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We are in an age of the "hurry let's IPO before they realize our customer acquisition costs are unsustainable" IPO. Take Blue Apron, for instance. They stated

We are in an age of the "hurry let's IPO before they realize our customer acquisition costs are unsustainable" IPO. Take Blue Apron, for instance. They stated their blended Cost Per Customer is $94 in their prospectus, this # has been parroted all over the place. This little piece of "hope the Analysts dont dig in" masks their most recent quarter costs which exploded to $460 per customer. (1) This is a classic, groupon-like example of somebody figuring out a really profitable niche that's easily duplicate and relies almost entirely on paid media to drive acquisition. The efficiency and sheer scale of todays' online advertising market means that if you're armed with a shit ton of cash you can buy your way into public-market growth. Sustainable it is not. No wonder they don't bother reporting a pesky little detail like "churn" in their prospectus (2) I wonder how much longer companies will be able to get away with this game. (1) https://www.recode.net/2017/6/1/15727182/blue-apron-ipo-s1-analysis-customer-acquisition-marketing-churn https://www.recode.net/2017/6/1/15727182/blue-apron-ipo-s1-a... (2) https://www.forbes.com/sites/neilstern/2017/06/05/meal-prep-pioneer-blue-apron-preps-for-an-ipo/#760d979313ef https://www.forbes.com/sites/neilstern/2017/06/05/meal-prep-...

Mizza 9y ago
Even $94 seems high to me, but $460?! I don't have any context for those figures though, does anybody know of a common cost per customer acquisition across industries/products? Maybe my intuition as a humble programmer is way off, but that seems incredibly high.
- ChuckMcM 9y ago
  The only way you can evaluate customer acquisition costs is to have the other number their lifetime value (LTV). In a 'goods' business it costs you $X to make the good and sell it (COGS) and people who buy it (after averaging sales, incentives, etc) as the average selling price (ASP), so to the extent that ASP > COGS you make money selling your widgets. A service business like this (or cable TV or whatever) has a customer acquisition cost (CAC), or the cost to get someone to sign up. and a life time value (LTV) which is the amount that customer will spend with you over the lifetime of their relationship with you. To the extent that LTV > CAC it tells you whether or not the business is viable. In both cases, when the ratios are wrong, the company loses money faster by either selling more widgets or getting more customers.
  - Mizza 9y ago
    This is of course a good explanation, but I'm actually just curious about the _magnitude_ of the actual numbers here, and across other industries.
    - 55555 9y ago
      Affiliate networks will tell you what companies are willing to really pay for a lead, customer, etc. You really need to know BA's churn and LCV etc., though. Nutrisystem pays $140 to affiliates per new customer and gets about $12 in revenue daily from the customer. That is sort of relevant. I wouldn't personally put any money into Blue Apron. They are hiding their churn and dressing up their numbers. I suspect they will blow up or fizzle out.
      - eldavido 9y ago
        Are they? What would "not hiding" it look like, a clear statement of it in their S-1, of the form "X is our churn rate?" I'm just not sure what people want. They show cohorts and give a lot of data on aggregate performance, but I agree, the lack of clarity is a bit alarming. Is there some kind of precedent people are comparing this to, a membership-style S-1 with clearer statement of what's going on?
        rhizome 9y ago
        What would "not hiding" it look like I'm guessing it would take the form of higher prices.
    - ethanhunt_ 9y ago
      Not sure if LTV for blue apron is in their IPO docs or not, but to put that number into perspective: their cheapest plan is $60 per week, so if they hold onto a customer for 6 months, that $1560. 20% profit margin would mean $312. No idea if those numbers are anywhere close to correct. The magnitude of CAC and LTV are only meaningful together. A ferrari dealership might have a $5000 cost to acquire a customer and that would be a bargain, because their LTV is $250k+.
- ithinkinstereo 9y ago
  Wow at $460 CAC you'd have the retain the customer for well over a year before you made that back (assuming 2 weeks of Blue Apron at $60/week per month with ~30% margin).
  - doublerebel 9y ago
    That length of time is rather normal in SaaS.
    - kalleboo 9y ago
      It's a lot easier to forget to cancel a software product you don't use than to ignore all the rotting groceries piling up in your kitchen.
    - jamesash 9y ago
      Maybe this comment points to a larger misconception: that some people will fall into the trap of analyzing Blue Apron as something of a tech company?
    - erdle 9y ago
      Which is why they targeted tech investors for money... people that know what they're doing wouldn't touch it.
- mcpherrinm 9y ago
  I'm not 100% sure this is the right way to calculate costs, but those numbers seem reasonable to me: You give people their first shipment free, which you'd normally charge $60 1-in-3 people continue after that, so your cost to acquire 1 customer was $90. Tack on an extra $4 for the ads that got them to sign up. If 1-in-7 people continue, you get into the 400s. Those numbers seem pretty believable to me.
  - mattmanser 9y ago
    What you charge $60 for shouldn't cost you $60, but I generally support the point. I think you're downplaying the $4.
    - naravara 9y ago
      I think he's talking in terms of unrealized revenue, not cost of production.
    - naravara 9y ago
      I think he's talking in terms of unrealized revenue, not cost of production.
  - deleted 9y ago
    [deleted]
  - clay_to_n 9y ago
    Plus all the initial marketing costs to get those people to sign up in the first place. Which, for an expensive service like this, where very few people are interested, seem significant.
    - clay_to_n 9y ago
      (Not to imply that it's a bad service - just meaning that the CAC is a lot higher for Blue Apron than an iOS app - they have fewer, but more valuable, customers.)
- godzillabrennus 9y ago
  The acquisition cost number is irrelevant. It could be $5,000.00! All that matters is you make money from the customer after all the expenses are taken into account. It's like the old adage: would you give me a quarter if I give you a dollar?
- eldavido 9y ago
  To throw some actual _data_ into this conversation: From the S-1, this is a 68% COGS business, meaning their unit margins are 32%. You can debate whether some of their opex belongs above or below the line, but let's assume the 32% number is baseline credible. The business had 4.1 orders/customer last quarter with an average order value of $57.23, meaning 73.21 of gross profit per customer. That means they recoup their marketing spend in 6 quarters. The big questions, in my mind, are (1) will people continue to be customers after a period of time and (2) will CAC stay the same, rise, or fall? I think there's more room for disagreement here than people admit. I haven't looked too closely at their IPO pricing, but there is some amount I would pay for a share of stock in this company - it's >$0. I'm just not sure how that number compares to the current share price.
  - jamesash 9y ago
    From yesterday WSJ: "Daniel McCarthy, a professor of marketing at Emory University, analyzed Blue Apron’s numbers and estimated that roughly 60% of customers stop using the service after six months." https://www.wsj.com/articles/blue-apron-chops-its-ipo-price-range-1498652104 https://www.wsj.com/articles/blue-apron-chops-its-ipo-price-...
    - Declanomous 9y ago
      I can't read WSJ, so I don't know if they address this, but I wouldn't be surprised if people find favorite recipes over time and then just go to the store and buy the ingredients. I've never tried Blue Apron, but that seems pretty likely given their business model.
    - naravara 9y ago
      It makes sense. My girlfriend and I have been doing it for about a month. We like the variety, the sense of surprise, and the ingredients are actually fresher than most of the produce at our grocery stores so the price per meal is almost worth it. (Though we'd prefer bringing it down to about $7 per rather than $10. Where the value falls down is in how much of a time sink it is. These meals take a fair amount of prep, and in exchange for all that time you only get two meals. When I cook on my own I usually batch enough to have at least another 2-3 meals worth of leftovers. If they set it up as a channel for weekly meal prep rather than 3 fun new recipes to try we'd be much more inclined to stick with it, but as it is it's just too much work for busy people to do every week.
- hkmurakami 9y ago
  Think of insurance. It has the highest Google keyword cost of any industry iirc. Something like $200+ CPC since LTV is so high.
  - brianwawok 9y ago
    Some lawyer terms are 1000 per click. They win the cpc war. Stuff like personal injury lawyer.
- erdle 9y ago
  ask/follow this guy: http://blog.minethatdata.com/ http://blog.minethatdata.com/
- marrone12 9y ago
  So the higher the pricepoint of the item, the harder it is to actually acquire a customer. To convince someone to buy subscription to a $60 box of food is quite the endeavor. You also need to be wary about how they exactly calculate CPAs based on ad buys. For instance, if they just comissioned a large scaled TV ad buy, that's millions of dollars they have to pay now. TV advertising has a long tail of user acq as it takes time for the message it wear in to a user. So if those millions hit in the billed quarter, they could still get customers in a later period and the CAC would change.
  - shostack 9y ago
    Channel-specific CPAs become very fuzzy and downright misleading the higher up the intent funnel you get. Things like display, TV, etc. are notoriously difficult to measure the exact impact of. Thus, looking at all marketing expenses rolled up is really the only safe way to capture all that value for this sort of math.
- ozi 9y ago
  I work for a B2B SaaS startup and it costs us around $1500 to find, acquire, and onboard a client that brings in a minimum of $5K/yr. That cost is projected to approach $500 over the next 24 months.
  - speedplane 9y ago
    What's your point here? That your company is better than Blue Apron? If so, go get em!
physcab 9y ago
Average revenue per customer is flat. Marketing costs increasing. Average repurchase rate seems to be flat. Yikes. Also this: > [W]e anticipate adding additional products and increasing the portion of our marketing expenses focused on brand awareness and customer retention in order to drive increased customer engagement and growth in our net revenue from existing customers When marketing is for "brand awareness" and "customer retention" that reads "we don't know how to acquire new customers profitably so the problem must be our brand". And brand awareness marketing is _very_ expensive.
- tedmiston 9y ago
  Honestly repurchase rate being flat is kind of surprising as they make it extremely difficult to cancel and even shadily dodge requests to cancel by deferring you for a long period of time instead until a surprise shipment you didn't ask for shows up. The reality check is a good thing for a business that thinks it's okay to treat their customers like that.
  - ghaff 9y ago
    I didn't have any trouble canceling after one order but the subscription aspect is definitely something I don't like about most of these services. To the degree I use them at all it's going to be on an occasional basis when it fits with my mood and my schedule. Trust me. If I want to send you $60 for some pre-kitted meals, you'll be the first to know. I absolutely do not want to have to remember to opt-out of some subscription service.
- shostack 9y ago
  Sorry, but I strongly disagree. As a company grows it may indeed find diminishing returns from scaling direct response channels that previously performed well. However spending to build brand awareness is what helps you reduce costs long term. If your brand is synonymous with the category, you win. It gets you more direct, referral and organic traffic, gets the press writing about you, gets review sites comparing you, etc. It is most definitely expensive, but can be critical to the long term success of a company once they reach a certain size. This is also doubly important in commoditized markets since brand is really the only thing that distinguishes you.
fullshark 9y ago
Better than the age of "never IPO that way our employees can't cash out their shares and leave".
- rhizome 9y ago
  A private company is not prohibited from profit-sharing or giving bonuses based on vested equity.
- erdle 9y ago
  Caveat emptor all around. An interview goes both ways.
- paulddraper 9y ago
  Non sequitur. You can both (a) cash out shares and (b) leave without an IPO. Heck, normally the company itself will buy back the shares. If they don't, they're not bullish on their future and I wouldn't be either.
dhebenudr 9y ago
It's a great time for customers to take advantage of these offers though. I've used over $1000 of Postmates promotional credit and ordered dinners from far-away restaurants that I'd never have the energy to drive to. $15 dinner item with waived $27 delivery charge? Yes please!
- deleted 9y ago
  [deleted]
- FTA 9y ago
  Essentially VC is subsidizing part of America's goods then. We could always skip the middlebusiness and just go straight to universal income paid for by these firms.
  - ebiester 9y ago
    But universal income will be used by poor people to buy essentials that have low profit margins, rather than an addiction by wealthy people to high profit margin services.
  - noway421 9y ago
    Ah truly Silicon Valley is at the bleeding edge of social benefit!
  - mason55 9y ago
    Yes, Matt Yglesias once said Amazon is "a charitable organization being run by elements of the investment community for the benefit of consumers"
    - michaelchisari 9y ago
      I really don't see the kind of aggressive growth plan and opportunities that Amazon chased after being pursued by many of these current startups. Amazon, Google, Facebook, they all quickly learned that their current model couldn't sustain their pie-in-the-sky valuations, so they pushed outwards in multiple directions. Blue Apron, as an example, doesn't seem to be doing that. And may not be capable of it. If they had a plan to use their valuation to purchase, automate and control the whole farm-to-table product chain, all while building up advanced technical services that can be sold to other tech companies and startups, that might be a different story. But I'm very skeptical that's the case.

Mizza 9y ago

Even $94 seems high to me, but $460?! I don't have any context for those figures though, does anybody know of a common cost per customer acquisition across industries/products? Maybe my intuition as a humble programmer is way off, but that seems incredibly high.

ChuckMcM 9y ago
The only way you can evaluate customer acquisition costs is to have the other number their lifetime value (LTV). In a 'goods' business it costs you $X to make the good and sell it (COGS) and people who buy it (after averaging sales, incentives, etc) as the average selling price (ASP), so to the extent that ASP > COGS you make money selling your widgets. A service business like this (or cable TV or whatever) has a customer acquisition cost (CAC), or the cost to get someone to sign up. and a life time value (LTV) which is the amount that customer will spend with you over the lifetime of their relationship with you. To the extent that LTV > CAC it tells you whether or not the business is viable. In both cases, when the ratios are wrong, the company loses money faster by either selling more widgets or getting more customers.
- Mizza 9y ago
  This is of course a good explanation, but I'm actually just curious about the _magnitude_ of the actual numbers here, and across other industries.
  - 55555 9y ago
    Affiliate networks will tell you what companies are willing to really pay for a lead, customer, etc. You really need to know BA's churn and LCV etc., though. Nutrisystem pays $140 to affiliates per new customer and gets about $12 in revenue daily from the customer. That is sort of relevant. I wouldn't personally put any money into Blue Apron. They are hiding their churn and dressing up their numbers. I suspect they will blow up or fizzle out.
    - eldavido 9y ago
      Are they? What would "not hiding" it look like, a clear statement of it in their S-1, of the form "X is our churn rate?" I'm just not sure what people want. They show cohorts and give a lot of data on aggregate performance, but I agree, the lack of clarity is a bit alarming. Is there some kind of precedent people are comparing this to, a membership-style S-1 with clearer statement of what's going on?
      - rhizome 9y ago
        What would "not hiding" it look like I'm guessing it would take the form of higher prices.
  - ethanhunt_ 9y ago
    Not sure if LTV for blue apron is in their IPO docs or not, but to put that number into perspective: their cheapest plan is $60 per week, so if they hold onto a customer for 6 months, that $1560. 20% profit margin would mean $312. No idea if those numbers are anywhere close to correct. The magnitude of CAC and LTV are only meaningful together. A ferrari dealership might have a $5000 cost to acquire a customer and that would be a bargain, because their LTV is $250k+.
ithinkinstereo 9y ago
Wow at $460 CAC you'd have the retain the customer for well over a year before you made that back (assuming 2 weeks of Blue Apron at $60/week per month with ~30% margin).
- doublerebel 9y ago
  That length of time is rather normal in SaaS.
  - kalleboo 9y ago
    It's a lot easier to forget to cancel a software product you don't use than to ignore all the rotting groceries piling up in your kitchen.
  - jamesash 9y ago
    Maybe this comment points to a larger misconception: that some people will fall into the trap of analyzing Blue Apron as something of a tech company?
  - erdle 9y ago
    Which is why they targeted tech investors for money... people that know what they're doing wouldn't touch it.
mcpherrinm 9y ago
I'm not 100% sure this is the right way to calculate costs, but those numbers seem reasonable to me: You give people their first shipment free, which you'd normally charge $60 1-in-3 people continue after that, so your cost to acquire 1 customer was $90. Tack on an extra $4 for the ads that got them to sign up. If 1-in-7 people continue, you get into the 400s. Those numbers seem pretty believable to me.
- mattmanser 9y ago
  What you charge $60 for shouldn't cost you $60, but I generally support the point. I think you're downplaying the $4.
  - naravara 9y ago
    I think he's talking in terms of unrealized revenue, not cost of production.
  - naravara 9y ago
    I think he's talking in terms of unrealized revenue, not cost of production.
- deleted 9y ago
  [deleted]
- clay_to_n 9y ago
  Plus all the initial marketing costs to get those people to sign up in the first place. Which, for an expensive service like this, where very few people are interested, seem significant.
  - clay_to_n 9y ago
    (Not to imply that it's a bad service - just meaning that the CAC is a lot higher for Blue Apron than an iOS app - they have fewer, but more valuable, customers.)
godzillabrennus 9y ago
The acquisition cost number is irrelevant. It could be $5,000.00! All that matters is you make money from the customer after all the expenses are taken into account. It's like the old adage: would you give me a quarter if I give you a dollar?
eldavido 9y ago
To throw some actual _data_ into this conversation: From the S-1, this is a 68% COGS business, meaning their unit margins are 32%. You can debate whether some of their opex belongs above or below the line, but let's assume the 32% number is baseline credible. The business had 4.1 orders/customer last quarter with an average order value of $57.23, meaning 73.21 of gross profit per customer. That means they recoup their marketing spend in 6 quarters. The big questions, in my mind, are (1) will people continue to be customers after a period of time and (2) will CAC stay the same, rise, or fall? I think there's more room for disagreement here than people admit. I haven't looked too closely at their IPO pricing, but there is some amount I would pay for a share of stock in this company - it's >$0. I'm just not sure how that number compares to the current share price.
- jamesash 9y ago
  From yesterday WSJ: "Daniel McCarthy, a professor of marketing at Emory University, analyzed Blue Apron’s numbers and estimated that roughly 60% of customers stop using the service after six months." https://www.wsj.com/articles/blue-apron-chops-its-ipo-price-range-1498652104 https://www.wsj.com/articles/blue-apron-chops-its-ipo-price-...
  - Declanomous 9y ago
    I can't read WSJ, so I don't know if they address this, but I wouldn't be surprised if people find favorite recipes over time and then just go to the store and buy the ingredients. I've never tried Blue Apron, but that seems pretty likely given their business model.
  - naravara 9y ago
    It makes sense. My girlfriend and I have been doing it for about a month. We like the variety, the sense of surprise, and the ingredients are actually fresher than most of the produce at our grocery stores so the price per meal is almost worth it. (Though we'd prefer bringing it down to about $7 per rather than $10. Where the value falls down is in how much of a time sink it is. These meals take a fair amount of prep, and in exchange for all that time you only get two meals. When I cook on my own I usually batch enough to have at least another 2-3 meals worth of leftovers. If they set it up as a channel for weekly meal prep rather than 3 fun new recipes to try we'd be much more inclined to stick with it, but as it is it's just too much work for busy people to do every week.
hkmurakami 9y ago
Think of insurance. It has the highest Google keyword cost of any industry iirc. Something like $200+ CPC since LTV is so high.
- brianwawok 9y ago
  Some lawyer terms are 1000 per click. They win the cpc war. Stuff like personal injury lawyer.
erdle 9y ago
ask/follow this guy: http://blog.minethatdata.com/ http://blog.minethatdata.com/
marrone12 9y ago
So the higher the pricepoint of the item, the harder it is to actually acquire a customer. To convince someone to buy subscription to a $60 box of food is quite the endeavor. You also need to be wary about how they exactly calculate CPAs based on ad buys. For instance, if they just comissioned a large scaled TV ad buy, that's millions of dollars they have to pay now. TV advertising has a long tail of user acq as it takes time for the message it wear in to a user. So if those millions hit in the billed quarter, they could still get customers in a later period and the CAC would change.
- shostack 9y ago
  Channel-specific CPAs become very fuzzy and downright misleading the higher up the intent funnel you get. Things like display, TV, etc. are notoriously difficult to measure the exact impact of. Thus, looking at all marketing expenses rolled up is really the only safe way to capture all that value for this sort of math.
ozi 9y ago
I work for a B2B SaaS startup and it costs us around $1500 to find, acquire, and onboard a client that brings in a minimum of $5K/yr. That cost is projected to approach $500 over the next 24 months.
- speedplane 9y ago
  What's your point here? That your company is better than Blue Apron? If so, go get em!

physcab 9y ago

Average revenue per customer is flat. Marketing costs increasing. Average repurchase rate seems to be flat. Yikes. Also this: > [W]e anticipate adding additional products and increasing the portion of our marketing expenses focused on brand awareness and customer retention in order to drive increased customer engagement and growth in our net revenue from existing customers When marketing is for "brand awareness" and "customer retention" that reads "we don't know how to acquire new customers profitably so the problem must be our brand". And brand awareness marketing is _very_ expensive.

tedmiston 9y ago
Honestly repurchase rate being flat is kind of surprising as they make it extremely difficult to cancel and even shadily dodge requests to cancel by deferring you for a long period of time instead until a surprise shipment you didn't ask for shows up. The reality check is a good thing for a business that thinks it's okay to treat their customers like that.
- ghaff 9y ago
  I didn't have any trouble canceling after one order but the subscription aspect is definitely something I don't like about most of these services. To the degree I use them at all it's going to be on an occasional basis when it fits with my mood and my schedule. Trust me. If I want to send you $60 for some pre-kitted meals, you'll be the first to know. I absolutely do not want to have to remember to opt-out of some subscription service.
shostack 9y ago
Sorry, but I strongly disagree. As a company grows it may indeed find diminishing returns from scaling direct response channels that previously performed well. However spending to build brand awareness is what helps you reduce costs long term. If your brand is synonymous with the category, you win. It gets you more direct, referral and organic traffic, gets the press writing about you, gets review sites comparing you, etc. It is most definitely expensive, but can be critical to the long term success of a company once they reach a certain size. This is also doubly important in commoditized markets since brand is really the only thing that distinguishes you.

fullshark 9y ago

Better than the age of "never IPO that way our employees can't cash out their shares and leave".

rhizome 9y ago
A private company is not prohibited from profit-sharing or giving bonuses based on vested equity.
erdle 9y ago
Caveat emptor all around. An interview goes both ways.
paulddraper 9y ago
Non sequitur. You can both (a) cash out shares and (b) leave without an IPO. Heck, normally the company itself will buy back the shares. If they don't, they're not bullish on their future and I wouldn't be either.

dhebenudr 9y ago

It's a great time for customers to take advantage of these offers though. I've used over $1000 of Postmates promotional credit and ordered dinners from far-away restaurants that I'd never have the energy to drive to. $15 dinner item with waived $27 delivery charge? Yes please!

deleted 9y ago
[deleted]
FTA 9y ago
Essentially VC is subsidizing part of America's goods then. We could always skip the middlebusiness and just go straight to universal income paid for by these firms.
- ebiester 9y ago
  But universal income will be used by poor people to buy essentials that have low profit margins, rather than an addiction by wealthy people to high profit margin services.
- noway421 9y ago
  Ah truly Silicon Valley is at the bleeding edge of social benefit!
- mason55 9y ago
  Yes, Matt Yglesias once said Amazon is "a charitable organization being run by elements of the investment community for the benefit of consumers"
  - michaelchisari 9y ago
    I really don't see the kind of aggressive growth plan and opportunities that Amazon chased after being pursued by many of these current startups. Amazon, Google, Facebook, they all quickly learned that their current model couldn't sustain their pie-in-the-sky valuations, so they pushed outwards in multiple directions. Blue Apron, as an example, doesn't seem to be doing that. And may not be capable of it. If they had a plan to use their valuation to purchase, automate and control the whole farm-to-table product chain, all while building up advanced technical services that can be sold to other tech companies and startups, that might be a different story. But I'm very skeptical that's the case.