If you were to turn off all of your paid marketing and ads, what would happen?
How long could you stay in business?
If your answers are “not sure” or “not long”, then, as a merchant, you’re Default Dead.
Ecommerce brands & Default Dead or Default Alive
Default Dead, in an ecommerce context, means if you were to lose your paid acquisition channels and your repeat customers, organic, and word-of-mouth new customers don’t cover your essential expenses, the clock will start ticking toward the day you’ll have to shut things down.
However, the flip side of this coin is that if your business can survive without the help of paid marketing, then your business is “Default Alive.”
This isn’t a new concept: Default Dead is a term originally coined for tech startups by Paul Graham, one of the founders of YCombinator.
In his definition, if a startup continues to grow at its current rate (assuming expenses stay constant), a Default Dead startup will eventually run out of money and have to shutter—but a Default Alive startup will not.
This dead/alive model is useful for startups due to their inherent volatility, but it never really made sense for ecommerce merchants…until now.
Calculating the status of your business: Is your business Default Dead or Default Alive?
Calculating if you’re Default Dead or Default Alive is the first step.
For most brands, this can be done as follows:
If this is greater than 0 then you are Default Alive; less than 0 and you are Default Dead.
Your cost to retain is calculated like this:
An example of what this could look like would be the fictional ACME Corp. Let’s say they have an Average Marketing Spend per customer of $14 (that includes the monthly cost of marketing employees, tools, paid content etc. combined, divided by their average number of customers each month), and orders have an average discount of $13, for a Cost to Retain of $27.
If their Profit Margin on an average order is $21, then their Default Dead or Alive result is -6, making them Default Dead.
Why is answering this question so important for ecommerce brands?
Over the past year, we’ve seen how iOS changes and social media algorithm updates can quickly evaporate profitable sources of new customers. In one study, merchants’ average Facebook ad campaign effectiveness dropped from a 6x ROAS (return on ad spend) to a 2.4x ROAS due to the reduced ability of Facebook to track shoppers on iOS devices.
It seems like every day there’s a new example of a successful merchant posing the question on social media: “Are anybody else’s Facebook ads acting up?”
Data privacy changes happened rapidly over the past year, and this shift is likely not the last time merchants will need to quickly adapt to unexpected downturns in ad effectiveness.
As a merchant, ensuring you’re Default Alive means focusing on the things you can control: your relationship with your existing customers and your brand.
This doesn’t mean you shouldn’t be advertising while the getting is good, but rather that you have retention and organic demand-focused activities in place that will help your brand stick around for the long haul if an unexpected curveball is thrown your way. We’ll be sharing lots more about techniques you can use to tackle this in future posts.
Planning for the future & course correcting
If it turns out your business is Default Dead, you need to take swift action to ensure your business can survive any volatility that surrounds ads or paid acquisition.
In future posts, we’ll explore what you can do to achieve or strengthen your brand’s Default Alive status and how to make sure you can withstand future changes to the ecommerce ad landscape. Doing so will be what separates merchants that get hit hard from those that can weather any algorithmic shifts.