Recently, I asked our team what kinds of meal kit services they’d heard of. It wasn’t exactly an experiment-worthy sample size, but every person I surveyed had either known of or used HelloFresh at least once in their lifetimes, with the occasional mention of Blue Apron.
Just a few years ago, this niche industry was shocking the world with its sudden explosion in growth, valued at over $1.5 billion in 2016 and nearly doubling the next year. What’s crazy is that while HelloFresh now dominates the meal kit sector, this wasn’t always the case.
Back in 2016, Blue Apron was leading the meal kit industry by a landslide. They held over 50% of the overall market share, with HelloFresh dragging far behind at 20%. A large reason for Blue Apron’s popularity was thanks to a dramatic increase in spending toward their referral program, online media campaigns, and particularly, offline media campaigns. Blue Apron spent nearly $2.5 million on just podcast and radio advertising, which was almost an 800% increase compared to the previous year. In comparison, HelloFresh only spent $450k on podcast and media marketing, barely 20% of Blue Apron’s expenses. Although Blue Apron’s profits suffered immensely as a result, they justified their high marketing costs by playing it off as a necessary long-term investment.
The question is, was this truly a smart investment?
Blue Apron’s Downfall
Blue Apron went public in the summer of 2017, but the results were shockingly catastrophic. Not only was the price/share of $10 well below Blue Apron’s target of $15-17, but the stock price tanked 70% over the course of the rest of the year. The CEO Matt Salzberg resigned, leaving Brad Dickerson, the former CFO, to deal with the consequences of Blue Apron’s actions.
What exactly went wrong?
Revealing the Data
Let’s take a look at what exactly led Blue Apron to this point.
When investors looked at Blue Apron from a top-down approach, the company seemed to be a huge success with high growth potential. What wasn’t considered at the time was that customer data was saying the exact opposite. Because of Blue Apron’s increase in marketing costs, their CAC grew from an estimated $63 to $100 over the course of 2015-2016. This meant that in order to stay profitable, each customer Blue Apron acquired would need to spend on average more than $100 in their lifetime - but this poses a large issue. The lowest cost of one order from Blue Apron is only around $50, and who’s to say that after a free trial, the customer would even make another purchase in the first place?
Not only that, but because Blue Apron is primarily a subscription-based model, customer retention is the core of their business model. Although retention metrics were not released by Blue Apron themselves, the firm Second Measure estimated that at the time, less than 30% of customers stayed a loyal member after half a year. Despite their marketing efforts, revenue/customer actually declined by nearly 15% in 2016 - not exactly ideal for Blue Apron.
So what was next for the company? They needed to take this data and re-examine their customer-level profitability.
Analyzing Retention Data
One way to visualize retention is through a retention curve.
The figure above displays Blue Apron’s expected retention curve, with an estimated 82% first month retention rate declining to around 20% after a year.
One small problem - this curve is completely inaccurate.
For example, the curve shows an immense overestimation of the retention rate for month 1 because it fails to account for low loyalty customers. The same thing happens for month 12 - a significant underestimation of the retention rate because it fails to account for high loyalty customers. Instead, what we need to do is to separate Blue Apron’s customers into two segments - low loyalty and high loyalty. By doing so, we get a new retention curve.
From this new visualization, it’s clear that the previous curve was a huge oversimplification. The high loyalty segment shows a high retention rate of over 90%, while the low loyalty segment shows a retention rate of hardly 50%. With such drastic differences between the two, it’s particularly important to analyze the segments separately. When comparing metrics between them, we can see where the issue arises.
First off, the NPV and CLV of the high and low loyalty segment are completely distinct from one another. The NPV for the high loyalty segment is $266, while for the low loyalty segment, it’s a disappointing $20. Comparing the CLVs as well, the high loyalty CLV is $166, while the low loyalty CLV is frightfully negative at -$80.
So while the high loyalty segment, which takes up 46% of Blue Apron’s customer base, is profitable for Blue Apron, their low loyalty segment, which takes up the remaining 54% of customers, is losing them money - big time. By using the two segment model instead of the oversimplified one segment model, Blue Apron seemed to actually be losing money from every new customer acquired, with a negative ROI of -10%.
Here comes the dilemma. What’s Blue Apron’s next best course of action given the data presented? Should they cut back on customer acquisition spending? Should they switch up their marketing strategy? Let’s think about this a bit more.
Given the fact that the main issue seems to be retention on the low loyalty segment side, next steps may not even be to adjust customer acquisition costs or advertising tactics. What they need to do is improve retention all around.
They must find ways to incentivize customer loyalty and prove to their customers that they have long-term value. Their objective shouldn’t be to continue acquiring new customers, but instead, to keep current customers motivated to stay loyal to their brand, especially with competitors like HelloFresh on the rise. Whether it’s through making customers excited about new offerings, amping up their referral program, or giving a ton of sweet benefits to more loyal customers, Blue Apron needs to cater more toward their high loyalty segment, and less toward their low loyalty one. And, in order to know which customers to focus their efforts on, they need to understand what exactly makes loyal customers loyal. Without proper segmentation, this is impossible.
So back to our question, was Blue Apron’s 2016 marketing investment truly the right move? It’s hard to say, but it certainly wasn’t the singular cause of their problems. What was the root of their problems was both not paying enough attention to their retention data and not doing something about it.
Cotera’s goal is to help companies visualize and better understand the implications of their data. Not only that, but we help you understand which customers you should invest your time and resources in, and which ones you should avoid. In other words, we do all the segmentation for you. What is sometimes overlooked (like segmentation and retention) often actually makes a huge difference in the success or downfall of a brand. Help us help you start taking your data more seriously - the results might just surprise you.