Exhibit 1 Good direct-to-consumer economics target customer lifetime value at double the customer acquisition cost. 1 Most common to look at 12 months, but denition can go beyond 12 months (lifetime). 2Accounts for shipping costs and transaction costs. Good direct-to-consumer economics target customer lifetime value at double the customer acquisition cost. Retention/average purchase rate per customer (purchases per year)1 Customer lifetime value (CLV) ($) Average order value ($) Gross product margin2 (%) Items per transaction Average item value ($) Customer acquisition cost (CAC) ($) Average monthly digital-marketing spend ($) Average monthly acquisitions Tra c (#) Conversion rate (%) Driven by UI/UX and oering A successful business build should reach a CLV-to-CAC ratio of 2:1 before scaling Illustrative theory of value creation Customer lifetime value Customer acquisition cost = Value creation DTC e-commerce: How consumer brands can get it right 5 Operations. DTC requires a logistics setup that differs substantially from what supply-chain managers at most consumer brands are used to. At the early stages of DTC, brands often outsource logistics to guarantee quality, speed, and the flexibility to scale operations up or down as needed. Consumer brands that have their own retail network often use their stores as e-commerce fulfillment centers. Nike, for example, lets online shoppers pick up their purchases at brick-andmortar Nike stores. During the COVID-19 crisis, Nike also introduced contact-free curbside pickup at selected stores. In the mission to optimize operations for the purchase process, it is important to also account for other phases of the customer journey, such as the returns process. Two out of three shoppers say they would not shop with a retailer again after a negative returns experience. Agile operating model. Consumer brands need to be able to adapt their ways of working to rapidly changing customer preferences. Building out an agile operating model enables small, cross-functional teams to work in short sprints to iterate on products and services based on customer outcomes. Using this approach, one home-goods company set up its end-to-end DTC business in only 13 weeks. Getting started: Monday morning questions Before investing in technology or hiring an agency to build the web shop, companies need to ask the following questions: 1. What is the role of DTC in the channel strategy? Will it help drive sales? Generate insights? Combat Lizzy Hillier, The stakes have never been higher for e-commerce customer experience, Econsultancy, October 16, 2020, econsultancy.com. Exhibit 2 Successful e-commerce is built on customer centricity. Source: McKinsey analysis 1 WMS = warehouse management system, CRM = customer relationship management, ERP = employee resource planning. 2KPIs = key performance indicators. Successful e-commerce is built on customer centricity. Technology Data and analytics Operations Operating model On-site UX/UI (website design and optimization) Platform and architecture Inventory management (including forecasting) Organization structure and governance (including KPIs) Shop platform (including tagging) Compliance Fulllment (storage, pick & pack, shipping, returns) Agile ways of working Integration (eg, WMS, CRM, ERP) Analytics tools and reporting Multichannel store operations (marketing, click and collect) Key talent and capabilities Growth CLV > CAC 6 DTC e-commerce: How consumer brands can get it right churn and stabilize market share? It is important to force clarity and assess relevant trade-offs, such as linkages to other channels and existing channel partners. 2. What is the assortment and pricing strategy? DTC requires a clear view of assortment and pricing as part of a broader channel strategy. 3. How will you build up the necessary capabilities? Brands dont have to do all the heavy lifting alone, but they will need to weigh the trade-offs of buying, building, and partnering extensively. There are multiple ways to begin the DTC journey. For brands just starting with e-commerce, using online marketplaces and established apps can be effective ways to learn about what works well online. Other brands that are more digitally mature may want to scale their online presence to engage consumers and generate insights on what works well but hold off on launching e-commerce. But with shopper behavior changing so quickly, brands will need to move with urgency to answer the critical questions and determine how best to connect with their customers online. Arun Arora is a partner in McKinseys Paris office; Hamza Khan is a partner in the London office, where Caroline Tufft is a senior partner; and Sajal Kohli is a senior partner in the Chicago office. The authors wish to thank Earth Chariyawattanarut, Cornelius Grupen, and Hai-Ly Nguyen for their contributions to this article. question; 0 What are the customer lifetime values? How companies calculate customers lifetime values and customer acquisition cost? What is the customer acquisition expensive than retention?