What you need to know:

• Ecom entrepreneur and ex-Credit Suisse analyst Carla Penn-Kahn warns DTC and ecom pureplay growth playbooks and investor appetite have been disrupted.
• Digital ad prices have doubled in four years and the unit economics of customer acquisition versus all the other business outlay no longer work (though she thinks Pinterest is an outlier).
• VCs are now laser focused on bottom lines, not top. Which means metrics like ROAS are trumped by profitable ad returns – a lesson broadly applicable outside of ecom.
• But she says businesses – and agencies tasked with optimising for profit – do not properly understand unit economics. Which means they are missing big clues on where their most profitable wins comes from. Penn-Kahn has a solution for that.
• In the meantime, she thinks more Australian ecom businesses – the likes of Temple and Webster, The Iconic, Adore Beauty and Kogan – face increasing pressure. Retail media is a potential saviour, but only for some.
• Plus, why Amazon is increasingly turning the screw – but may not have it all its own way if Microsoft buys Shopify. She thinks the deal is on.
• Meanwhile, VCs now have a shiny new toy to focus on.
• There’s much more nuance and no small amount of punch in the podcast. Get the full download here.

Price hikes

Coles and Woolworths last week posted bumper results for their ecom arms. But Carla Penn-Kahn says they’re the outliers.

“There’s a big disparity a big disparity between how the institutional ecommerce arms of businesses like Woolworths and Coles are performing, and the next tier down, the medium sized enterprises [like] Adore Beauty, Temple and Webster and Kogan. Then there's a further step down, which is the majority of DTC brands in Australia, who aren't seeing profitability. They are definitely not seeing record profits coming out of their channel.”

Penn-Kahn exited her kitchenware ecom business last year. At that point she says it was turning over circa $30 million, down from its $40m Covid peak. Growth through ads, she says, was no longer viable.

“Ad platforms became increasingly more expensive. We saw the cost to advertise – cost per acquisition – double between 2019 and 2023. It used to cost us anywhere between $20 and $25 to acquire a customer. We were pushing $40 to $50 to acquire a customer by the time we sold out.

“The minute I started seeing that, I realised our AOV – average order value, around $150 per order – [versus] the margin profile … the unit economics didn't work.”

Meta, Google and Amazon are all posting bumper ad revenues, despite volumes declining from their Covid peaks.

“If you ask the advertising platforms themselves, they say it's competition bidding pricing up. I personally don't believe that's the case … if clicks and impressions are down, they still need to ultimately drive enough revenue to continue to perform for their shareholders. So they've got no other choice but to put their prices up.”

Some might argue that is not how biddable media works. The counterargument is that the platforms have some control over floor prices. Either way, Penn-Kahn thinks TikTok will ultimately take the same inflationary route.

“Of course [TikTok will hike prices], every business does it. You start at a really reasonable price point, you get in there, you get embedded in a business's workflows, you become a crucial part of their advertising, and then you lift prices so you can start moving towards profitability.”

Moats bridged

The upshot – as evidenced locally by Mi3’s Marketing & Customer Benchmarks FY25 report – is that ecom businesses are refocusing on customer lifetime value (CLV) over acquisition, per Penn-Kahn.

“In terms of customer acquisition, not a lot of businesses are making money out of that initial purchase, but they're doing a lot on the back end to do things like reviews, retention, also loyalty programs, to try and drive customers to come back to the store without using advertising platforms – because that's how they're ultimately getting that customer profitable.”

Even so, Penn-Kahn thinks many ecom pureplays will continue to struggle. She cites The Iconic as an example. A couple of years ago, it had “the widest range for fashion” and same or next day delivery with 30-day free returns. “So there was no reason not to shop with them. But today, you can get the same products from Myer or David Jones or a number of other stores, and you can also still get it same day, next day, pick up in store … [so] The Iconic no longer has a competitive edge and a moat around their business for their convenience.”

Likewise Booktopia, hence its demise.

“Booktopia’s moat was the convenience of having every single book title that any customer ever wanted. But ultimately, Amazon's entered the Australian market. They also have every single book every customer could ever want, and they delivered it quicker and that led to Booktopias downfall. In my opinion, that was the start. I also think the fine that they received from the ACCC was disproportionate to the size business that they are, and that definitely hurt cash flow. I also think they invested recklessly, unfortunately, assuming that Covid demand … was going to be the future growth rate for their business.”

Penn-Kahn thinks the likes of Temple and Webster and Adore Beauty must likewise get their next set of decisions right.

“One of my major observations around Temple and Webster's results is that they had to spend 66 per cent more this year to drive 26 per cent more revenue. That's an incredibly inefficient way of looking at how you're going to grow your business. Ultimately, no matter what economies of scales you get, you can't sustain 26 per cent growth on 66 per cent rising advertising costs. So it'll be interesting to see what Temple and Webster does over the next 12 months.”

(The retailer increased revenues from $393.5m in FY23 to $497.8m, an increase of 26 per cent. Advertising and marketing costs increased 62 per cent from $48.1m to $77.9m. Net profit after tax dropped 78 per cent from $8.3m to $1.8m.)

Retail media

“For Adore I think their strategy is going to be to go heavily into retail media, and I think they have no other choice,” says Penn-Kahn.

“They're sitting on a 33 per cent gross margin. They're selling the same products as a lot of other people. It's highly competitive. Customers are shopping around for the best price in Google feeds, Google shopping, Pmax campaigns, and so retail media is going to flow straight to their bottom line. Ultimately that's going to be how that they can really drive some profitability into that business.”

Retail media, she suggests, “is definitely going to be the future for businesses like Adore. It may even mean Temple and Webster consider introducing branded product, because then retail media can become a revenue stream for them.”

With the numbers coming out of Chemist Warehouse and Woolworths in particular “I’m very bullish on retail media,” says Penn-Kahn. “But DTC brands don't have that option unless they're selling other product. And [even] then I don't think competing products will want to pay to be featured high up on a DTC brand's website.”

Amazon primed

Amazon is making $50bn a year from retail media and rising. Penn-Kahn says DTC brands are increasingly realising they have to be there, because even the ads they are spending on platforms like Meta are driving customers to Amazon rather than their own sites – in the US market at least.

“They may not be clicking, but they are seeing the ads [on Meta] and then they're going into Amazon, where they hold their Prime membership, searching for that brand that they've seen and making a purchase on Amazon alongside all the other products that they potentially want to buy at the same time.

“So certainly DTC brands are seeing a lot of revenue coming through Amazon, and less so their direct consumer website, if they are selling on Amazon – and Amazon's often fulfilling those orders quicker than the DTC brand themselves can.”

Locally, she thinks Amazon is about to get another leg up.

“An interesting hot take I have is ... Amazon signing an exclusive deal to allow weekend deliveries with Australia Post … I can't see other brands like Myer or DJs getting Aus Post to deliver for them on weekends. So I suspect it might be something exclusively for Amazon, which 100 per cent gives Amazon an edge in this market over Australian businesses.”

Microsoft muscle job

But ultimately, Amazon might not have everything it’s own way. Penn-Kahn thinks Microsoft may have a say.

“I've seen some interesting developments. So a couple of weeks ago, we saw the announcement of the CTO of Microsoft joining the Shopify board, and subsequently, Shopify has just announced that their new CTO is ex-Microsoft. He's had a long career there, and he was also part of developing the Microsoft Clarity tooling, which a lot of businesses, especially Shopify businesses, have now rolled out on their website. It's a free behavioural analytics tool, and it's come at the right time because Google has messed up royally in their rollout of GA4, which is the new version of Google Analytics. So it was ripe for disruption by Microsoft," says Penn-Kahn.

"So potentially, the future is Microsoft acquiring Shopify, and they will own the space. You will be advertising on Bing through the Shopify network as an ecom brand, and leveraging Microsoft's AI to build your website, build the content. It could be a full ecosystem roll up if it happens. It's very possible.”

ROAS v profit

When venture capital firms first piled into DTC businesses “they started valuing ecommerce brands on a similar multiple to SaaS businesses, and as a result, a lot of ecommerce brands couldn't sustain the growth rates that they needed,” says Penn-Kahn. 

Their solution was to blow massive sums trying to drive revenue and hoping to get to profitability via economies of scale.

“But most of the US listed examples show there's a lot of profitability lacking in those pure ecommerce businesses. There is profitability in the D2C brands that have an omnichannel strategy, and there are exceptions to the rules. But ultimately, venture-backed businesses need to scale with significant velocity, both top line and now the expectation is alongside bottom line,” she adds. “And the DTC model can't do that.”

The laser focus on profit versus revenue is washing through the supply chain – and talking about metrics like return on ad spend (ROAS) no longer cut it, because they have no bearing on whether acquisition is actually profitable.

“It’s definitely starting to change. We're hearing a lot of people talk about ‘I want my agency or my performance marketer to optimise advertising for profitability’. But then when we actually speak to them on how they're measuring profitability on advertising spend, they look at us pretty stumped,” she adds. “That’s obviously a problem we’ve set out to solve.”

Hence Penn-Kahn’s next venture is a SaaS platform called Profit Peak, based on a tool built at her last venture to better unpick its own profit economics.

“It allows businesses to really unite the two most important parts of their business – advertising and product – in a single, common data set, so that they understand in real-time, product economics, unit economics, and also understand order-level unit economics, which is really important for the operations team.

“Basically, it's becoming a modern version of profit analytics tooling combined with a recommendation engine, and ultimately an optimisation tooling for ecommerce brands and DTC brands to really understand how to move the needle and – what that 20 per cent is that drives 80 per cent of their profitability," she says.

“As a business, how do you scale, how do you move the needle if you don’t know what are the most profitable parts of your business to hone in on? … You need to know what is the 20 per cent that's going to make the big difference in your business to focus on.”

Unit economics lesson

Unit economics, suggests Penn-Kahn, is what marketing and its supply chain should be prioritising above all else.

“That's exactly why we built the tool, because nobody in our business was talking in unit economics. They were all talking about how much revenue a product drove, or how much this ad drove in revenue.”

She provides a unit economics 101.

“Ultimately, unit economics is where you look at what you sell the product for. So that's your sale price. Then you need to look at what your cost of goods sold is. So the cost of selling that product would have been what it costs to get it into the country, landed into your warehouse, and then selling it to the customer. So that gets you to gross profit margin.

“Then you need to start looking at things like your variable costs. So what did it cost to actually advertise this product across the customer journey, across multiple touch points, across multiple advertising channels? What did it cost to ship the order so the customer actually got it in their hands? Picking, packaging costs – those are all your variable expenses, and that gets you down to what I call contribution profit.”

Contribution profit, says Penn-Kahn, “is what every single business should be looking at on a daily basis, no matter what industry they're in: how much contribution profit dollars have I banked today?”

But that’s just one side of it.

“Then they need to know what their fixed cost base is. So those fixed costs are rent, wages, Shopify, Magento/Adobe Commerce fees, insurance – all those costs that don't change. No matter how much revenue you drive in the business, you're still going to have to pay those fixed costs at the end of the month or the end of the quarter, if it's a utility bill. Making sure that those contribution dollars banked every day actually cover the fixed cost base in your business – that gets you to break even. Every dollar of contribution profit that you bank over your fixed costs, is where you get into profitability territory,” says Penn-Kahn.

“If you do that breakdown on an order level, you can then get it to a product level and really understand which of those 20 per cent of products that you invest in drive 80 per cent of your business's profitability.

“Then you can say ‘hey, advertising team focus on this 20 per cent because that's where we get the 80 per cent of profitability, they're the highest unit economic products in our business’. Equally, you can say to your product and inventory team, ‘these are the lifeblood of our profitability. Stop letting them go out of stock!’”

Penn-Kahn says it’s a depressingly recurring theme.

“This is a conversation I have with brands all the time. They'll say, ‘Our performance last month was great because our best sellers came back in stock’. I'm like, why were your best sellers ever out of stock? That means you don't know what the 20 per cent is in your business that drives 80 per cent of profitability if you've gone out of stock.”

Performance vs brand

While laser focused on unit economics, Penn-Kahn says brand has a significant role in optimising those numbers.

“For B2B, where I am now, brand is everything. It’s how you connect with your customers and that's how you differentiate yourself in the sea of SaaS tools available. But [likewise] for B2C, D2C for anyone building an ecommerce brand … your brand is of so much value to you, it's also, ultimately your nest egg that you can one day sell, and you need to be able to show that you have loyal customers, returning customers, who love your brand.

“So investing in brand today is essential, and it will also lower your CAC long-term. If you don't invest in brand, customers don't know who you are, and it's going to take a lot of touch points in the middle to actually warm them up to trust you and actually try your products.

“If you invest in brand, you've already warmed up the audience, so there's going to be less touch points, less expense to actually get them to make a purchase. Then ultimately, you can then move to owned media to keep them as a customer, versus keeping on spending in the platforms to actually drive the same customer back.”

Penn-Kahn says that kind of efficiency is now essential for those trying to attract funding.

“Today, interest rates are obviously high. You can place money on bonds and get a great return, and venture is obviously a very risky asset class, so it's not as desirable to spend money investing in a business that only drives revenue at a very high cost. [VCs] also want to see a bottom line result, and they want to see that that bottom line can actually scale, it's actually efficient, and there's economies in it. When when you're just purely advertising for that revenue hit, you're not proving that. You're just proving that you know how to build an unsustainable business.”

If that’s the case, what avenues remain viably open to start-ups that still need to acquire customers in the first place?

“A lot of people are investing in brand, they're investing in content, how you show up to your customer. That's a really big strategy.”

Despite seemingly soaring ad loads, “YouTube is really underutilised,” says Penn-Kahn. “Even Pinterest, a lot of customers are telling us that they're able to acquire customers, even though it's advertising far more efficiently, but a smaller market, on Pinterest than they can on Instagram, for example. So they're looking for alternate channels to drive that.”

But she thinks those DTC’s seeking VC-backing might struggle either way to land it.

“I certainly think for the Australian market and the US that has ship has sailed … I think they've obviously watched and learned from a lot of the investments made in the US that haven't been the success that everyone hoped for. So I think the future of venture-backed is AI and SaaS, to be honest.”

For VCs, like marketers, are also drawn to the shiny and new.

“A lot of people jump onto the hype, and certainly venture is a similar game … and that’s what’s happening now with AI. It’s like, if you don't have an AI investment, you're not in the game.”

What could possibly go wrong?

There's more punch and slightly more nuance in the podcast. Get the full download here.