#1 Cost of goods sold (COGS), they determine the gross margin profile of your business
You can take a smart approach to ensure that you lie in the highest quartile of margins within your D2C sub-sector by:
i. Procurement - go deep with fewer SKUs with fewer vendors.
ii. Pricing - build strong brand to command closer to full price more often.
iii. Product - introduce more premium products to increase AOV and LTV.
#2 Marketing costs
Creeping increase in marketing costs with scale is a killer of modern consumer brands. Your marketing should get more efficient as you scale, and the efficiency can only come from building super strong brand loyalty and trust. The way the marketing game is rigged is that every year Facebook, Google and Amazon will increase their cost per impression, and seek to earn more rent from brands. So the only way to beat the game is to grow organically, to grow repeats and to grow word of mouth at a faster rate than the paid marketing cost increases.
In the early days, spending 40-50% of revenue on marketing for a consumer brand is not unheard of. As time passes, you'd want these marketing spends to come down to 20 - 25% of sales. Over many years, as your brand becomes a mature, you could hope to get them down to 15% of sales.
I know there are brands that even spend 70-80% of revenue on marketing, but I'd say that's an unsustainable route to take, and if you can't get repeat rates above 25-30% and get at least close to half of your revenue from repeats, then you haven't found product market fit yet and have not earned the right to blow through marketing dollars on paid acquisition. Wait, fix your customer experience, and spend the marketing money more wisely once you have PMF.
#3 Overheads
Ideally, you'd want to operate at 10-12% overheads, but in the early days, 15-20% is understandable as you are building team and capabilities for the next layer of scale. Overheads are not something one has to fret about too much as long as gross margin structure is solid and marketing is getting more efficient, you would cover overheads and turn a reasonable profit at scale.
So what's the oversimplified formula for EBITDA in a D2C brand? If a brand has a 65% gross margin, and 30% marketing costs, with 15% overheads, you could expect it to turn a 100 - 35 - 30 - 15 = 20% EBITDA
This post was originally shared by Dhruv Toshniwal on Linkedin.