Suzy Ross: ‘Why the market is more forgiving of Farfetch’s losses than those of M&S’

But what’s striking is how differently the market reacted. M&S’ share price languishes far below former highs, whereas when Farfetch posted a $436m (£329m) second-quarter loss in August its share price actually went up by 20%. 

So why is the market so apparently forgiving of ongoing substantial losses at Farfetch?

The justification is usually focused on Farfetch being valued as a technology business, but the market is also emboldened by the disclosure in its pre-filing of certain key customer metrics that give investors confidence in its long-term profit potential.   

Customer metrics

Specifically, it’s the information revealing how customers behave over time that is so revealing of future profit potential. 

Ahead of the float, Farfetch disclosed its customer cohort chart (known as the C3). This analysis displays revenue by acquisition cohort over time and shows how total customer spending changes as each cohort ages. It highlights whether you are effectively acquiring loyal customers who will continue to shop for years to come or acquiring fickle one-time shoppers.

What Farfetch’s investors can tell from its C3 disclosure is that the luxury fashion retailer has an incredibly loyal customer base; once Farfetch acquires a customer, it keeps them for a long time.  

What Farfetch’s investors can tell … is that the luxury fashion retailer has an incredibly loyal customer base; once Farfetch acquires a customer, it keeps them for a long time

And every loyal customer is, in effect, an annuity for the business. It’s the sort of customer behaviour more typically seen at a subscription business than a retailer. 

Another powerful example of investors valuing the customer base comes from Revolve Clothing. In 2019, when Revolve went public, it achieved a revenue multiple five times greater than its apparel retailer peers.  

The reason? Revolve disclosed key metrics to investors that showed how it was able to acquire customers profitably and retain them for many years. The upshot, as highlighted by Harvard Business Review, is that the long-term potential for profit was far greater than Revolve’s current revenue suggested. 

Customer transparency

There is a huge opportunity for retailers to shine a light on the underlying loyalty of their customer base by revealing key metrics on customer acquisition and retention.

Such transparency would allow investors greater clarity on the health of the customer base and the potential for longer-term profit, and allow them to value that in the share price.  

Looking at financial disclosures, models and metrics is currently the preserve of academics and investors seeking to evaluate business performance.

However, the customer data that investors want to see is of much more than academic interest. It is the key to future retail growth as retailers move from being shopkeepers to ‘customerkeepers’. 

The customer data that investors want to see is … the key to future retail growth as retailers move from being shopkeepers to ‘customerkeepers’

And its importance is even greater now as in the midst of another lockdown shoppers continue to move online. With the migration to online accelerating, traditional performance metrics such as store like for likes are becoming increasingly meaningless as a way to evaluate business performance.  

Instead, shareholders and management must use customer metrics to evaluate business performance. Customer like for likes should become the norm for retailers.

So what needs to change at the majority of retailers to make truly customer-centric retailing a reality?   

Democratising customer data 

Marketers need to give up their ownership of customers and customer data, recognising that from now on every area of the business ‘owns’ the customer.  

From now on every area of the business ‘owns’ the customer

So that means, for instance, giving the buying teams data about the products and brands that are driving the acquisition and retention of the best-performing customers. And chief marketing officers and their teams need to work closely with the supply chain to ensure the availability of the key brands that attract and keep customers.  

Chief financial officers need to embrace customer-based planning. They must forget more traditional forecasting methodologies like store like for likes, and instead move forward with bottom-up forecasting based on the acquisition and retention of customers and accurately predict future value. Of next year’s revenue and profit, how much is going to come from existing customers and how much will need to come from new customers? 

Data that matters

Policymakers and regulators should be imposing mandatory disclosure requirements for a standardised set of customer metrics. This would force retailers to be transparent about the health of their customer base. In turn, investors would be able to make more accurate valuations by factoring in statistically robust forecasts of future revenue and profit from the customer base.

All this hinges on the right approach to data. Having joined-up customer data – combining identifiable customers (e.g. from loyalty and ecommerce) with unidentified but unique customers (using tokenised credit card data) – must be every retailers’ priority.  

Cloud-based data and analytics tools enable the collection and joining of vast amounts of granular data about individual customers’ behaviour (transactions, product margins, cost to serve, market data, ads and so on) at speed and scale.

Cloud-based data and analytics tools enable the collection and joining of vast amounts of granular data about individual customers’ behaviour

This enables a completely joined-up, single view of every customer’s current and potential value and behaviour that unlocks customer-level trading.

The difference this will make is profound and exciting. Imagine, customers’ long-term value becomes the principal focus for investors’ assessment of business performance. That’s a stark contrast to the current emphasis on short-term revenue that places relentless pressure on retailers. 

The best retailers will be able to make longer-term bets focused on the future rather than just fret over the next quarter’s numbers. 

And that means being able to compete on an equal footing with businesses such as Amazon, and coming out fighting to reclaim lost ground – and even surge ahead – by focusing on and investing in the things that truly matter to customers.