Last week, Stitch Fix (SFIX) announced disappointing results on their earnings call and noted that they'll be laying off 15% of their salaried workforce. Among the many reasons cited, CEO Elizabeth Spaulding specifically called out the Apple Privacy Updates as a primary reason as to why they have struggled to acquire new customers over the last year.
Stitch Fix is an ecommerce fashion company. After completing a short quiz about their style preferences and sizing, customers are sent a box of clothing to refresh their wardrobe. It’s an interesting concept as it removes the need for the customer to choose specific items. Instead, Stitch Fix wants you to think of them as your personal stylist, boasting the power of their fashionista algorithms to choose the right look for you.
Headquartered in San Fransisco, Stitch Fix is your stereotypical DTC ecom company that somehow shot to a 10B valuation during the pandemic, with impressive customer growth fueled mostly by Facebook advertising. We've seen dozens of these…
Admittedly, there was a point where I strongly considered signing up for this service—but I haven't thought about them in a while—probably because I stopped seeing their Instagram ads.
Spaulding’s comments mark the first time I’ve seen a DTC ecom CEO directly call so much attention to Apple’s iOS14 impact. During the earnings call, Spaulding detailed specific strategies that they are rolling out in response, including Conversion Rate Optimization (CRO) efforts as well as media channel diversification (i.e, looking beyond Facebook advertising).
These changes, which rolled out a year ago but didn’t take full effect for several months, have turned the digital advertising industry upside down. Many brands that emerged over the last 5-10 years have heavily relied on Facebook and Instagram advertising to grow their business. It worked really damn well, and to be honest, it was fairly simple for almost anyone to use Facebook ads to profitably acquire customers.
The golden age of Facebook advertising felt like the roaring 20s all over again. Time-tested concepts taught in universities like the “Four P’s of Marketing or the principles of influence no longer mattered; all you needed was a few half-decent graphics or videos and an email list that could be uploaded into Facebook’s audience matching tool, and the machine learning would take care of the rest.
Many brands found, by far, the best results with direct-response advertising through Facebook, so there was little incentive to invest in concepts like brand equity or to test other channels. Could you blame them?
Stitch Fix is not alone, and I don’t mean to pick on them. Many advertisers—sorry, most advertisers—are still struggling to recover from the impact of iOS14. It has been a rude awakening; a bloodbath. Few brands that were not previously diversified were able to weather the storm with ease. Instead, most brands took a punch in the mouth and have been testing dozens of new strategies within Facebook or elsewhere in an attempt to find new methods of profitable growth.
Of course, there are other factors at play: inflation, supply-chain issues, the war in Ukraine, and more. That said, I cannot understate the impact that Apple’s Privacy updates have had on DTC brands. The former are macroeconomic factors that impact long-term trends, but at a micro-level—for those that are in the trenches with these brands day in and day out—iOS14 feels like the real enemy.
In a May 2022 interview with Ben Thompson of Stratechery, Eric Seufert of Heracles Media noted that:
There are probably about a hundred people in the world that have agency over these decisions at the big tech companies that will ultimately be responsible for the future of the internet… and those hundred people probably have more economic [influence] than OPEC… and so few people understand this.
We are seeing this unfold, and Stitch Fix is a perfect case study to help understand how we arrived here and where we might be going.
Stitch Fix was founded as a subscription box service. They carry apparel from major brands like Nike, Ralph Lauren, Kate Spade, The North Face, etc. Their original service, called Fix, ships a customized-but-random collection of apparel to your door. That is, customers don’t typically choose the specific products that will be included in their box.
In Q2 of 2021, they launched a new service: a direct-buy option called Freestyle. which is an online shop where you can directly buy individual products from them (as opposed to having a random assortment sent to you).
Their story from the last two years follows a similar trajectory to many other pandemic growth stocks and is highlighted by the following moments:
Eric Seufert predicted that the negative impact iOS14 would have on advertising effectiveness would be gradual: “The quality of [Facebook’s] algorithms don’t immediately go to zero; it’s gradual. They sort of bleed out over time.” It certainty looks as if Stitch Fix experienced this effect. Things got bad toward the end of 2021 and got worse at the start of 2022.
During an earnings call in March of this year, CEO Elizabeth Spaulding started by highlighting previous conversations about how "the conversion journey is not linear" and then went on to discuss the results:
Active clients declined 4% quarter over quarter. There were two factors that largely impacted gross adds: first, conversion of new visitors for Fix and Freestyle is not where we want it to be; second, given changes in iOS 14 marketing channels that have historically been effective for us are presenting challenges in effectively targeting clients.
The launch of the direct-buy service, Freestyle, did not go as planned. I am skeptical about whether or not this service offering is a positive or negative addition to the overall Stitch Fix strategy:
On the one hand, I hate it, as it's a misalignment from their core focus. Why should I buy a pair of Vans sneakers from them, as opposed to buying that same pair of sneakers direct from Vans.com or from one of dozens of other retailers? How can this possibly be profitable? This just seems like a distraction.
On the other hand... it’s another revenue channel and adds flexibility to inventory and supply chain management. They could use Freestyle to cross-sell/upsell existing customers of the Fix service and increase average revenue-per-active-user (ARPU). For example, if I were a Fix customer and was randomly sent a Callaway Golf Polo that I really liked, I'd like the option to go on their Freestyle site and order more variations in different colors. Ideally, Stitch Fix would make the process simple and cost effective, and just include those products in next month's box. The cherry on top is free shipping.
But what about using Freestyle as a means of new customer acquisition? I really don’t see the value since you can get these products from dozens of other retailers. The only exception, perhaps, is that Freestyle will allow Stitch Fix to run Google Shopping ads. This would be a low-cost way to increase site traffic and perhaps drive incremental revenue; however, the goal of this program should always be to convert those first-time Freestyle buyers into subscribers of the Fix service.
For example, if a new customer were to convert via Google Shopping ad and buy a pair of Nike sneakers, I’d expect Stitch Fix to include in the box a postcard outlining the benefits of Fix and offering a discount for signing up. This cohort of customers should be targeted with direct mail, email, and other types of advertising (Facebook, etc.), as they are much more likely to become long time Fix subscribers compared to non-customers.
However, I do believe that Freestyle should stay in its lane as a value-add to existing subscribers of Fix. Done right, this could lead to higher ARPU and better retention.
Please forgive my back-and-forth on the matter, but I am truly on the fence about whether or not Freestyle is a good idea. I believe it could be a delightful addition to the customer experience so long as it does not become a distraction from the core customer acquisition strategy
Unfortunately, when Freestyle was launched, leadership let it do just that…
Remember the Malcolm Butler Superbowl? In the final seconds of Super Bowl XLIX, the Seattle Seahawks loomed on the one-yard line, attempting to take the lead against the New England Patriots. Seahawks head coach Pete Carroll called in a pass play, a controversial decision as it removed from the equation bruising running back Marshawn Lynch. Lynch had carried the team for most of the season and the game leading up to this very moment.
Seahawks quarterback Russell Wilson dropped back and quickly attempted a pass to receiver Ricardo Lockette, only it was intercepted at the goalline by Patriots’ defensive back Malcolm Butler. Game over. Patriots win.
Pete Carroll will never live this down. Some speculate that Carroll called in a pass play because he wanted the game-winning touchdown to be credited to his shiny young protege, Russell Wilson, as opposed to the veteran Lynch. This is just speculation, of course, but there’s one clear lesson from that Super Bowl: when you’re on the one yard line, don’t lose sight of what got you there.
Don’t get cute. Don’t be Pete Carroll.
In September 2021, when Stitch Fix launched Freestyle, they redirected all traffic for stitchfix.com to the Freestyle experience.
Oh no! Don't ever do that! Never never never!
We can assume that visitors navigating to stitchfix.com are likely seeking the Fix service, which, especially at the time, is all they were known for. Visitors were likely confused when presented with the option to buy specific items in a traditional ecommerce experience. Conversion rate plummeted.
During the March 2022 earnings call, the CEO admitted to the snafu:
In our efforts to launch and promote freestyle, we chose to direct visitors coming to stitchfix.com toward the Freestyle experience. It is important to note that stitchfix.com is the primary landing page for customers interested in ordering a Fix. Therefore, in leading clients to the freestyle experience first, we inadvertently created friction for those seeking a fix. In an effort to mitigate this friction, we are beginning to direct stitchfix.com traffic to a clear and easy fix onboarding path.
We expect this to boost new fix client conversion over time.
Yeah, me too.
Last week, on the latest earnings call, she highlighted this again; only this time, shifting gears toward blaming iOS14 for the recent performance:
In Q2, we saw that our new onboarding flow created friction for customers' eager for a fix, therefore impacting conversion. In parallel, similar to many in our industry, we continue to navigate the ongoing effects of Apple privacy changes, which is impacting traffic to our site. Both of these have made new client acquisitions challenging.
I would imagine that, like anyone, their Facebook ad campaigns have been turned upside down and CPA costs have risen dramatically. The transcript suggests that their primary attempt at resolving this was to improve conversion rate:
Given that conversion of new visitors was not where we wanted it to be in the second quarter, we took action to refine the onboarding experience and our landing page. This has resulted in approximately 40% improvement in new client conversion in the third quarter as compared to the second quarter. First, we began directing all stitchfix.com traffic to a simplified fix first onboarding path. Now, clients entering through switchfix.com are directed to schedule a fix upon completing a style profile.
After scheduling, their freestyle shop is unlocked. Second, our landing page experience better clarifies our offering and highlights our key differentiators. We now feature more community-based stylist content, and we enable visitors to interact with Style Shuffle before creating an account. While this is indeed positive progress, we are still not yet at our desired conversion level.
This sounds great, but I don't think Conversion Rate Optimization alone will be enough to steer the ship in a positive direction. A 40% improvement in conversion rate is massive; however, we've seen the costs of some Facebook campaigns double over the last year, which would still make these campaigns significantly less profitable than they were pre-iOS14.
It is likely that the Freestyle landing page snafu left their marketing team with the feeling that CRO is the answer. My thought is that this can help, but it needs to complement a larger traffic acquisition strategy.
In addition, overall new client traffic to our website was down in Q3. As I noted at the outset of the call, both factors, conversion and traffic, ultimately played a role in the 3% decline in our total active client count quarter over quarter. We are deeply focused on driving traffic into our ecosystem and reigniting new customer conversion. As part of these efforts, we are further diversifying our marketing portfolio with the support of our new chief marketing officer.
At its core, advertising is a numbers game. The key to success is driving a high volume of quality traffic to your site, recognizing that individual behavior is random, but larger populations can move the needle. I agree that they should be diversifying their media spend and looking to other channels for similar quality, but cheaper, traffic acquisition.
We are moving more into digital channels such as TikTok and YouTube as well as leaning into the use of influencer partnerships. To that end, we recently launched an integrated men's campaign with Keegan-Michael Key called Stitch Fix It. During this campaign, we not only saw an increase over 60% in men's traffic than over the prior weeks, but also strong efficiencies in our direct response ads CPAs. Additionally, as we said we would do last quarter, we have successfully rolled out personalized search.
I applaud the pivot but am critical of the narrative. Brands, and their investors, need to be aware of the paradigm shift taking place in digital advertising. Nothing—not even TikTok—will allow advertisers to return to the ease of targeting and reporting that made the pre-iOS14 Facebook ecosystem so scalable.
We are unlikely to return to a place where we can feel confident that the Return on Ad Spend (ROAS) numbers reported in a given ad platform like Facebook reflect the full impact of the campaigns. To quote Stitch Fix CEO Elizabeth Spaulding: “the conversion journey is not linear.”
Only a small percentage of your customers will directly click-through your TikTok ads or YouTube videos and complete checkout in that session. Almost none of them will click on any display ads or CTV ads, nor will anyone hear your podcast ad, pull to the side of the road, and immediately buy your product.
Instead, we need to rely on a Halo Effect. While a customer might not click through your TikTok ads and directly make a purchase, that ad placement might increase the probability that the might convert through a different, direct-response ad in the future. For example, if I were performing a Google Search for “men’s apparel,” I might be more likely to click on, and convert through a Google Search Ad for Stitch Fix if I had previously seen other ads.
The Halo Effect is difficult to measure. It often requires access to data analysts that can run multi-regression models, and not every small business owner with a Shopify store has this capability in their back pocket. Sometimes it just requires gut instinct.
Spaulding’s comments above hinted at a Halo Effect: "during this [influencer] campaign, we not only saw an increase over 60% in men's traffic than over the prior weeks, but also strong efficiencies in our direct response ads CPAs."
If it were me, I'd have led with this fact. I'd be shouting it from the rooftops.
My suggested edits to her comments, which hope to add clarity, manage expectations, and foster optimism around the marketing program:
We're still adapting to the changing landscape of digital advertising and how it is impacting customer acquisition, specifically in the aftermath of Apple's privacy updates.
We now understand that Facebook advertising, in particular, is no longer going to be a source of new customers with the low CAC numbers that we had grown accustomed to, at least without the help of other marketing initiatives.
Mediums like Facebook and Google can still be profitable avenues for customer acquisition, however, we are shifting gears to launch a comprehensive, cross-channel strategy that will allow this program to return to profitability and scale our customer acquisition efforts.
In addition to focusing on our on-site conversion rate, we are testing new advertising mediums including TikTok, YouTube, and influencer and celebrity partnerships, and we are encouraged by early results.
For example, a recent campaign with celebrity Keegan-Michael Key helped generate a 60% uplift in traffic to our men's categories during the time of the campaign. More noteworthy, though, was that during that campaign, we saw a decrease in CPA across our other direct response channels. This suggests that the Keegan-Michael Key campaign caused a positive impact on conversion rates for our Facebook and Google campaigns. In marketing circles, this is referred to as a halo effect.
We believe that our new mediums, such as TikTok and YouTube, might have a similar halo effect. We don't expect these channels to directly replace what we previously earned from Facebook; however, all of these platforms can work in conjunction to increase customer acquisition at an overall lower cost. This finding has instilled confidence in this new strategy and we are optimistic about our future cross-channel efforts.
We also recognize the role that Freestyle plays in creating a delightful customer experience for our core customer base. We don’t necessarily see Freestyle as an avenue for new customer acquisition, however, we do see the potential for this service to increase revenue per active user, increase active customer retention, and improve our flexibility with inventory and supply chain management. Freestyle provides a unique competitive advantage that makes the core Fix product stand out as a pioneer for the next wave of DTC fashion.
The last two years have been a rollercoaster for anyone working in digital advertising, ecommerce, or for a DTC brand. Everyone is still attempting to find their footing and nearly everyone has made countless mistakes that can hopefully turn into learning experiences. I applaud Stitch Fix for being so forthright about their struggles and being transparent about their strategy, even if I disagree with individual components of it. I certainly hope that more brands will soon understand the need for cross-channel diversification and attribution that factors in the halo effect of these new channels.
I’ll be paying close attention to the Stitch Fix story, because it is the same story that many are facing. The only real takeaway is this: the aftermath of iOS14 has been a massive challenge, and if you’re lucky enough to have survived to this point, don’t call a pass play on the one-yard line. Instead, stick to your core focus and give yourself the best chance to succeed.
We'll get back to you within a day to schedule a quick strategy call. We can also communicate over email if that's easier for you.