Case 039Unit economicsCore

Nikhravik Beauty, a D2C skincare brand, pays Rs 650 to acquire a customer, and only some customers reorder. When does a customer become profitable?

The situation

Nikhravik Beauty sells skincare online, direct to consumers. It spends Rs 650 on marketing for each new customer it wins. The average order is Rs 900 at a 62% gross margin, and shipping plus payment costs come to Rs 120 an order.

Of new customers, 35% reorder within 90 days, and 60% of those reorder a second time. Assume no further orders after the third, and that the order value and costs stay the same on repeat orders.

Your task

What does each order contribute, when does the average customer pay back the Rs 650, and how much room is there for error?

Quick check

Does the expected customer pay back the Rs 650 acquisition cost?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

The first order loses Rs 212, and the expected customer clears the Rs 650 cost only by the third order, Rs 33 ahead. Each order contributes Rs 438: Rs 558 of gross margin less Rs 120 of shipping and payment. The average customer places 1.56 orders, worth Rs 683. That is a 5% cushion: a CAC of Rs 683 or a first reorder rate below 30% wipes it out.

Step 1What does one order contribute?

Think of a tuition teacher who pays Rs 650 for a newspaper advert to find each new student. The first month's fee barely covers the advert; the teacher earns only if the student stays. A D2C brand buys customers the same way, so the question is never whether one order is profitable but whether enough orders follow to repay the cost of the first. One order: Rs 900 at 62% gross margin is Rs 558; less Rs 120 of shipping and payment is Rs 438 of contribution. Against Rs 650 of acquisition cost, the first order is Rs 212 short.

Step 2When does the average customer pay back?

Weight each later order by its chance. 35% of customers place a second order, so it adds 0.35 times Rs 438, Rs 153.3, taking the expected total to Rs 591.3, still Rs 58.7 short. A third order comes from 60% of that 35%, 21% of customers, adding Rs 92.0. The expected customer reaches Rs 683.3, clearing Rs 650 by Rs 33.3 on the third order, about six months after the first.

The relationship
Expected contribution=438×(1+0.35+0.35×0.60)=438×1.56=683.3683.3−650=33.3\text{Expected contribution} = 438 \times (1 + 0.35 + 0.35 \times 0.60) = 438 \times 1.56 = 683.3 \qquad 683.3 - 650 = 33.3
438contribution per order, Rs: 900 x 62% - 120
0.35share of customers who place a second order
0.60share of those who place a third
650acquisition cost per customer, Rs
What it says in wordsEach order's contribution is weighted by the chance it happens; the expected customer is worth Rs 683, only Rs 33 more than it cost to win.
Cumulative contribution per customer against what it cost to win them, Rs4008001,200438438After order 1591876After order 26831,314After order 3CAC Rs 650order 1: Rs -212+33expected customer (35% reorder, 60% of those again)a customer who does reorder
The first order contributes Rs 438, Rs 212 below the Rs 650 acquisition cost; the expected customer reaches Rs 591 after the second order and Rs 683 after the third, just Rs 33 above the cost line.
Step 3How much room for error is there?

Very little. The cushion is Rs 33 on Rs 650, about 5%, so the business is roughly at break-even on each customer it buys. If acquisition cost rises from Rs 650 to Rs 683, which can happen in a single festive season of competitive bidding for ads, the expected customer no longer pays back. If the first reorder rate slips from 35% to 30.3%, the same. Nikhravik's growth is safe only as long as both numbers hold.

First reorder rateCAC Rs 600CAC Rs 650CAC Rs 700
30%+48-2-52
35%+83+33-17
40%+118+68+18
Rs of profit or loss per customer after three orders. At today's 35% reorder rate and Rs 650 CAC the customer is Rs 33 ahead; a Rs 50 rise in CAC or a five-point fall in reorders puts it behind.

What would you ask the founder? Reorder rates by acquisition channel, because customers bought through discounts often reorder least. Whether the 35% is measured on recent cohorts or flattered by early, loyal ones. And whether a subscription or a refill product could raise the second reorder. The limitation of this model is that it stops at three orders and ignores the time value of money; a customer who keeps buying for two years would change the answer, so ask for retention beyond 180 days.

Where candidates lose it

The common loss is using the contribution of a customer who reorders twice, Rs 1,314, and calling the business comfortably profitable. Most customers never reorder; the expected customer places 1.56 orders, not three.

The second is computing payback on gross margin, Rs 558 an order, and forgetting the Rs 120 of shipping and payment, which makes every customer look about Rs 187 better than it is.

What the interviewer asks next

  • What first reorder rate would Nikhravik need to support a CAC of Rs 800?
  • A refill subscription lifts the second reorder from 60% to 80%. How does payback change?
  • How would you reconcile this per-customer view with the brand's reported EBITDA?

Company names and figures are illustrative.