, I don't know. We can talk about it, but what I think the DTC index does and what's so great about it is it, it actually provides some substantiation.

To the hearsay in this particular tweet, which

[00:02:27] Taylor Holiday: That's right.

[00:02:27] Richard Gaffin: Sucked. So

[00:02:28] Taylor Holiday: We're here. We're here to substantiate the claims. Right. And I think that part of the role that we see ourselves as having in the industry is to help individual brand owners who stare all day at a single dataset, get context for their experience. Anytime that I see a lot of conversations relating to broader industry sentiment or performance across all of e-comm, I think there's an opportunity for us to give visibility into, certainly not the entire thing, but a meaningful sample of data that I think helps to provide some context.

And what's crazy about Sean's tweet, so he references a conversation with a dozen or so brands, is that it follows a pattern that is actually very, very consistent with what the data actually showed. So, you know, when we think about things being bad, there's lots of lenses that you can make that subjective determination on.

And depending on what you look at, you can craft different narratives. And so it's important that we. Acknowledge that we are constructing a narrative out of a set of information that could have different viewpoints, and having your own viewpoint is very useful. But what I mean by that primarily is that if we look at, let's just say revenue, revenue in the last 28 days, year over year is actually up 9%.

So if we stopped the story right there, sorry about the dog barking in the background, if we stopped the story right there, things are good. 10% annual increase, not too shabby. But you can't stop there, right? You've gotta really get into the composition of that revenue. And so some, here are some other key metrics.

For the last 28 days, year over year, spend up 4.55%, so m e r is also up then 2.29% CAC is down 4.42%. AOV is down 6.74%. Important to think about the relationship between those things. And that means that a m e r or new customer revenue over ad spend is down 5%. So if we start to see this, anytime we think about revenue composition, and we're gonna talk about this more soon in, in an episode where we think about forecasting, we're always looking at two things.

The performance of our existing customer revenue and the performance of our new customer revenue. And so what we start to see here is the underlying crack in the story about the revenue being up 9%, and it relates to . The new customer efficiency versus the existing customer revenue and how each of those played out as well.

[00:04:57] Richard Gaffin: Right. So there's you know, as, as the editor of the DTC Index newsletter, I feel equipped to talk about this, but there's so right. Revenue, the kind of like headline . Key metric is always revenue in the newsletter. And of course it is up 9%, almost 10%. And, but of course like when we break that down, there's a couple of things that we need to point to.

One is that new cus new customer revenue has dropped year over year. And not only has new customer revenue dropped, but a MER has also dropped as you pointed out, which is to say both revenue volume and revenue efficiency are down. Which is obviously not a good sign, but then returning customer revenue is up and it's up quite a bit.

It's actually up 20% year over year in the last 28 days. And of course, what that points to then is that we're sort of in a sponge squeeze situation, which is to say new customer acquisition is down across all the important metrics. Returning customer revenue is up, and this is another important point.

That Sean actually kind of references when he talks about the sweepstakes that Ridge has just finished running, which is that discounting is also significantly up year over year, which means we're relying on existing customer revenue and we're making more concessions to get them to return, which again, so it points to September being obviously a bad month for acquisition, which it always is.

But this year it's more so than than usual.

[00:06:18] Taylor Holiday: Right. And when you, and when you combine those factors, . New customer efficiency down, existing customer revenue up while discount rate up, you likely also have margin down, right, despite revenue being up. I'd be willing to bet if we pulled the P&Ls of this dataset that you'd see operating income now that's dependent on how they're handling opex, but at least contribution margin down year over year.

And that's, that's really important. So, yeah, you, you, you said it. This is, this is a squeeze the sponge moment where as brands are struggling to generate new customer revenue efficiently, they still have growth targets that they have to hit. And so what do they do when that happens? They go and they extract value outta the customers that they have, usually through promotion.

And that's, I think, a little bit of what we're seeing here.

[00:07:05] Richard Gaffin: Yeah. Okay. So one, one thing I wanna point out here is Pranav responds to your Twitter thread saying different years, same story. you say, I'm not sure it's the same. and so I mean, I think the thing he is pointing out is that there is a certain seasonality to this that is to be expected.

September is usually bad, honestly, it feels like, you know, July through October are usually pretty bad. So that's nothing new. But what do you feel is different about this year?

[00:07:29] Taylor Holiday: So I think we're looking at year over year comps and we're literally describing the differences in the year. So, so, so, yeah. So in that sense, I, I, so I understand it. I think you're right in that the sentiment is that it's September and October. We have to remind ourselves that there is no natural calendar-based demand moment that drives the economy into, and customers into large purchase volume in this moment.

But I think the real thing is like a 28% . Difference in discount rate here over year is a big number, right? It speaks to a different set of behavior. In the customer or in the brands in the way that they're selling their product. And I, you know, we don't have marginal contribution margin for this, this data, but we are going to soon.

That's a thing we're working hard on because I think it really does actually illustrate the key story here, which is, are we generating dollars in our bank account as a business? And I, I would be concerned about that. So that's, I think to me why it's not exactly the same year over year is that last year we had

More efficient new customer acquisition, or basically the same volume, but at more efficient levels and less dependence on discount, which means more marginal dollars. So in overall, that's a better setup, especially as you head into the period where you're supposed to be saving that discount extraction sponge squeeze for two months from now, not realizing it today.

[00:08:44] Richard Gaffin: Right. And I think, you know, one other significant difference, and I think this is the thing that, that Sean is pointing out in his tweet when he, when he starts to speculate about the reason why September was especially bad, is that there's probably, or it, it points towards there being some sort of macroeconomic reason why this year is different or worse than last year.

And like you point out, yeah, the discount rate is significantly up. The, the reliance on returning customer revenue is also significantly up. So that means it's not, it's not nothing. What he points to is a little bit is a drop in consumer confidence. Interestingly, our D to c i, which is our direct to consumer confidence index points to September actually being, or consumer confidence, being at a pretty low ebb in August and actually coming up to a year long, high, I think as of last week.

So, That's not necessarily the case, but what, what do you think? Like what is your speculation on the reasons behind this?

[00:09:39] Taylor Holiday: Well, so this, this is why I am actually. Least interested in being the person that's gonna say why. I, I really wanna be the provider of what so we wanna provide with clarity what is happening. And then the inference is like the thing for, you know, what we do over a beer or some whiskey in a fire pit, right?

Like that's, that's the stuff where we all have to sort of acknowledge that we're out on a limb when we start to begin to. Provide conjecture as to what, why everything is happening. But yeah, I think there is a really weird corresponding data point is that the DTCCI, so our direct to Consumer competence index, as you mentioned in the week of September 18th through 24, hit a 1 0 8, which is the highest recorded number that we've ever plotted in.

You know, I think we're like what, five months into to tracking the data or so. But the DTCCI tends to be . Predictive of the coming m e r, right? And so we even saw m e r respond back, so it, it actually tends to be a signal that it's going to be better. And if you look at the week leading up to September 24th, we also hit in the week of the first week of September, 89.38.

So a really low number. Right. So you see that where it's predictive of m e r in the future. So the DTCCI would tell us that that coming weeks in October actually show promise for the consumer. So it's worth tracking and seeing, seeing what happens here. But I, I would just caution, I love the parts of Sean's tweet.

I think he gets a little out onto a limb when he starts getting into why and what that means for the future. But it certainly is choppy and it's worth keeping an eye on.

[00:11:16] Richard Gaffin: Yeah. Okay. So if, if, you know the point of this is not speculation and simply to examine the facts, what do you think is the lesson here? Or is there any, what, what action step do you think is suggested by this trend?

[00:11:29] Taylor Holiday: so what I love, and I think Sean gives it away at the end of his tweet, he, he tells you like, Hey, all this macro stuff, it didn't really affect us because we cr we created an artificial outcome through this, the giveaway, I think they give away a Land rover or whatever the heck they were doing. And this is it.

This is the secret, is the way that you move independent, the macroeconomic environment, is you manufacture demand. You create it by creating artificial moments that don't depend on the cultural calendar. And we would call this four Peaks theory. This is saying September and October. There's not a natural demand.

Maybe you're grabbing Labor Day, but after, after Labor Day, there's a real dry spell of nothing to talk about for a minute. Unless you're in back to school or so, have some other built in calendar demand. You've gotta make one. It's your job to create it. And it's funny, I, similar thing, and I've referenced back to this now a couple times, because sitting with him, like just the, the wisdom per minute from Bennett at True Classic Tease, when we were on that panel together, he also brought up that like, hey, we don't really care about the, the macro environment that we exist in.

'cause we believe it's our job to succeed regardless. And that's, I think, the thing that. It's important to understand the context in which we exist, so DTCCI and these other elements. 'cause they, they represent how easy or hard the job to do is, I think. But it doesn't actually change the task at hand.

Growth is still your responsibility. Success is still your obligation, and you have to do that in spite of the economy. And the way that you do that is that when demand isn't created externally, you manufacture it internally. And I think as a business, that's the secret to all of this, is that hidden amongst the conversation that's sort of like, look over here in John's tweet is this little thing at the end that says like, but we are unaffected.

We are unaffected because we manufacture the demand with storytelling and promotion and, and concepting ways to, to create demand, what doesn't naturally exist.

[00:13:23] Richard Gaffin: Yeah. Well, I think, I think a funny thing too about that is, is phrasing makes it seem like almost . The fact of the bump being artificial is a negative. Right? Rich has been mostly ineffective, but that's because we're ending our sweepstakes. We have an artificial bump. This is, it's like this is fake. This is a bandaid.

We, we just kind of got lucky is sort of the implication there. But actually I think what we're saying here is that I. You have to create artificial demand, like you don't really have another choice. So in fact, that's a good thing. The, you know, the 20% increase in discounts year over year is not necessarily bad, even though, you know, obviously we like to caution against discounting too much.

But I think like all you need to know is that there will be a consequence that you have to deal with in the future in terms of this sponge being squeezed. But that doesn't necessarily mean, maybe this is what you're saying that. Squeezing the sponge is a bad thing, or even it's even a necessary thing right now,

[00:14:16] Taylor Holiday: Yeah, I mean, look, sometimes you have to realize the revenue today because the cash needs of your business demand it. And basically what you're doing is you're kicking the new customer acquisition problem out 30 days and you're surviving, and that's part of it. Pay worth had a horrible month in September and we, we went after a promotion towards the end of the month that are trying to do some things like And so sometimes you're just saying, I need to survive today and I need to solve new customer acquisition problem tomorrow. But that doesn't alleviate the reality of that problem. And if you deceive yourself into thinking, oh, we did this great job. We, we meet up, we, we got to 9% revenue growth in the month of September.

This is why this like discipline cohort specific L T V forecasting will always drive you to this understanding that if I don't refill the sponge, if I don't increase the size of my active customer file. Future revenue will suffer. And so at some point you're gonna have to reconcile that problem, and it probably means lower m e r less profit for a month as you reinvest in new customer acquisition.

[00:15:15] Richard Gaffin: Gotcha. Alright, well, , is there anything else you wanna hit on this?

[00:15:20] Taylor Holiday: I, I would just say like, look, we're, we're heading into Q4. There's a bunch of tropes that you're gonna hear, but one of them that's very real is that you, the work you do today is the prophet. You realize Black Friday, cyber Monday, and if you, if you pull back now, If you do, there will be a consequence to it.

The same customers can't be offered a sale in September, October, November and December. Like they're gonna act on one of them, and they probably don't need your product every time that you do it. And so you only can pull revenue forward so many times before it doesn't exist that when you go to get it at the peak moment.

[00:15:53] Richard Gaffin: mm-hmm.

[00:15:53] Taylor Holiday: so I think that just, I would caution against that. I would dig deep in figuring out what could we say right now that matters. How do we create a moment? How do we figure out a way to plug ourself into the cultural zeitgeist? Maybe you get, you know, Travis Kelsey to wear your outfit to the next football game when he is dating Taylor Swift or whatever.

Or you get Dionne Sanders to wear your glasses on the, the sideline. Like we've seen lots of ways in which moments have been created across e-commerce. In the last. Last 30 days. So it's your job as a marketer to figure those out. And I don't say that frivolously. I know how hard it is and I know the challenges facing it.

We're living it alongside you in Bamboo Worth, but that's what we have to go and do. And there will be a price to pay if you just squeeze the sponge now and that that will come at what's supposed to be your most profitable moment of the year.

[00:16:35] Richard Gaffin: Gotcha. All right. Yeah, it's I mean, I think the moral of the story here is that it's a, a tough line to walk. Like for in, in this time, you're gonna have to generate revenue in whatever way you can, just because it's a downtime, but at the same time, there's gonna be a consequence and it's just about preparing for that.

All right. Well, I think that's a. Short and sweet. I don't know if there's anything else particularly to hit on this, but two things. One, subscribe to the DTC index so you can get this type of update. We're gonna be talking about it. I think the plan is to talk about it at least once a month. Talk about the sort of trends, things that have happened in the previous month and what that might mean for the upcoming month, upcoming quarter.

And then the other thing we wanna mention too, of course, the Black Friday Cyber Monday database. Offer databases for sale right now when we think about prepping for Q4 and making sure that that discount is the one that really counts, it's all about going in and seeing what people have done in the past and developing your own strategy for how that's gonna work.

So it's, as a reminder, it's a huge database. 700+ offers from 2022 and 3,000+ screenshots of all those offers as well. Go check it out on common thread co.com. We'll also have a link in the show notes to get it, and then also a link. To the D D C index, please subscribe. Yeah, I think that'll do it for this week.

Y'all take care of. We'll see you next week.