Wrong Budgets and D2C India

Wrong Budgets and D2C India

It is a brand's fault if they cross the budget, and still do not see corresponding results.

So, let’s try to avoid a Wrong Budget!

A go-to-market plan of a business depends on a budget, predominantly.  

It necessitates the development of a comprehensive and holistic strategy to seamlessly incorporate available technology into the overall vision.

A good ‘Budget’ asks 3 basic things -

1. Which tech/tactics would deliver significant ROI? 
2. What tech/tactics from before are underperforming? 
3. Where is investment going to be impactful for 2024?

In the dynamic world of D2C (Direct-to-Consumer) ecommerce in India, budgeting is not just a financial exercise but a strategic necessity. Wrong budgeting decisions can lead to missed opportunities, stunted growth, and even the downfall of a brand. 

This blog delves into the nuances of budgeting in the D2C space, highlighting real-life examples, data, and tables to illustrate the profound impact of budget mismanagement on brand potential.

Identifying Priorities (get brand specific af)

Priorities are always supposed to be extremely brand specific, it’s not about other brands you like - It’s always about where your brand stands at the moment!

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KEY AREAS WHERE BRANDS FEEL THEY ARE UNDERPERFORMING

1. Customer Acquisition and Marketing Costs
2. Customer Retention
3. Costs of Maintaining My Ecommerce Infrastructure 
4. Analytics & BI
5. Mobile Conversion Rate
6. Lacking Clarity on my Technology Roadmap
7. Desktop Conversion Rate
8. Loyalty
9. Underperforming Cart & Checkout
10. Product Information and Inventory Management
11. Customer Service and Post-Purchase Shipping and Return Support
12. Supply Chain
13. UGC (User Generated Content)
14. Ratings and Reviews
15. Payments

(the above are represented in the order of most important to least)

Indian D2C brands are investing in the bread and butter of commerce: cost-effectively acquiring customers and retaining those customers with high-quality products and services.

But how?

Allocate your ‘Budget’ to…

(all sub-points are in hierarchy of importance)

REDUCE CUSTOMER ACQUISITION AND COSTS

1. Marketing via messaging platforms
2. Simplifying Cart & Checkout
3. Conversion Rate Optimization (CRO)
4. Analytics, Data & BI

INCREASE CUSTOMER RETENTION AND LOYALTY 

1. Marketing via messaging platforms
2. Ratings & Reviews
3. Shipping & Return Experience
4. 1st-party Data & Analytics

REDUCE PLATFORM MAINTENANCE COSTS IN THE LONG-TERM 

1. Adopt Next-Gen Automation Architectures
2. Harness the AI Revolution by couple real-time data to services

Customer Acquisition and Customer Retention strategies frequently underperform despite significant investment…

How does an Indian D2C brand overcome that?

1. How to Create ROI in Customer Acquisition?  

1. MARKETING THROUGH MESSAGING

High ROI through targeted and specific outreach - with a highly filtered recipient list, businesses and brands can send personalised data and specific information to select users.

2. SIMPLIFYING CART & CHECKOUT 

The high ROI way to build conversion rate and lower CAC. 

Potential solutions to streamline an excessively intricate or sluggish cart functionality involve implementing a single-page checkout system that stores a majority of user data. This approach aims to decrease the time spent on the checkout screen and ultimately boost conversion rates.

3. CONVERSION RATE OPTIMIZATION (CRO) 

Incorporate a Progressive Web App (PWA), enhancing mobile performance to drive increased conversions, implementing a single sign-on checkout, integrating flyover notifications that facilitate a seamless customer journey to checkout, and conducting A/B testing on pages to optimise overall performance.

4. 1ST PARTY DATA & ANALYTICS 

Gather information from individual customers.

The most successful digital retailers leverage this data to formulate precise marketing campaigns. 

Brands and businesses are encouraged to integrate their data into a Customer Data Platform (CDP), which consolidates and organises all collected site data. Subsequently, this CDP aids in developing tailored, high-return-on-investment (ROI) marketing campaigns.

Couldn’t hurt if you had the data from, say, 500+ D2C brands in India 😉

2. How to Maximise Customer Retention and Loyalty

Driving Incremental Revenue 

Managing customer retention involves a more intricate approach than acquisition, necessitating nuanced strategies for first-time, two-time, repeat, and loyal shoppers. 

And inevitably, the room for error in retention efforts is notably limited.

1. THE ROI OF ORDER TRACKING AND RETURNS 

Your customer's attention is at its peak focused on your brand during the post-purchase experience, whether they are monitoring an order yet to be delivered or awaiting the acceptance of a return.

Why? Because their money is on the line

So, focus on Real-time Data to enhance post-purchase experience and Return Management for post-delivery experience.

2.  AUTOMATION UNLOCKS CUSTOMER RETENTION

As per a recent report by Salesforce, 88% of customers emphasise that the experience a brand offers is equally crucial as its products and services. Additionally, almost 75% of customers anticipate brands to comprehend their distinct needs and expectations.

Utilising automations enables brands to provide personalised, seamless experiences, fostering customer loyalty. Here are three methods to harness these potent tools for enhanced retention:

1. Ratings & Reviews With Smart Filters 

Allow customers to customise their review experience by enabling them to filter reviews based on topics that align with their interests. Leveraging individual customer preference data, these topics are automatically chosen based on their significance in reviews and dynamically presented on the website for a personalised display.

Example: Smart Filters empower shoppers to make more informed purchase decisions — resulting in a 200% lift in time spent onsite

“The difference between a community and an audience is that audiences are spoken to, while communities speak to one another. A brand can only unlock the power of community when the community doesn’t just listen but participates and materially shapes what’s being made.” 

• Alexis Lloyd

Meaning, let the first hand observers of your community, your brand, your product; talk to each other through UGC, Reviews etc.

2. WhatsApp And Other Messaging

With smart product recommendations, predictive segmentation, and smart scheduling features, brands can seamlessly provide meaningful messaging experiences, save precious time, and drive higher retention.

Example: Predictive segmentation to engage customers that are likely to purchase with SMS campaigns around sales and key marketing dates

A campaign sent to a right segment can see 26x ROI

3. Loyalty & Referral 

Automations play a pivotal role in helping brands optimise their loyalty and referral programs by delivering hyper-personalised messages to customers at precisely the right moments, ensuring maximum engagement.

Example: Brands witness an impressive +300x return on investment (ROI) when employing abandoned cart flows tailored specifically for loyal customers.

Understanding the Significance of Budgeting in D2C

Budgeting in the D2C ecommerce sector involves allocating resources effectively across various channels—marketing, operations, inventory, technology, and customer service.

A well-planned budget ensures that a brand can scale, adapt to market changes, and meet customer demands efficiently. However, a miscalculated budget can result in overspending or underspending, both of which have detrimental effects.

The Pitfalls of Wrong Budgets

1. Overemphasis on Marketing Without Adequate Fulfilment Infrastructure
   Investing heavily in marketing without a robust fulfilment infrastructure can backfire. Imagine running a successful campaign that drives massive traffic to your website, but you lack the inventory or logistical capability to fulfil orders promptly. This mismatch not only tarnishes the brand's reputation but also leads to lost sales and customer trust.
   Example: An Indian D2C brand, XYZ Clothing, allocated 70% of its budget to digital marketing campaigns during the festive season. The result was a 150% increase in traffic and a 200% rise in orders. However, their fulfilment centre was only equipped to handle a 50% increase. Consequently, they faced a 40% order cancellation rate due to delayed deliveries.

1. Neglecting Customer Service and Experience
   In the D2C model, customer service is paramount. Under-budgeting for customer support can lead to inadequate handling of queries, complaints, and returns. This not only affects customer satisfaction but also hampers long-term brand loyalty.
   Example: Brand ABC Skincare dedicated a mere 5% of its budget to customer service. During a product recall due to a packaging error, they were overwhelmed with inquiries and complaints. The slow response rate led to negative reviews, causing a 30% drop in repeat customers over the next quarter.

The Role of Data-Driven Budgeting

To avoid these pitfalls, D2C brands must adopt a data-driven approach to budgeting. This involves analysing historical data, market trends, and customer behaviour to make informed decisions. Let's explore how data can be leveraged to optimise budgets.

Analysing Marketing Spend

A common mistake is not aligning marketing spend with customer acquisition cost (CAC) and lifetime value (LTV). Brands often spend excessively on acquiring new customers without considering the long-term value they bring.

CAC vs. LTV Analysis

From the table, Brand B's high CAC relative to its LTV indicates overspending on customer acquisition, resulting in lower ROI. In contrast, Brand A and C have optimised their marketing spend to achieve higher ROI.

Balancing Inventory and Marketing Budgets

Balancing inventory and marketing budgets is crucial. Overstocking or understocking can be equally detrimental. Data-driven forecasting can help brands maintain the right inventory levels, ensuring they can meet demand without excessive carrying costs.

Inventory Management Metrics

The table showcases how accurate demand forecasting and inventory management can minimise stockouts and reduce carrying costs. In February, despite a slight overstock, the low stockout rate indicates efficient inventory planning.

The Impact of Technology Underinvestment

Underinvesting in technology can cripple a D2C brand's operations. Robust technology infrastructure is essential for managing website traffic, processing payments, and handling logistics. Brands that fail to invest adequately in technology often face operational bottlenecks that can stifle growth.

Case Study: Pepperfry

Pepperfry, a leading D2C furniture brand in India, initially struggled with technology underinvestment. In 2018, they allocated only 8% of their budget to technology, resulting in frequent website downtimes and payment failures during peak sales periods. This led to a 20% cart abandonment rate and significant revenue loss.

Pepperfry's Technology Investment vs. Operational Efficiency

The Consequences of Ignoring Customer Feedback

Customer feedback is invaluable for D2C brands. Ignoring feedback can lead to missed opportunities for improvement and innovation. Budgeting for customer feedback mechanisms, such as surveys and reviews, can provide insights into customer preferences and pain points.

Case Study: FabAlley

FabAlley, a D2C fashion brand, initially ignored customer feedback on sizing issues, resulting in high return rates and dissatisfied customers. In 2019, they allocated 10% of their budget to a robust feedback system, leading to a 25% reduction in return rates and a 15% increase in customer satisfaction.

FabAlley's Budget Allocation for Customer Feedback vs. Return Rates

Lenskart India & their Budgeting

Lenskart, one of India's leading D2C eyewear brands, experienced rapid growth due to aggressive marketing. However, they faced significant challenges due to poor budgeting decisions in their early years. Initially, they allocated a substantial portion of their budget to marketing and customer acquisition, neglecting other crucial areas like technology and customer service.

In 2015, Lenskart invested heavily in online marketing campaigns, resulting in a 250% increase in website traffic and a 300% rise in orders. However, their website and backend systems were not equipped to handle such a surge. Frequent website crashes and payment failures became common, leading to frustrated customers and abandoned carts.

Moreover, customer service was overwhelmed with queries and complaints. The lack of adequate support staff meant long response times and unresolved issues, further damaging their reputation. Negative reviews started piling up, and within a few months, their sales took a significant hit.

The Impact of Misallocated Budgets - Lenskart

Technology Investments

Lenskart's early success can be attributed to its substantial investments in technology. The company utilised German robotic technology to produce high-precision eyewear, making it the only Indian company to achieve such precision (up to three decimals) in its products. However, the overemphasis on technological advancements led to underinvestment in other crucial areas like customer service and marketing.

Marketing Strategies

Lenskart's marketing strategies have been multifaceted, involving Google ads, social media campaigns, and celebrity endorsements. Despite these efforts, a significant portion of the marketing budget was spent on digital ads, often overlooking more cost-effective channels.

Customer Service

Customer service is a critical component for any D2C brand. Lenskart's underinvestment in this area led to a relatively high churn rate. Despite offering innovative services like home eye tests and 3D trial experiences, the customer service department was often overwhelmed, leading to dissatisfaction.

Lenskart's Missed Opportunities

In 2015, Lenskart launched its "Blu" eyewear collection, designed to protect eyes from harmful blue light. Despite the innovative product, the launch did not achieve the expected success due to insufficient marketing and customer education. The budget allocation heavily favoured technology development over market awareness campaigns.

Lessons Learned

1. Holistic Budgeting: Allocate budgets across all critical functions—marketing, inventory, technology, and customer service. A balanced approach ensures that no aspect of the business is neglected.
2. Data-Driven Decisions: Use historical data and market analysis to forecast demand, allocate marketing spend, and manage inventory. This minimises risks and maximises returns.
3. Customer-Centric Approach: Prioritise customer service and experience. Satisfied customers are more likely to become repeat buyers and brand advocates, reducing the long-term cost of customer acquisition.
4. Marketing Mix: A balanced marketing strategy that includes traditional and digital channels can enhance reach and engagement.

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Conclusion: A Brands' Potential depends on Right Budgeting.

The consequences of misallocated budgets in the D2C sector are profound and multifaceted, affecting everything from customer acquisition to long-term brand loyalty. Real-world cases like Lenskart and Nykaa underscore the importance of strategic financial planning.

Lenskart's heavy investment in technology and customer experience has resulted in its valuation skyrocketing to over $2.5 billion​ (Indian Retailer)​. Similarly, Nykaa's targeted marketing and efficient budget allocation have enabled it to dominate the beauty and personal care market, with its IPO valuation reaching approximately $7 billion in 2021​ (Startup India)​.

These examples illustrate that thoughtful budget allocation can drive significant growth and market leadership. However, it's equally critical to avoid common pitfalls such as over-investment in untested marketing channels or underestimating the importance of customer retention.

A strategic approach, supported by data and aligned with the broader market trends, is essential. As highlighted by experts, the Indian government's initiatives like the abolition of the angel tax and the focus on infrastructure development are poised to further support D2C brands by improving financial liquidity and reducing operational costs​ (Instamojo)​​ (Startup India)​.

Leveraging these opportunities while maintaining a balanced and well-planned budget can unlock a brand's full potential and ensure sustainable growth in a competitive market.

In summary, the right budget allocation, backed by data-driven insights and adaptive strategies, can transform potential losses into substantial gains, setting the stage for long-term success in the dynamic D2C landscape of India.

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