Interview Transcript

Did the CAC change massively over the years?

Not massively, no. It was pretty stable. Like most companies, they find their level and they build their business around that level. When these things go wrong, for example, with Blue Apron, who are the US equivalent of Hello Fresh, it’s because you’ve looked at one metric and not the other. Blue Apron was a classic example where all the early adopters were people who were really into the cooking, great fit with the service, product market fit. They are great customers; the LTV and the CACs look great. Then they prepare to float and there is a pressure on to really demonstrate that the growth is continuing and, by the very nature, you are getting into the lower value customer, or the lower lifetime values, and people who are not quite as good a fit, but you’re still paying the same CAC for them. Maybe you are even paying more because you think there is some headroom in your lifetime value and suddenly you discover that your retention rates have gone through the floor, you’ve been far too aggressive in it. In any customer subscription business, you have that real balance between the quality and the rate of growth. To grow faster, you generally have to pay more for your customers; if you fall into that kind of trap then the whole thing can quickly unravel. At the same time that you are paying more, the lifetime values are coming down and, suddenly, your payback periods are infinite because you are not earning the money back.

If you have that discipline around the metrics, then you don’t that problem. You just need to be really clear about it.

I think Naked’s sales retention is roughly 80% to 83%, over the last few years. How do you compare that to other businesses? You mentioned Blue Apron or Hello Fresh; how did you really look at that?

To be honest, we didn’t. When you’re building the model about how fast we want to grow, there is a sales retention number which means, I know I can bank in, from what I currently have, what will still be around next year. You can have initiatives that improve that by various percentage points, through investments and features on site and things like that. Then you are really planning on, in order to grow sales, I need to recruit this number of customers and this is what they’re going to become, down the line.

So we didn’t really worry about that stuff. We just worried about whether we were growing sustainably. Any subscription business like this has a period where it is, essentially, profitable on a unit economic basis because I can track these cohorts and I can see that they are definitely profitable, but it’s not profitable overall because I’m still pumping a lot of money into recruiting new customers. Obviously, that only works if the new customers are as profitable as you think they are going to be.

We thought about it at that level, which was where were we on that curve? What level makes sense to go after? To come full circle, that leads to the Naked US stuff, which was just a huge opportunity. They were a very small part – admittedly, the biggest direct to consumer wine business – but in a country where direct to consumer wine was just going to be huge. There were just a lot more customers you could go after and know that the economics were just as good as they were now. You could really go after that, as a business, and that’s what the money from the Majestic sale went into, really expanding the US business as fast as we could.

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