The CQ: The Importance of Whale Watching
Sometimes, 80% of revenue is driven by 20% of customers; companies need to diligently track and serve those top-tier supporters.
The CQ is Forerunner’s weekly newsletter covering the most pressing consumer trends and analysis, as well as business-building insights from our investment team. Subscribe now to get the latest edition in your inbox every Saturday.
Buzzing at the Forerunner Office…
Know the Difference Between ‘Whales’ and ‘Piranhas’
By Jason Bornstein, Principal
While at Forerunner, I’ve experienced the cycle of investing for growth across categories and business stages, followed by the important transition to demonstrating profitability. An often overlooked topic that consistently inspires the teams I partner with, especially during challenging times, is that of a brand’s top customers. Which customers are most engaged with your brand? And how well do you know them?
Call them “whales” or “superfans,” it's a common rule of thumb that companies can see 20% of customers drive 80% of revenue, and potentially an even greater portion of profits. Identifying top customers, treating them well, and prioritizing how to find more of them can reorient a team cross-functionally around high-impact initiatives and help them develop a deeper understanding of the business. During my time at Bonobos, this reorientation originated from an epic “whale” presentation that detailed characteristics of the brand’s highest spenders and most loyal fans. A top-customer mindset shifted us toward identifying the exceptionally valuable customers that purchased in our Guideshops and catalog, and in turn, would build conviction in our opening dozens of doors over the coming years and scaling our catalog from a small test to our largest acquisition channel. For other companies in our portfolio, like outdoor home brand Sunday, the top-customer conversation has centered around which cohort of customers is least likely to churn. Are customers who spend more money less likely to churn? Are customers who attach more products to their subscription less likely to churn? Are customers with larger or smaller yards less likely to churn?
While the circumstances might be different, the efforts at Bonobos and Sunday were not dissimilar from what brands are experiencing in today’s market where burn, headcount, and prioritization have come into the foreground. Realistically, all of a brand’s customers will not have the potential to be top customers. But brands must ensure that the lower-value “piranha” customers are not too much of a drag on the business that teams lose the ability to control their own destiny—because there are certainly consumers out there that will create new accounts to reuse discount codes, or customers who will buy steeply discounted items and return often. These customers will have a negative impact on a brand’s contribution margin, and the best course of action is to take steps to mitigate the downside while focusing on the upside of top customers. This might mean revising your customer service policies with an eye toward remaining best-in-class, while narrowing the guardrails: shortening return windows, adding a free shipping threshold, adding final sale, and switching refunds to store credit after a certain number of days.
One thing most brands could do better is to identify the top 20-40% of customers who have the highest potential to shift up to the top 20%. This is where the acquisition team hands off to the retention team, and the magic starts to happen. Top customers will often emerge on their own through spend volume, purchase frequency, acquisition channels, and love on social. It’s the next tier down that can use extra attention, where initiatives can have the highest impact. Of course, the threshold for what makes a customer land in the top 20%—or that top 20-40%—shifts as the business grows, so it’s important to mind which customers are profitable and which customers have the most potential. Treat them well, don’t take them for granted, and focus on retaining them. “Whales” will play an outsized role in the success of your business.
This Week’s Top 10 Consumer Insights
The consumer is expected to finally slash personal spend beginning as early as Q4. This week, KKR predicted personal consumption growth will continue to decline over the next 12 months amid the perfect storm of inflation, decreasing disposable income, equity market volatility, and a decline in general consumer sentiment.
As Covid fears finally dwindle, travel has changed a lot in a year. Airbnb netted $379M in the second quarter—a significant increase from the $68M loss it took in Q2 of last year. Average daily rates are up 40% compared to 2019, and the 103M nights and experiences booked last quarter are a record high.
Is the job market finally showing signs of cooling to match the headlines about job cuts and rescinded offers? LinkedIn reports that hiring was down 1.5% in July compared to June, decreasing 8.1% compared to the same time last year.
A “Boomer Blockade”? According to The Atlantic, Baby Boomers are staying in their jobs longer—sometimes well into their 70s and 80s—which has prevented many Gen X and Millennial workers from getting coveted promotions and executive roles.
Not cutting back, but certainly cutting costs. Amid rising menu prices, The Restaurant Group, which owns Burger King (among other chains), has been observing a trend that consumers are redeeming more coupons and loyalty points. Customers are still ordering the same menu items–they’re just staying conscious about costs.
Restaurant Week in NYC will now last 30 days. The move is intended is to help recover in-person dining to 2019 levels, which is currently down 30-40% due to food inflation, concerns about COVID variants, and recession-like economic conditions.
Following plays by Amazon and Walgreens to become consumers’ new PCP, another retailer is getting into the healthcare mix. This week, CVS announced plans to expand into the primary care business by the end of this year.
Walmart is the latest retailer to join the circular economy movement with the launch of Walmart Restored, a refurbishment program offering products at a steep discount.
Despite frequent backlash directed toward the social media giant, the American Customer Satisfaction Index (ACSI) found that satisfaction with Twitter is up 11% from last year, and is one of only two companies to show such improvement. That said, Twitter is still in 10th place of the 12 researched social platforms, with Pinterest at the top.
TikTok is one of the primary places where consumers discover new music—so it’s perhaps no surprise to see the social platform launch a partnership with Ticketmaster to enable concert ticket purchases directly on the platform.
“We have an idea of the opportunity we want to seize—it might be really big, but we’ve got to start somewhere today, like every startup does. So, where do you start to do a proof of concept? Where do you start to de-risk your model? Where do you start to show some of that early traction? What are the early KPIs and metrics that show you’re onto something? And then, as you do that, what other opportunity can you unlock? How do you set up a new set of standards or metrics from that, and then evolve it? That’s what we [at Forerunner] have been doing. We went from the big picture being that the consumer is our North Star, and saying, ‘Okay, we are going to start with the evolution of e-commerce. And then we’re going to expand it into the B2B tools that serve this shift. And then, when the winners have been identified, we’ll look at how that same trend has impacted financial products, healthcare products, etc.’”
—Kirsten Green, Founder & Managing Partner at Forerunner, talks to Harry Stebbings on 20VC about how the firm has managed to evolve into other sectors with a single North Star in mind—and why she follows a startup-like playbook for growth in the process.
Their last episode broke records, and this one is even better. Kirsten sits down with Harry Stebbings for a new episode of 20VC. She talks about scaling Team Forerunner and the firm’s AUM, her personal exploration period before entering VC, and how FV has brought more B2B investments into the portfolio without losing a consumer ethos.
Jason talks to Cale Weissman, Editor-in-Chief of Modern Retail, for the MR Podcast. Listen to the whole episode for more of their discussion on new funding paths for DTC brands, loyalty initiatives, and Forerunner’s research-led investing approach.
ŌURA has now launched SpO2 sensing—a critical new metric allowing users to understand how well their body is using oxygen to function at its peak. In addition, the company just announced a partnership with Natural Cycles.
“I don’t think DTC is dead; I think DTC alone is dead,” said Ari Bloom, Co-Founder & CEO of A-Frame, this week in Retail Brew. Read more about the company’s portfolio of brands and how they’re showing up in retail.
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