Channel Economics and Subscription Viability at a Specialty Tea Retailer
Hunan-based specialty tea retailer Yuntai (not a real company) sells 180 SKUs. Last year 62% of ¥18 million net revenue came from a large marketplace and 38% from its own site. Finance reports blended gross margin of 50%, but the marketplace charges 12% commission and Yuntai spends about ¥25 per marketplace order on platform ads. Fulfillment costs ¥15 per order on both channels; the own-site payment fee is 0.6%. The own site's average order value is ¥220 and paid acquisition costs ¥120 per new customer. Analysis of 12 months of own-site cohorts shows 32% of new customers place at least one additional order within a year, and repeaters place 2.5 additional orders on average. The CEO wants to cut marketplace ad spend and put the budget into paid search, and also launch a ¥128/month tea subscription whose goods and fulfillment cost is ¥62 per box; monthly churn is 9%. The marketplace contract requires price parity on listed SKUs.
1. Calculate the 12-month contribution LTV of a new own-site customer acquired at ¥120 and assess whether the CAC is sustainable. Then calculate contribution per marketplace order and recommend how the CEO should reallocate spend.
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Own-site unit economics
| Item | Calculation | Value |
|---|---|---|
| Revenue per order | given | ¥220.00 |
| Gross profit | 50% × 220 | ¥110.00 |
| Fulfillment | given | −¥15.00 |
| Payment fee | 0.6% × 220 | −¥1.32 |
| Contribution before CAC | 110 − 15 − 1.32 | ¥93.68 |
12-month cohort value
- Expected additional orders = 0.32 × 2.5 = 0.80
- First order after CAC = 93.68 − 120 = −¥26.32
- Repeat contribution = 0.80 × 93.68 = ¥74.94
- 12-month LTV = −26.32 + 74.94 = ¥48.62
- LTV/CAC = 48.62 / 120 = 0.41
The CAC is not sustainable on a 12-month view: the average new customer does not repay acquisition cost within the year. Break-even needs additional contribution of 26.32, i.e. 26.32 / 93.68 = 0.281 additional orders, which at 2.5 orders per repeater means an 11.2% repeat rate. The observed 32% clears that, but only just. Reaching a conventional LTV/CAC of 3.0 would need LTV of ¥360, hence 4.12 additional orders per acquired customer - a 165% repeat rate, which is impossible under the current model. The lever must therefore be CAC, AOV or margin, not repeat rate alone.
Marketplace order
Contribution = 110 − (12% × 220 = 26.40) − 15 − 1.32 − 25 = ¥42.28. This is positive per order and carries no acquisition risk, but Yuntai does not own the customer relationship or the data.
Recommendation
Do not cut marketplace spend to zero: it is contribution-positive and funds fixed costs. Cap own-site CAC where first-order plus realistic repeat contribution repays within 12 months. With 0.8 additional orders, maximum break-even CAC is 93.68 × 1.8 = ¥168.62, so ¥120 is inside break-even but leaves almost no profit; a safer cap is ¥70–80. Shift part of the marketplace budget into second-order conversion (welcome series, timed reorder reminder), because each converted repeat is worth ¥93.68, and test incrementality with a geo holdout before reallocating.
2. Evaluate the proposed ¥128 monthly subscription using the data given. What churn and cannibalization assumptions would you test before scaling, and what would make you stop the pilot?
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Contribution per box = 128 − 62 − (1% × 128 = 1.28) = ¥64.72.
Expected lifetime at 9% monthly churn = 1 / 0.09 = 11.11 months. Undiscounted LTV = 64.72 × 11.11 = ¥719. If acquisition cost is ¥300, LTV/CAC = 2.4 and payback = 300 / 64.72 = 4.6 months.
Sensitivity: at 12% churn, lifetime 8.33 months and LTV ¥539; at 7% churn, 14.29 months and LTV ¥925; at 5% churn, LTV ¥1,294. A one-point churn change moves LTV by roughly ¥80, so churn measurement is the critical variable - more important than the headline price.
This LTV is not incremental if subscribers are existing customers who would have bought anyway. Compare with the non-subscription pattern: ¥220 every two months gives 110 × 50% = ¥55 gross profit per month before fulfillment and payment, or about ¥46.84 contribution per month after fulfillment and payment. The subscription yields ¥64.72 per month, so it is accretive only if it does not reduce other purchases by more than about ¥17.88 per month.
Pilot design: recruit from existing customers (near-zero CAC), randomize a holdout, measure 90-day incremental contribution including other purchases, track churn by cohort, and test ¥128 versus ¥148. Stop if incremental contribution is negative, if three-month churn exceeds 30%, or if fulfillment cost per box rises above ¥70 at low volume. Do not scale paid acquisition until six-month retention is known; at 9% monthly churn only about 32% of subscribers remain after a year, so a paid CAC above roughly ¥250 becomes difficult to justify.
3. Given the marketplace's price-parity clause, how should Yuntai pursue the channel shift without breaching the contract or destroying marketplace volume?
Read the worked answer
Price parity restricts the listed price of identical SKUs, not the total offer. Viable moves:
- Bundle and exclusive SKU differentiation. Create subscription-only blends, gift sets and case sizes not listed on the marketplace, so the own site competes on assortment rather than price.
- Loyalty and service. Free brewing guides, faster delivery, member-only pre-release and repeat-order convenience are not price cuts on listed SKUs.
- Marketplace as acquisition. Use package inserts, thank-you cards and brand search to migrate customers, subject to marketplace rules; check the contract for anti-solicitation clauses before doing this.
- Measure incrementality. Run a holdout in one region or pause ads on a subset of SKUs for four weeks and observe total contribution, not marketplace revenue alone. Marketplace ads at ¥25 per order still leave ¥42.28 contribution, so cutting them may reduce total profit even if own-site LTV looks strategically attractive.
- Renegotiate. If Yuntai represents a meaningful share of category sales, ask for lower commission or co-op funding. Do not breach parity; delisting a SKU to avoid parity can trigger penalties and lose the marketplace's demand.
Decision rule: keep marketplace spend while contribution per order is positive and incremental; shift budget only where marginal own-site CAC falls below the 12-month contribution it generates. Set an eight-week test with a pre-agreed stop rule, and protect the brand's marketplace rating because that rating drives organic volume.