Josh Henshaw from Coniston Capital talks about marketing from an investor’s point of view

Josh has plenty of experience in fund-raising, having spent 5 years investing in SMEs prior to joining Coniston Capital. 

He gives his opinion on what makes a great brand, the pros and cons of selling products through subscriptions vs. one-off sales, and explains the importance of CAC, AOV and LTV, collectively. 

We also discuss the importance of having multiple marketing channels and why, as an investor, Josh does “not want to see any single reliance on one marketing channel,” whilst touching on the advantages of user generated content for a business.

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Andrew Veitch: Hello, and welcome to The Joy of Marketing, with me – Andrew Veitch.

This week, I’m joined by Josh Henshaw from Coniston Capital. Josh and I actually have invested together in a couple of e-commerce businesses. And I thought it would be great to get him on the show, just to give a bit of a view about how you should approach that next step, when you’re ready to raise funding to grow your business.

So Josh, welcome to the show.

Josh Henshaw: Hi Andrew, thanks for having me.

AV: So just kicking off, I mean, within and obviously I’m just talking here within the direct to consumer, what sectors do you like, when you kind of see it on a on a business plan? And what sectors do you think, oh, no, this, this isn’t going to be one for me?

JH: Yeah, it’s a good, it’s a good question. Um, so I suppose for me, my kind of key passion and luckily, it’s been my focus throughout my time, investing is consumables.

So, you know, that will be your FMCG’s – so ready meals, meal kits, flavour pots, pet food, flowers, and the like. And suppose key reasons I really like those are one, it’s consumable, so it lends itself very well to DC proposition and indeed, if you’re going to consume it, there’s a good need for repeat purchase.

But also, it’s around with the occasion that comes with those consumables. So when we think about flowers or meals, for example, you know, I can send a bunch of flowers for someone’s birthday, for a christening, wedding, graduation, and it goes beyond just becoming a product, it starts to become something that’s more emotional than that. And that’s really important when building a brand and especially direct to consumer brand, having that direct connection with the consumer.

And similarly, with sort of, you know, meal propositions, you order your meal box, you cook it for, you know, your family coming over, for yourself after a long day at work and then the ability to then have increased product ranges. So you might do some seasonal stuff around Christmas, you might do some stuff around Easter. And again, it just starts to embed you more into the lifestyle of a consumer. So that fundamentally just becomes habitual for them, which is, you know, what you’d really strive to do?

AV: You know, I absolutely agree with that. I think if you’re selling a product in an area that people aren’t very passionate about, you know, it is quite hard to build a big brand. I mean, a classic one is cars and insurance. I mean, people are very passionate about cars, you know, a Skoda and an Audi might be a very similar thing, but from a brand proposition they’re radically different. On the other hand, when you talk about car insurance, I mean, frankly, nobody really cares, do they? You just buy whatever’s the cheapest.

JH: Yeah, absolutely. And I think the car proposition is a really interesting model to look at, you’re completely right, you have the functional Skoda, or you’ve got the passionate Audi one is going to give you the thrill of driving for the pleasure of it, one is just going to get you from A to B, I myself used to own a Skoda.

AV: Yes. And I’m sure the margin on an Audi is much better.

JH: Probably, indeed, yes. And then and then I suppose, again, coming back to your question, thinking about, you know, one’s that I’m maybe not so hot on, this is more driven by my experience as a consumer. One area, that I’ve always really struggled with is that sort of slightly large and cumbersome, you know, the furniture, furniture, as a kind of a sector. I mean, I know you’ve recently moved flats and sort of, you know, struggled with that whole buying process. But when I moved into my flat, we ended up having to order flat pack furniture, because that could come in a week, otherwise, it would take two months. I’ve toyed with the use of sort of, you know, or augmented reality to try and envision within, you know, my flat or our living space. I haven’t really found that particularly slick process for one that actual, you know, customer purchasing experience, but also the actual delivery of it and that user experience. So that’s something that I’d be interested to see if there’s a solution there. But one that I may be not so enthusiastic about

AV: No, and I certainly obviously furniture is one of the areas where I don’t think anybody has has really got that to work properly in e-commerce. I mean, obviously, as a consumer, when I order I expect everything fast, and Amazon, Amazon has trained me now basically, to expect it next day. So if I, if I log on, and I’m told that six weeks, 12 weeks, that’s not really on. But then obviously, wearing my business hat, I can understand why furniture businesses can’t hold enough stock to be able to ship next day. So that probably is a sector that I join you, certainly as an angel investor, I wouldn’t be rushing to react.

So yeah, so you did just hint briefly at brands there. So I mean, what would be the sort of signs to you that this is a great brand, and this is something you’d like to get involved in?

JH: Yeah, so that’s a really interesting question and I suppose that there are several key things here, but I’ll just kind of highlight a few that I always like to think about when I first view a company.

And, you know, first and foremost, is the brand actually resolving a real need? Or is it trying to solve an issue that isn’t really there, is it making a mountain out of a molehill? If it’s the former then great, if it’s the latter, you know, as an investor, I’m going to struggle to get on board with it.

The brand also needs to have a clear purpose and mission. So is it enriching the customer’s life beyond just a product or service, and as a brand are people clearly communicating that to the customer? And during a diligence process, one of the things that I always like to focus on is – are the staff bought into that vision? Because you know, your staff are the ones who are going out there delivering the service, communicating the message to the outside world and your consumers. So be that marketing, customer service, sales, people doing the picking and packing at distribution centre or manufacturing the actual good. So you know, without that sense of belief and passion, it wouldn’t be an as authentic brand experience that you really require to build one of these brands that maybe you know, have longevity or be sustainable. So that’s key.

Differentiation is another. So you know, what is the USP of a brand? What are they doing that’s different to the competitors out there? Does it have an amazing purchasing experience through an app or a call centre? Is the unboxing something really memorable? So something that goes beyond just – can I get next day delivery, which is just an outsourced, third party provider. I think as well, it has to be customer centric offering. So does it offer exceptional customer experience? And is it also willing to listen to the customer? And indeed, if it has to innovate to what the customer really wants and needs.

AV: I guess one of the ways you might assess that is by looking at Trustpilot. And review sites.

JH: Yeah, yeah, absolutely. So you can look at Trustpilot or review sites, although, you know, I think in some cases, that might be a bit of a red herring. I, I do always like to kind of order the product regularly myself, just to see if there’s also a consistency to it. But I think that’s really important when you’re going through, you know, an investment process, which can last up to three months, because there can be huge volatility of products. So that’s sort of consistency is also key.

And then I think, finally, and this is something I’ve been focusing on more recently, its around community. So especially the power of the online community via the likes of Facebook. So this is a great place to actually, you know, build a brand. So how engaged are people with a brand? How passionate are they in their posts? Are they responding to other people’s posts? Is there you know, UGC that I can use on other platforms?

AV: UGC, user generated content, just for people that aren’t all fame.

JH: Yeah, so yeah, so have they uploaded pictures of their meals that we can use, you know, as authentic content that I can use on Instagram, for example, based on Snapchat. And then Fundamentally, this could lead to the ideal, which is, can I get my consumer to sell my product for me via this community?

So that’s something that I like to look at. And I suppose when I first look at a brand, those are some of the things I really like to delve into. And if they can kind of tick those boxes, then we’re in a pretty good place.

AV: Okay, so I’ve got, I’ve got a great brand, I suppose the mechanic of selling is quite a division. And I will say, I’ve tried both. There’s quite a division between just the ordinary one-off selling, or subscription. So what are your feelings on the pros and cons of these?

JH: Yeah, yeah, absolutely. And, of course, there are both advantages and disadvantages to each but you know, obviously, depends on what product or service you’re offering, who’s your customer base, etc.

So, from an investor’s perspective, you know, a simple and immediate one is, from a subscription perspective, one of the advantages is an investable view, this is higher quality earnings, because it’s recurring. So, you know, they will view that as a better source of income. I think, coming back to our point around, you know, the automated purchase, if you’re sort of, you know, the Skoda buyer maybe. And it’s sort of a more functional purchase, where there’s not a really great user experience to actually purchase it and it’s more of a necessity. So you know, Razor heads, and maybe washing up tablets, having something like that just delivered to you on sort of a monthly basis, for example, where you would historically maybe only pick it up once you’ve run out, so actually, it just going to end up being, you know, not clean shaven or have dirty clothes. I think subscription work really well for those businesses.

However, some of the disadvantages that come with that is what we’ve seen in some of our portfolio companies, which is you have to be so clear and communicating the fact that you are signing up to a subscription, you need to make the cancellation, you know, straightforward because if someone forgets to cancel, or you know, they didn’t realise what they’re getting themselves into, and then you suddenly take a sum of money out of their account. This can really break that sense of loyalty and trust between brand and consumer. And trying to win that back is really, really challenging.

And I think Parsley Box, which is you know, a business we are involved in together that delivers ready meals to ambient ready meals with class for up to six months in your cupboard for baby boom past generation is a prime example of where a subscription probably wouldn’t work. Because I think, one, you’re dealing with a consumer who is going to be 60, a lot of 60 plus a lot of whom are sort of maybe in their 80s. So it could be viewed as more vulnerable. They maybe don’t know what they’re getting into. They could end up just getting, you know, endless supplies of meals being delivered, having money coming out of their accounts

AV: Parsley Box actually goes far as to say in a lot of their adverts – no subscription. (Yeah) I mean, that’s certainly is something I’ve, where I’ve ran businesses that have done the same product as a subscription and not as a subscription. I’ve always found that it’s roughly twice the CAC to recruit a customer on a subscription as it is to recruit a customer one off, because I think I think people are just very, very cautious about it.

JH: Yeah, I would agree. I mean, people, people are cautious about them, they don’t necessarily want to have that absolute commitment to it. And I think by providing a one off, you put the control back into the consumers hands. And I think again, going back to parsley box, one of the things is, it’s a product that can last for up to six months in a cupboard, that’s one of the great USBs to it, everyone’s going to have a different consumption habit. And their consumption habit is not the same week in week out some weeks, they may have one meal, some weeks they may have five meals, you just can’t create a subscription model that’s going to suit that, otherwise they’re going to be endlessly going in and out changing their subscription model, that you may as well just have one off

AV: I agree. So I guess the other thing that e-commerce businesses tend to spend quite a lot of time doing is working at how to recruit customers. So which is easier said than done. So what sort of mix would you be looking for in marketing channels?

JH: Yeah, this is this is a really good question. And something that we always like to front load, when we’re when we’re looking at a business, we basically do not want to see any single reliance on one marketing channel. So for example, Facebook, because we view that as just a single point of failure, you know, if anything would happen to Facebook that would compromise that channel, where your ability to recruit cost effectively that could be detrimental to the business model. We ideally, in sort of when we invest around the series A stage, we’d like to see, you know, a couple of channels in use that can cost effectively recruit customers, ideally across online and offline.

So you know, online being your Facebook, your PPC, Tik Tok, Snapchat. Offline being newspapers, magazines, swaps, inserts, for example. And then maybe, you know, building that at a later date up towards TV, which is good from a customer acquisition perspective, but great from a brand and awareness perspective.

And I think whenever we look at a business, we always think about exit, and we like to work our way back. So we think in it, what does the business have to look like for us to exit this to say private equity or trade, if you’re a trade player coming in, and you want to buy a business, to take it to the next level, you might be having to invest four or five times the amount in marketing to achieve that growth. Now, you as a business need to have a channel mix that can cost effectively recruit those customers, and deliver the solid unit economics and return on investment they’re looking for, but with a marketing spend, that’s four or five times higher than you’re currently running at. So to have that kind of spread of channels is critical.

And I think TV, there is a great one, because actually their mantra, you’ll know better than I on this, but TV is a great one where you can invest a huge amount of money. And it’s highly scalable.

AV: Well, absolutely. I’m an enormous fan of TV. And there is just that bit more of a barrier to entry. I mean, I’m concerned, certainly as a marketing director, I would be concerned if my business was dependent on Google PPC. (Yeah)

I’ve been I mean, I was actually running a business where PPC was a big part of the mix. And then one day, Nestle one of the largest food company in the world, one of the largest food companies in the world, decided to compete against us in the PPC auction. So I was running quite a small business. My main competitor was one of the largest companies in the world, and we were in an auction, so it was fairly clear who was going to win it.

JH: So you came out on top then.

AV: Yeah, so I really so it’s, it’s so easy for people just to pile into PPC, whereas getting a TV campaign working is, you know, there’s just a little bit more of a I guess, a bit more of a moat there. And as you say, you also have that issue on PPC that there only are a certain number of good searches, whereas TV is something that you can really, you know, you can really scale out.

JH: Absolutely. I always feel like with TV as well. It’s a great opportunity for you to really sort of get your brand’s story out there and mission. So a really great challenge, something we’ve been experimenting with and the businesses I’m involved in and it’s actually been proven quite successful, which is great.

AV: So Josh, I know that one of your real passions is spreadsheets. Could you just talk a little bit about lifetime value? Why it’s important and how you calculate it?

JH: Yeah, absolutely. As you say, that’s a real passion of mine. But firstly, like, why is lifetime value important? I mean, it fundamentally addresses the key principle of how much profit, and you know, what is my payback period from this customer. So just on that payback period, you know, when we’re looking at a business, you want to, you know, understand how long it’s going to take until you start to make profit from our customers. So sub six months, that’s a great place to be sub 12 months is a good place to be in 18 months is still workable, you know, when when I’m looking at LTV, I think companies often present it as a, on a revenue basis. So how much money am I going to get from this customer? What investors care about is contribution levels. So how many pounds are you going to put in my pocket over your lifetime, as one of my customers so, we always look at it on a contribution level, so after your raw materials, picking, packing, shipping, credit card fees, and marketing costs. And the way in which we’ll model it out is, you’ll obviously be able to, you know, figure out using Vaov and then your contribution margin – how much you’re making per order and there’s going to be probably a variability between the new and for repeat, given offers to onboard new and then your repeat orders probably being higher. And then you’ll look at sort of historic trends around retention, and how many orders people would place. And from that, it’s quite simple to kind of model out you know, what you or you forecast a contribution LTV to be. But then again, this is not a static number, right? In your roadmap, you may be having, you know, a launch into new products, or you may be bringing manufacturing in house, all of which is going to have kind of a knock on impact. All this will fundamentally tell you is, do I have a business model today that can make money if people act way they have historically acted?

AV: Yeah, and just to get in a little sales pitch. And obviously, if you’re using machine labs, you can just go in and there’s a cohort analysis table that will help you

JH: Just to push the sales even further, from an investor’s perspective, if you do have that data to hand and neatly packaged up, it makes our jobs a lot easier. I would encourage you and implore you to get the product.

AV: Okay, so apart from lifetime value, what other metrics would you be looking at?

JH: Yeah, so it’s an interesting question. And I think it’s almost slightly loaded in a way, because with all of these metrics, what you what it’s really important to recognise is you can’t look at them in isolation, and i’ll kind of come back to my key reason for why on that, but we always look at, obviously, you know, your CAC, so your cost of acquiring a customer, the volume of customers you on board, it’s important to look at, in certain instances, the cost of a repeat transaction. So you know, it’s typically one of businesses, how much as a marketing cost to get a repeat order, average order value, that’s for both new and repeat and tied into the, the new would definitely be the kind of what offers are we putting forward to help onboard customers.

But beyond that, it’s really a focus on that kind of retention piece I discussed earlier. So typically how many boxes are people ticking. And with this, it’s really important, especially if you’re a young business to, you know, instead of a fact that the earlier cohorts are not necessarily the best representation of how future cohorts are going to perform, because you’ve probably picked up friends and family as well as the kind of a hard core customers who have really been looking for your product. So actually, there’s probably going to be a bit of a change and maybe a slight softening of that retention as you kind of move forward. So that’s always something to be mindful of.

And then I think final piece on that one, that I’m really interested in is actually the demographics you’re looking at. So we use mosaic profiling to be able to really drill down into what type of consumer is actually purchasing this. And that gives us a great understanding of really how big is the market, what penetration do we need to be able to achieve to deliver before plus numbers, but really critically, it will tell us who are the best performing customers. And this is this is really interesting, because what this comes back to is with a point around CAC, we look at CAC in isolation. If you’re a CMO, Andrew, I’m sure you could deliver me an excellent CAC. But you would sacrifice my average order value and my retention by saying, “Okay, well come on board, and I’ll give you 75% off your next reorders.” You then have a terrible AOV and then when your third orders finally up, a lot of people are probably just gonna churn off because you probably just picked up a load of kind of voucher vultures who just buy around the next best deal. You can’t just focus on one of these units or metrics. You have to look at number rounding and it’s very difficult to achieve great AOV, great CAC, great retention all at the same time, but I’m happy to trade off one for the other. So maybe if my CAC is a little higher, but actually I get really good AOV and really good retention, my payback period might still be within that six month period. I’m happy with that.

AV: Yeah, well, I think about the marketing trilemma, you know, where you can only have two of the three factors. So you can have CAC, lifetime value, or volume, any two of these three. So and, you know, you tend to start with CAC, and LTV, you know, cheaply recruiting great customers. But the problem is, the CEO of the business will say to you, as the marketing director, we need more sales, so you have to increase volume. And at that point, you have to either sacrifice quality, effectively lifetime value or spend more sacrificing CAC. And I think usually the answer to that question is it’s CAC that you sacrifice because it’s usually better to pay more to get good customers.

JH: Yes, you get right customers who are going to stick with you and keep on ordering.

AV: Fantastic, I suppose. So let’s just imagine we followed all of this advice, we now have a wonderful domestic business. I mean, I guess the dream, particularly when you’re in a market like that maybe isn’t that large, I mean, obviously for our listeners in the US, it’s maybe slightly less important for them to go international, because they’ve got such a giant domestic market as it is. But for those of us in smaller European countries, we probably do reach a stage where we actually have to think about expanding. I mean, how important is is that to you as an investor? And do you do you feel comfortable when people talk about going international?

JH: Yeah, I mean, look, it’s a debate we’ve been having with several of our portfolio companies. And one of the key reasons you might want to take it International, or indeed, and another way to do it is actually just by expanding your product verticals. So you can maybe enter into new markets, just within the UK by expanding what products you offer. So there are a few ways of doing it.

But the key reason we always like to do it is: one, it could just be that we want to grow a bigger business. And actually, we see that potential. But for us, again, we’re always thinking about exit, and you have to leave some value on the table for the next buyer to really say actually, that’s where I’m going to be able to make my ROI. So I think, look, if you can maybe hypothetically prove it out. If we take Europe as an example. And you can prove it out in one European country and say, look, then you can roll out to a few other countries, that could be good for sort of a trade player coming in.

One of the things I would say about it, this is what we’ve experienced, and I know Andrew you’ve experienced this as well is it’s very challenging to take companies abroad, it costs more than you think. And there are so many things that you just wouldn’t have thought about the turnout to be an issue. So for example, one country we launched into, the returns rates were just so much higher than they were in the UK, or another one we launched into, actually did cash upon delivery, as opposed to you know, anything with a credit card. And it’s just stuff we didn’t know. So if you are going to do it, you need the appropriate firepower. But more critically, you need someone sat around the table, who’s been there done it before, and probably has a bit of a bloody nose.

AV: I mean, it’s it’s hard. I do also think some of some sectors are harder than others. I mean, I’ve spent most of my career in food and drink and food and drink, well, you just need to visit different countries. And you can see that food and drink is something that’s radically different (variable). And you know, with hindsight, my attempt maybe to launch the British ready meal into France. I tried to take cottage pie to the French. So it was tricky. I mean, sometimes I think you know, when you talk about leaving that thing for the the acquirer, I do sometimes think that a great international strategy is better left on PowerPoint.

JH: Yeah. And I think, look, it’s a lot of the businesses we see sort of a first time founders and obviously there’s a you know, there’s an ambition and a desire to take it International. However, we do always, you know, in the first instance, just have the idea that – just look, at some point, you know, this is going to be very possible, but there’s still a lot to go after in the UK market. I mean, we’ve got businesses that turning over sub a million pounds and saying, well, we need to go to the States. You don’t just focus on the UK, the market probably plenty big enough, get that absolutely nailed. And then consider your next move. There’s no need to rush it. Really just nail what you’ve got in the domestic market. Once that’s done, done, really consider your options.

AV: Well, that was absolutely great. you’ve been a fantastic guest. Thank you very much for the time.

JH: Thanks for having me.

AV: If you would like to meet your Shopify store or other ecommerce store so successful that Josh would invest in it. We will guide you through our marketing playbook and help you rocket your sales. Thank you for listening and see you next week on the Joy of Marketing

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