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Blue Apron Case Study

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If you pay attention to the stock market, you may have noticed a new company on the New York Stock Exchange. Blue Apron, a meal kit delivery service, joined the market back on June 29th. It opened at $10 per share, but has since dropped to $7.41 as of the market opening on July 20th (Check out how it’s doing today at https://finance.yahoo.com/quote/APRN?p=APRN). Why has it struggled? First, let’s get a good understanding of what Blue Apron provides customers.

Launched in 2012 by Matt Salzberg, Ilia Papas, and Matt Wadiak, Blue Apron eliminates the middle man to deliver fresh food that users can create with an in-home cooking experience. Blue Apron markets to those who are tired of eating out and value the in-home cooking experience that comes with making food with the family or someone special. It emphasizes the farm-to-table concept and aims to eliminate food waste.

Meal kits start as low as $8.99 per serving for a family of 4. Here’s an outline of their plans:

2 Person Plan Family Plan (serves 4)
  • 3 recipes per week
  • Either 2 or 4 recipes per week
  • $9.99 per serving ($59.94 weekly total)
  • $8.99 per serving (either $71.92 or $143.84 weekly total)
  • 6 meal options per week (3 vegetarian and 3 non-vegetarian)
  • 4 meal options per week (no vegetarian option)

The meal kit comes packaged in a refrigerated box so the food stays fresh. Blue Apron also offers a wine delivery service that come with suggestions for pairing wine selections with recipes. The site includes prep time, cooking tips and techniques, tools from the test kitchen (to buy), ingredients, and instructions for recipes.

Addressing Blue Apron’s Customer Base

Blue Apron takes some key metrics into consideration in analyzing their data. They calculate the number of customers “by counting the total number of individual customers who have paid for at least one Order from Blue Apron across our meal, wine or market products sold on our e-commerce platforms in a given reporting period.”* Here are some other metrics they use:

Metric Indicates:
Average Order Value Mix of product offerings chosen by customers, mix of promotional discounts, and purchasing behavior
Orders per Customer Customers’ purchasing patterns, including repeat purchase behavior
Average Revenue per Customer Customers’ purchasing patterns, including repeat purchase behavior

*

Blue Apron has discovered that 92% of their net revenue for 2016 and through March of 2017 has come from repeat customers.* Repeat customers are valuable to any business. First of all, it is much cheaper to retain a customer than obtain a new one. Secondly, repeat customers will often act as an advocate for your business if they had a positive experience.

Blue Apron is also aware that it experiences seasonal trends in sales. Seasonal trends refer to the business cycle that a company goes through, having more sales in one quarter than another quarter. For Blue Apron, it recognized that the first quarter is the time when it experiences the most customer engagement. Thus, the first quarter will also have the highest marketing expense as a percentage of revenue.

Blue Apron is on track to spend much more on marketing in 2017 than it has in the past:

Marketing Budget (in millions)  % Increase
2014 $5.9 N/A
2015 $31.1 527%
2016 $103.4 332%
3 months ending March 2016 $16.5 N/A
3 months ending March 2017 $50.0 303%

*

IPO

Now, why would Blue Apron want to be registered as a publicly traded company and go through the costly and detailed process of an IPO?

This post on Investopedia gives some basics of an IPO. The main reasons to do so are that an IPO creates capital for the business and can present a sense of credibility to the public. Companies must comply with detailed federal regulations and disclose their financial statements to the public. Publicly traded companies also have more liquidity for investors.

From a numbers perspective, Blue Apron has struggled. According to an article by the New York Times, it has never been profitable despite growing sales each year and suffers from some company abandonment- 60% of users quit after 6 months. Much of its costs have come from advertising and trying to grab a significant share of the competitive meal-delivery service market. Podcast advertising is a large expense for them.

Financial Analysis*

 Ratio 2015 2016 2017 (Thru March)
Liquidity Ratios      
Current Ratio 2.97 1.2 0.84
Quick Ratio 2.52 0.71 0.41
Activity ratios
A/R turnover 1893.85 441.56
Inventory turnover 17.65 2.42
Asset turnover 3.63 0.58
Profit margin -13.78% -6.90% 1.75%
Debt to assets 31.54% 77.52% 96.59%
ROA -25.00% 1.01%

Looking at a few financial ratios, we see that although it is true Blue Apron has never been profitable, they seem to be moving in the right direction when looking at profit margin, but that could change for the rest of 2017. Areas of concern are the falling current ratio and quick ratio which measure a company’s ability to meet current liabilities. They have both fallen over the past 2 years, so hopefully the influx of cash from the IPO can help with this.

Competition

Blue Apron faces a lot of competition, which is part of the reason it’s stock price has struggled. Some of the main players in the meal kit delivery service are HelloFresh, Home Chef, and PeachDish. The market it is competitive, and One reason analysts have pointed to is Amazon’s deal to buy Whole Foods for $13.7 billion. As a brand, Blue Apron must look to distinguish itself from the other meal kit companies. Businesses in this industry can separate themselves by their brand, reputation, customer satisfaction, price, product quality, reliability and timely fulfillment, and flexibility.

Most of the plans are similar in price, and it is often up to cooking experience, customer service, and packaging to distinguish among the competition. Blue Apron has tried to do so by developing a line of wines that pair well with recipes, but HelloFresh also did so as of May 2017. Blue Apron has a “Market” where users can buy supplies that Blue Apron cooks with in its test kitchen. While the “Market” seems like a good idea, it cannot compete with a company like Amazon when it comes to providing retail products. For example, Blue Apron’s Market offers a non-stick pan for $99. Amazon has the same pan for the same price, but if users are seeking lower prices, they can find a similar product for as low as $26.83 elsewhere on Amazon. My suggestion would be for Blue Apron to stick to what they mainly offer. Maybe instead of offering products it uses, it could start to offer the farm-fresh ingredients it uses in recipes for consumers to purchase individually. However, as a business expands its products and area of service, the number of competitors also increases.

In conclusion, we are not trying to persuade you to invest in Blue Apron. By thinking about the logistics and marketing aspects of the company, you can learn as an entrepreneur. Blue Apron knows the type of customer it attracts and uses specific metrics to measure customer attributes. When we do financial modeling for customers at ProjectionHub, we take these factors into consideration. Each plays a critical role in developing an idea for how much revenue your business will be able to accumulate. In starting your own business, you need to be able to track what customers purchase and how much they are willing to pay for products. Knowing what marketing tactics bring in the most revenue allows you get the most return on investment. Analyze your market. What does the competition do, and how can you distinguish yourself from it?

*The numbers and much of the data in this post about Blue Apron were found in it’s initial prospectus filed with the SEC at https://www.sec.gov/Archives/edgar/data/1701114/000104746917003765/a2232259zs-1.htm#ca16601_prospectus_summary.

Feature image: https://image-service.blueapron.com/render/q/quality/75/src/https%3A%2F%2Fmedia.blueapron.com%2Fhome_page%2FSplash%2F20170620_TopImage_640_Mobile.jpg

https://www.blueapron.com/

How to Forecast Revenue for a Startup | Read Our 12 Tips on Revenue Generation for Any Startup – ProjectionHub

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image for startup revenue blogHow to Forecast Revenue for a Startup in 12 Easy Steps

Every startup that needs to create revenue projections will likely go through the same basic process to do so. We’ve created a 12 step guide on how to forecast revenue for a startup below, and we have also created various spreadsheet templates for you to use to create your own sales and revenue generation projections. 

Step 1 – Total Addressable Market (TAM) – # of Potential Customers

The first step in forecasting revenue projections for a startup is to estimate the total addressable market.  This is the entire global market for your product or service.  Here some examples:

  • If you are starting a coffee shop – your total addressable market would probably be the number of coffee drinkers around the world.
  • If you are starting a software company that serves businesses – your total addressable market would be the number of businesses around the world.
  • If you are starting a hair salon – your total addressable market would be the number of people with hair around the world.

Step 2 – Forecasting Growth Rate % of TAMRevenue Projection Funnel

Once you identify your starting point you might know that your total addressable market is growing by some rate each year.  So maybe the number of coffee drinkers is increasing by 3% each year.  If you are following along with the Excel template I have created, you will need to estimate a monthly growth rate for the Total Addressable Market.

Step 3 – What % of the Addressable Market Can you Actually Serve

Now step one of startup revenue forecasting begs the question.  If I open a salon in Miami, Florida, I can’t actually serve every person in the world.  You probably have a 30 mile radius of people that would be considered your “Serviceable Market” – these are the people you can actually serve.

If you are building software for businesses to help them manage employees, then your serviceable market is not all businesses, it is probably all businesses with employees.

Step 4 – What % of the Serviceable Market Will you Target

Next, we need to refine your market even more.  If your serviceable market for your coffee shop is a 30 mile radius, maybe your target market is the workers in the office buildings within a 1 mile radius.  Obviously there may be other competitors that would take some of the serviceable market, so you need to establish your target market.

If you are a salon, your target market might be women between the ages of 25 and 45 within a 5 mile radius to make the most out of your revenue potential.

Step 5 – What % of the Target Market Can you Convert to Leads

Now that you have narrowed down your market to a select target market, the next step of forecasting revenue is to estimate the number of potential customers in your target market that you can convert into leads.  For a business with a website, a lead might be someone that visits the website.  If you have a retail location like a salon or a coffee shop a lead might be someone that walks into your store.  So you need to estimate the number of people from the target market you can turn into leads.

Step 6 – Can you Improve your Conversion Rate

Now with any of these % rates within this model you might be able to improve your conversion rates, or increase the number of leads that turn into customers etc.  So when I am creating a custom financial model I add several lines that say “Growth Rate % of Conversion Rate.”  This means that you can increase (or decrease) your conversion rates within the model over time.

Step 7 – What % of Leads will you Convert into Customers

Now this number can vary greatly from business to business.  For example, a coffee shop might convert 99% of the leads that walk in the door into paying customers, because a lead probably wouldn’t visit without intending to purchase, but with a web based business, a good conversion rate from website visitor into customer might be 3% to 5%. Depending on your industry, you may need to do some research to get an idea of what you can expect in terms of conversion rates from leads to customers.

Step 8 – Churn Rate – What % of Customers will you Lose Each Month

A crucial part of forecasting revenue is determining what percentage of your new customers won’t ever come back again.  For a salon, hopefully customers are happy and they come back on a regular basis for a haircut, but for a coffee shop, maybe a customer was just passing through the area and happened to stop by for coffee, or maybe they hated your coffee.  You need to estimate what % of customers won’t come back.

Step 9 – What is the Average $ Amount of a Customer Purchase

The next estimate you need to make is the average purchase of a customer.  Many of our financial projection templates help you automatically calculate an average customer ticket like our coffee shop spreadsheet.  For example, if someone buys a coffee for a $1 and a muffin for $2.50, the purchase amount should be $3.50.

Step 10 – What is the Growth Rate % of the Average Purchase $ Amount

Again this could increase over time.  As a salon, what if you start offering hair coloring services or maybe perms, or some other service that could increase the average purchase amount per customer.

Step 11 – On Average How Many Purchases Per Customer Per Month

Lastly for startup revenue projections, we need to know how many purchases per customer per month on average.  If you are a coffee shop and have a lot of “regulars” your average # of purchases per customer per month might be 10.  If you are a salon on the other hand and the average customer gets a haircut every 4 months, then your average purchase per customer per month would be .25 purchases.

Step 12 – Total Purchases x Total Average $ per Purchase = Total Revenue Generated

Finally, it is time to bring it all together.  You just need take your Total purchases from all customers  x  the average purchase amount to = your total projected revenue.

Again, this process should work and can be easily adapted for just about any business.  If you have any specific questions about how to forecast revenue growth for a startup or business, you can visit our FAQ page for more information or contact us!


Best of luck!

Is your Market Big Enough? Or Are you Wasting Your Time?

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One of the first things an entrepreneur should do before investing time and money into a new venture, is to determine whether the market is big enough to support your business. In this blog post I am going to go through an example that will demonstrate how to estimate the size of your market, and how to determine whether it is big enough to allow you to meet your goals as a business owner.  

Market for an Innovative Startup

This process is really back of the napkin type math, but it is so simple that many entrepreneurs simply overlook its necessity.  

For example, let’s say you have a new payment technology that would make it more efficient for consumers to make large one time payments.  Your solution is an alternative to a wire transfer from your local bank which may cost the consumer between $20 and $50 just to wire the funds.  Maybe your solution is much more efficient and you only charge $1 to transfer any amount of funds up to $1 million.  Sounds great right?  Everyone should start to use your product, but now the question is, even if everyone starts to use the product, is the market big enough for you to make a profit?  

 

After a bit of research you find that the average consumer performs a wire transfer once every 5 years.  Most people will never make a wire transfer, and those that do, don’t transfer large sums very often.  Let’s say you find that there are 10 million wire transfers made by consumers each year.  You know that if you advertise you can acquire a customer for every $1 of advertising.  So let’s say you invest a million dollars in development of the system and a million dollars in marketing/advertising.

  • This will allow you to acquire 1,000,000 users.

  • Each user will perform (on average) 1 wire transfer every 5 years.

  • You have 90% gross profit margins per transfer, in other words you make 90 cents per transfer

  • So in year 1 after investing $2 million you will make 200,000 transfer x .90 = $180,000

So is the market big enough in this scenario?  No.  It would take you over 10 years to generate $2 million in gross profit.  The back of the napkin math does not work, so you should not waste your time, energy and money to take on this project.

The purpose of this blog post is not to tell you that wire transfer technology is a bad idea, it is simply to show you the process that you should think through before you start a company.  If all goes as planned, is your market even big enough to allow you to generate a profit someday?  If not, don’t waste your time.

The Sneaky Way to Determine Market Size for your Startup

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I was talking to an experienced entrepreneur the other day about how to determine the market size of your startup, and he blew my mind with a sneaky, but effective approach to determining your market size.  So when there is no good source that can tell you exactly what the market size is for your product or service here is a sneaky approach that can provide great first hand data.

Let’s say you want to start a dog boarding business in your city.  Here is what you could do to determine market size:

1.  Call your Competitors as a Potential Customer – First, call the other dog boarders in the city and act as if you are an interested potential customer.

2.  Ask For a Quote –  Then ask for pricing information.  You might ask the nightly rate, and whether they give discounts if you board over a certain number of days.

3.  In Astonishment About the Great Price, Ask for Volume –  When they tell you a price, no matter what the price is, react in astonishment and say something like, “WOW!  That is great!  At that price you must be boarding hundreds of pets each week!  How many pets do you have on an average night?”  Then just let them know you will call back later to book your pet.

4.  Repeat – Now call your next competitor and do the same thing until you have contacted every boarder in your service area.

5.  Analyze – With price and volume information in hand you can get an idea of the total market for your service, you can also determine which competitor has the most market share.  Lastly, you can take the average sales for your competitors and assume you will have the average, and then determine whether that is enough to breakeven.  If your overhead requires you to have 50% of the market to breakeven, you may want  to reconsider whether the market is actually big enough for your business to make sense.

I am not a proponent of lying or cheating, but I also think accurate market data will make a world of difference in your startup, so if you are feeling sneaky, go for it!