Subscriptions Power Disco Past iOS 14.5, Amazon
The year 2021 has been a doozy for Ben Smith. In March, he celebrated an investment round for Disco, his direct-to-consumer skincare company. In April, Disco’s customer acquisition cost increased by a whopping 300% with the release of iOS 14.5. In May, he began selling a top item on Amazon, only to see Amazon bid on the exact Google Ad keywords he relied on for traffic to Disco’s website.
He told me, “We experienced all of the harmful effects more or less at once. So a month or two ago, I shut down our Amazon presence. Almost immediately, our on-site conversion rate doubled, and our Facebook acquisition cost came down massively.”
Smith and I recently discussed these developments and more, including his focus on subscription sales. Our entire audio conversation is embedded below. The transcript that follows is edited for clarity and length.
Eric Bandholz: Tell us about your journey.
Ben Smith: Right out of college, I owned two boutique gyms for three or four years. I grew them to a comfortable level. I needed to decide to open more gyms or sell what I had and start something else. I opted for the latter. My timing was lucky. I sold the business in 2019, about a year before the pandemic.
After selling, I looked for opportunities in the health and wellness category. I’ve struggled with acne over the years. I was able to resolve it with natural skin care products. That’s what led me to launch Disco in October 2019.
We’re a direct-to-consumer men’s skincare brand that focuses on clean, natural ingredients. We’ve had our ups and downs, as do most startups. The last couple of months have been especially challenging.
Bandholz: You’ve raised some capital.
Smith: That’s right. I was naïve about the growth possibilities. There’s a place for bootstrapping and for raising money. We’re combining both.
Early on, I should have been more rigorous around market fit and product testing to understand customer acquisition. We made it work, and we’re making it work now.
When we hit a certain monthly growth percentage, we decided to raise money. If you do it properly with the right folks, it can be beneficial. But you can also raise too much money or raise money from investors that are not aligned with your vision.
Bandholz: What sort of decisions would you make differently?
Smith: My biggest mistake was not hiring growth expertise. For startups, there’s often a first employee that understands customer acquisition, including creative, copy, offers, landing pages, conversion rate, that kind of thing. I had no knowledge of those.
Second, we launched with seven products, which was too many. We wanted a complete skincare regimen — a one-stop shop. Logically, that problem makes sense. But I now know to test two or three SKUs that could be bundled for a higher average order value and expand from there. Launching with seven versus two or three takes more cash. It might even confuse prospects.
Not hiring a growth marketing genius and starting with too many products — those were the two biggest mistakes.
Bandholz: Every business needs a growth marketing genius.
Smith: It’s always a problem, whether you’re a $5 million or $500 million brand.
The fundamentals of a good DTC brand are customer acquisition cost, lifetime customer value, and average order amount. It’s a simple math equation. Had I understood that, I would have done things differently at the start.
We had essentially no revenue in the first year. We were floundering. I racked up personal credit card debt to keep the business afloat. We ran out of money a couple of times. Things started to change and scale once we found our product-market fit and messaging and marketing funnels that resonated with our target audience.
We couldn’t afford to hire that expertise initially. So it came down to getting my hands dirty and learning. You can have an excellent product, but it’s pointless if you don’t know how to sell it in a way that makes mathematical sense.
So I taught myself about landing pages, copy, conversion rates. We began to scale. That was roughly a year ago. We’re finally in a position to hire a growth marketer. That’s what I spend most of my time on. I enjoy it. But we need someone to take us to $10 million, $50 million.
Bandholz: You alluded to the recent challenges. iOS 14.5 has upended ad performance on Facebook, Google, and other channels.
Smith: Right. There’s lots of chatter these days about the marketing efficiency ratio — total revenue divided by advertising spend. It’s a quick indicator of marketing effectiveness. The ratio varies based on the business. It also matters if a business relies on new or repeat customers.
Disco can lose money on the first purchase because subscriptions are a large part of our revenue. With the iOS issues, it’s more important than ever to acquire customers that come back repeatedly.
As for our MER, we’ve built a financial model in Google Sheets where we input the daily spend across every channel. We allocate the spend for subscriptions versus one-time purchases. The model has allowed us to understand the incremental revenue lift of shifting channels and expenditures.
Bandholz: I noticed on your website that you pre-select the subscribe option at checkout.
Smith: Yes. The conversion rate for subscriptions (versus one-time purchases) is about 8% lower, but the lifetime value is much higher. Over half of new customers opt for subscriptions.
Bandholz: What’s your customer retention strategy?
Smith: I think of it in phases. First, how do we drive the lowest acquisition costs for high-retention customers? Our marketing efforts need to appeal to high lifetime-value customers.
Then, after we acquire customers, we hope to retain them with email flows, value, and education. For example, new subscribers receive our 30-page skincare bible. It’s a crash course on how to take care of your skin. We’ll include that as a printed booklet in new subscription orders.
However, the best retention strategy is having a very good product that works.
Bandholz: Let’s return to iOS 14.5. For listeners who aren’t familiar, before iOS 14.5, Facebook, Google, and other platforms could track iPhone users’ activities, such as the apps they use and the sites they visit. iOS 14.5 changed that. Now, iPhone users have to agree to be tracked. The impact for advertisers is less-precise audience targeting, lower ad performance, and higher customer acquisition cost. What is your iOS 14.5 plan?
Smith: We raised money in March 2021 to aggressively acquire customers. Fortunately, that was just before iOS 14.5 rolled out. Brands and marketers have to rethink advertising — mainly on Facebook, Google, Instagram, Snap.
We’re not immune to that. Our customer acquisition cost increased by 300% with iOS 14.5. However, the reaction by advertisers has been a bit overblown. Advertising on Facebook still works. It’s just more expensive.
We scaled down ad spend, which had been very profitable in terms of customer acquisition. Around the same time, we launched on Amazon.
We had the cost-per-acquisition increase due to iOS 14.5 and simultaneously gave up nearly 15% of revenue to Amazon because we placed a top-selling item there. Then Amazon started bidding on our Google keywords for that SKU, which increased our cost per click on Google Ads.
We experienced all of the harmful effects more or less at once. So a month or two ago, I shut down our Amazon presence. Almost immediately, our on-site conversion rate doubled, and our Facebook acquisition cost came down massively.
There is some merit to being on Amazon because lots of folks shop there. But if you’re focused on owning the customer experience and on subscriptions, it doesn’t make sense to be on Amazon, period, especially if you’re below $10 million in revenue.
As an aside, iOS 14.5 will likely prompt brands overly reliant on Facebook to consolidate or shut down.
Bandholz: Where can people learn more about you and buy some Disco products?