Unprofitable Categories Drive Acquisition

Jerry Hum shares insights about Touch of Modern's strategic shift from growth to profitability, emphasizing the importance of maintaining a diverse product mix despite varying profitability across customer segments. The company discovered that different customer segments had inverse category preferences, leading to a nuanced approach in category management.

• Customer Behavior Insights:

  • 10% of visitors return daily (gaming-level engagement)
  • 40% return weekly
  • 80% return at least monthly
  • Daily visitors are 10x more likely to purchase than tri-weekly visitors

• Revenue Distribution:

  • 80% of revenue comes from top 20% of customers
  • Category preferences completely inverse between loyal and occasional customers

• Strategic Category Management:

  • Cannot cut unprofitable categories because:
    • New customers prefer different categories than loyal customers
    • These categories serve as acquisition channels
  • Solution: Maintain all categories but:
    • Keep less popular categories for new user acquisition
    • Strengthen inventory in categories preferred by loyal customers

• Profitability vs Growth Decision Factors:

  • Market timing and investor sentiment
  • Understanding available operational levers
  • Company's ability to execute the chosen strategy
  • Risk assessment between founders and investors
  • Cultural implications of shifting focus

• Results:

  • Achieved EBITDA profitability within 10 months after strategic shift
  • Successfully balanced new user acquisition with loyal customer retention
  • Maintained growth while achieving profitability goals

• Key Philosophy:

  • "Growth comes in and out of style, but profitability is always cool"
  • Swimming with one hand close to the pool edge - maintaining ability to become profitable if needed