The Unit Economics Don’t Work: A Common DTC Startup Problem
Starting a new business is never easy, and it can be especially challenging when faced with the harsh realities of making your unit economics work. One Squall client, a wellness tech startup that produces a device to help calm the primal brain and relieve stress, was struggling with low gross margins and high acquisition costs.
The startup was losing money on every sale, despite constant assurances from their agency that they were building brand awareness. The startup’s team had to find a way to create healthy unit economics while continuing to show a month-over-month increase in revenue. In this blog post, we’ll explore how Squall was able to overcome these challenges and create a sustainable business model.
Step 1: Insights
Squall started conducting surveys, interviews, and running split experiments. We discovered that people already thought the device was expensive but “totally worth it” if it worked. The startup’s struggles were not about their product but their unit economics — how to make the numbers work to get past the bleeding. This insight proved to be crucial as it helped the team to focus on building a story that resonated with its audience.
Step 2: Convincing People It Works
Squall’s next step was to pivot the startup’s website away from the numbers & stats-based storytelling and create a simple story arc that resonated with people so everyday consumers could logically understand the product works to relieve stress & anxiety.
Squall utilized a caveman to describe why we feel stressed and how the Vagus Nerve can calm the primal brain. By linking the device to a story that could be easily understood and related to it, the startup’s message became clearer to its audience.
The big lesson here is that numbers alone don’t sell people. People need to hear a story where using their own common sense, they can know the product would help them. People don’t want to hear about the details; they want to understand how it can help them in their own life.
Step 3: People are willing to pay for what works
With insights and a clear story, the startup was ready to develop its pricing strategy. People already thought that the device was expensive, so Squall decided (counterintuitively to most) to increase the price. While most marketers advise decreasing prices to increase the conversion rate, the decrease in gross margin usually counteracts any improvement in CAC. Furthermore, when a company is early in its go market cycle, it’s required that they maximize their gross margin because they are offering a unique solution to the market & should be considered high value. So often, when people say your product is too expensive, you should try raising the prices because the price increase may result in a negligible increase in CAC.
Through the use of comparison bias and bundling, Squall was able to increase the startup’s gross margins by 83% while boosting the conversion rate. The startup bundled multiple products together and marketed the product as a package deal. This allowed them to sell multiple products and increase gross margins. The startup also used comparison bias to its advantage. By utilizing non-linear pricing in its packs, Squall was able to increase the AOV.
In conclusion, the importance of building a story that resonates with your audience and developing a pricing strategy that works sounds simple but requires thinking outside the box. By focusing on the insights gained from surveys, interviews, and split experiments, the startup was able to understand its customers’ pain points and address them through story-telling and an effective pricing strategy. This story shows that unit economics need not be an insurmountable problem. With the right insights, story, and pricing strategy, startups can create a sustainable and profitable business model.
Do your unit economics need to be improved? Squall can help.
