Hear ye, hear ye! Calling All Ecom Founders and Growth Leaders:

Thought experiment: what can Buffett teach us about growing our ecom brands?

The goal of Bodacious Brands’ writing

Before we begin, we’ll be clear on the WHY.

Why are we writing this?

The goal of any writing at Bodacious Brands is to provide useful information to others in the DTC ecom brand-building industry today that hopefully makes your journey better, more successful, and more fulfilling.

You all are working your asses off to build great brands and deliver great experiences to your customers, and it’s a joy to cheer you on from the sidelines.

We would have LOVED having this information when we were building Chubbies.

This writing also helps us process our own learnings and lessons.

We’re not speaking at you; we’re learning with you…like Harvey here

4 Characteristics of How Buffett Invests and Applications to DTC Ecom Customer Acquisition

In today’s post, we’ll explore four characteristics of Buffett’s investing and company-building methodology and consider the application to the good and holy work of growing our DTC ecom brands.

For the busy people out there, the TLDR is the following

1. When you know the price you’re willing to pay for your next marginal customer and their cost, you can decide exactly how much to invest in those customers to foot with your business model

2. When the cost for the next marginal customer is below your threshold, you buy every customer you can until the cost goes above that mark. When the cost for the next marginal customer is above your threshold, you pull back until this dynamic changes. This means new customer acquisition can be somewhat volatile and that a firm “marketing budget” is more a guideline than a hard and fast rule

3. Ignore how everyone else does it. Build every part of your company in the way you think is best.

4. Buffett doesn’t use revenue as his key metric, so why should you?

Basically, it all boils down to understanding the numbers and thinking independently.

The meat and potatoes of the points are detailed below, but first, let’s define ‘marginal.’

Let’s say you open a store in your downtown.

Because you picked a decent location, you are organically acquiring 100 customers per week at an AOV of $100. You then start spending $1000/week on marketing, and after a few weeks, you still have 100 new customers per week with an AOV of $100.

On one hand, you could say you’re only spending 10% of revenue on marketing (blended new customer ROAS of 10x!!), but from a marginal perspective, that money clearly was not spent usefully.

You could make the argument that the dollars are going towards “brand” spend that will pay off at an even later date. The notorious “filling the top of the funnel”. If so, great! Measure it somehow and make sure you understand what success looks like vis a vis that measurement.

Now, the reality of the situation is not this simple. Most brands are already spending media dollars on a couple of channels with a variety of different tactics, growing their organic presence online, etc. - so it’s not quite so cut-and-dry as the example above. However, this principle still holds. If you are going to spend more $ on outbound marketing, you need to understand the impact not just of all of your marketing in aggregate, but also of that marginal amount spent.

Once you understand your marginal customer acquisition cost (Marginal CAC), we want to compare that against our unit economics and align that math with our long-term business objectives. If you expect to drive $0 of incremental revenue from your new customers, well then you’ll want to make sure you’re making a solid chunk of profit on those marginal orders. If you expect your new customers to repeat like gangbusters, you may be willing to dip into unprofitability on that first order (on a marginal basis - NOT blended) because you know their contribution margin LTV will ultimately make up for that deficit on a time frame you’re comfortable with.

(Note: There are a few ways to approach the topic of calculating your Marginal CAC which we’ll cover in another Bodacious Brands post in addition to how to figure out non-blended unit economics on your new customer acquisition. It’s an extremely fun topic with a lot of depth, so want to give it some dedicated airspace.)

But this explanation should give a working understanding in order to put the following four ideas into context (especially ideas #1 and #2).

1) Buffett does not buy for the sake of buying. He is patient. He is fine ‘doing nothing’.

When the price is too high for the asset he wants to buy, he is completely fine going long periods buying nothing.

He does not purchase shares on a pre-determined regular cadence (e.g., spending x dollars weekly because he has a ‘budget’).

DTC Application:

If the cost to buy a marginal new customer is above our max threshold, we are not REQUIRED to spend more $$.

This likely means slowing new customer acquisition (unless we’re investing in measurable brand marketing - aka marketing with the intended payback window beyond the time period in question) until we get to a marginal CAC that aligns with our profit threshold.

We will have the opportunity to purchase customers at the price we require at some point in the future and there’s a reason we are not hitting our optimal Marginal CAC right now. It could be our on-site conversion rate, our ad creative, the actual cost the impressions on our media platforms, etc. - but our focus as we trim budgets should be on solving these major problems. Once solved - we’re back in business and can continue to scale our budgets.

Importantly, we do NOT need to spend the same amount every day or week simply because we received a budget from finance/accounting for the month.

The reason to spend $$ is to buy something. Whether that’s customers, brand equity, incremental orders from repeat customers, or something else - we have to know what we’re buying and we have to know the value of that asset. Once we’ve got that, we simply compare the value of the asset to the current market cost. If the cost is lower, we buy. If higher, we cut.

2) When the price is right, Buffett is ready to buy, and buy BIG

We all have heard news stories reporting on Buffett purchasing some massive amount of a company. Then, sometime later, we hear another news story of his purchasing another large block of shares.

He buys every share he can, at or below the acceptable price for the next marginal share.

The acceptable price is at or below the per-share intrinsic value with an additional built-in margin of safety (buffer) in case he is wrong on future cashflows (read: investment returns).

One company he’s purchasing right now is Occidental Petroleum. He’s not buying 1000 shares a day, for instance (dollar-cost averaging).

Rather, he is constantly evaluating the per-share intrinsic value of the business and is ready to buy when each share is below that number.

Similarly, because he knows the price he is willing to pay for each marginal share, he knows exactly when to stop buying.

DTC Application:

Rather than rigidly adhering to a consistent daily spend number, we might embrace the possibility that acquiring new customers can be slightly more irregular, volatile, or unpredictable.

When we’re driving excellent performance, and we can purchase the next marginal customer at or below our threshold price (with a margin of safety baked in) we might benefit by being prepared to greatly increase the investment in new customers.

Since there is a non-zero chance we are wrong about future contribution LTV, we might also include a buffer in our max allowable CAC for the next marginal customer.

When we know the max acceptable CAC for the next marginal customer, we know precisely when and why to stop spending more to acquire customers.

In theory, we should architect our new customer acquisition machine to spend whatever is needed when the price for each marginal customer is below our threshold.

In practice, there are realities & constraints that we may need to balance, which we acknowledge, of course, but we should always be aware of the above dynamic and incorporate as we see fit for our business.

Note: we’re not telling anyone to introduce massive whipsawing into your operational cadence, but simply to consider an evolution of the objective inputs used when making new customer acquisition capital allocation decisions.

3) Buffett architected his business to support his long-term goals; not to match ‘how everyone else does it’.

He considered, from first principles, what he thought was best for his business.

This includes how he reports on performance, how he incentivizes his team, how he communicates externally, how he chooses investors (shareholders), and how he, as the company leader, measures success.

He does not optimize for, or manage to, any individual quarter, or even year.

He does not do quarterly earnings calls with analysts.

These activities are hallmarks of “how everyone else does it”, but not a fit for the way Berkshire Hathaway wants to operate.

DTC Application:

We want our brands to exist long-term, even outlasting us.

This is crazy to think about, but totally possible.

If we’re thinking long-term, we can be more thoughtful about architecting our company and its activities to better support our long-term aims.

By re-architecting, we might recognize better how some actions—like maximizing near-term revenue or near-term contribution margin—can possibly undermine long-term profit or contribution margin growth.

If we have a board or investors, we don’t have to manage the business to show certain outcomes simply because we have a board meeting on an arbitrary date.

Long term, this can be a recipe for disaster.

Rather, we ensure the INPUTS are correct and follow the disciplined operating framework we, as entrepreneurs, have chosen as IDEAL for running our businesses over the long term.

This can manifest in being able to accept slower revenue growth for some period of time because we stuck to our disciplined framework of purchasing customers up to, but not beyond, the max price for the last marginal customer.

It means we can stomach a month with a negative revenue comp.

It also means we can explain to our team and investors why we operate this way.

On the flip side, this may mean we COMPLETELY BLOW THROUGH our forecast to the UPSIDE because we were able to heavily invest in new customer acquisition based on our acquisition framework.

It’s important to note that this updated way of approaching new customer acquisition DOES NOT MEAN YOU’LL SPEND LESS AND DRIVE LESS REVENUE.

Rather, it is about having an updated decision framework for when you, the capital allocator, determine it makes sense to pour more fuel on the new customer acquisition fire, and when it might make sense to pump the breaks a little bit.

Ideally, the goal in all of this is that over the long term, you can grow revenue AND profit to a greater degree than you would otherwise.

4) Buffett does not use revenue as a measure of success

He does not measure success the same way most other companies do.

He looks at progress and growth in per-share intrinsic value over the course of 5 or 10 years.

His calculation of per share intrinsic value is not calculated as a function of revenue or revenue growth.

His focus is on what truly matters: creating a business and a brand for the long term - a business that produces positive cashflow for its owners.

DTC Application:

How do you define success?

What is the definition of “per-share intrinsic value” for your business?

Only you will know what best suits your business, but ultimately it may mean, dare I say it, we don't solely focus our teams on revenue growth.

It could mean, for instance, we consider goaling our teams on things like contribution margin growth over a prolonged period or measurable brand love and how that metric improves over time.

Wrapping it up

So there you go. Maybe a 92-year-old can help us evolve our thinking about how to grow our ecom brands.

To review:

1. Buffett's patience and willingness to refrain from buying when prices are high can be applied to DTC companies. They aren't obliged to spend on customer acquisition if costs exceed the threshold. Slowing down acquisition can lead to future opportunities at desired prices.

2. Buffett's readiness to increase investment when prices are favorable can benefit DTC companies. Being prepared to invest significantly when marginal customers can be acquired below the threshold price can be game-changing. Architecting flexible acquisition processes and determining the maximum acceptable cost can enable a more sustainable growth in profitable new customer acquisition over the long term.

3. Buffett's focus on long-term goals rather than adhering to conventional practices can guide DTC companies. Re-architecting activities to align with long-term aims and avoiding short-term revenue maximization can lead to sustained growth. Disciplined frameworks that YOU define as best for YOUR BUSINESS could replace arbitrary timelines and help ensure correct inputs.

4. Buffett's measure of success based on per-share intrinsic value instead of revenue can be useful for DTC companies. Defining success beyond revenue growth and considering metrics like contribution margin growth or brand loyalty can offer a path to greater long term profit maximization, which is ultimately why we’re here.

What do you think?

Gimme feedback. C’mon gimme it!

Some prompts for your comments…

• Am I insane?

• Is there something in here that resonates with you?

• What do you want us to write about?

• Is there anyone you know who might benefit from reading this?

Thank you

Thanks so much for reading. It’s our sincere hope that this content is useful.

#customeracquistion #dtc #d2c #ecommerce #brands #ecom #investing #capitalallocation #buffett #warrenbuffettistheman #buffetttaughtmeeverythingiknowaboutecommerce

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