When Blue Apron (APRN) gave investors their first glimpse at its financials with its S-1 IPO filing last year, one trend stuck out like a sore thumb. Blue Apron's customer acquisition costs were climbing astronomically, and its marketing spending was getting less and less efficient. That came to the fore when the company pulled back on marketing spending in the latter half of 2017 and saw its customer base tank.

Nine months later, the problem may be even worse. At a recent investors conference, Blue Apron CEO Brad Dickerson said, "I'm a firm believer that the acquisition of new customers, everything being equal, will increasingly continue to be more and more challenging as more competition, more people spending money on voice and marketing" enter the market.

Blue Apron investors are in for a big challenge.

A family cooking a recipe from Blue Apron.

Image source: Blue Apron.

Some big name competitors

In just the last nine months, the competition has gotten much more intense.

  • HelloFresh stepped up its marketing in the U.S., and it's poised to overtake Blue Apron as the most popular meal-kit delivery service in the country.
  • Walmart (WMT 0.08%) started experimenting with meal kits at the end of last year, and it recently announced plans to offer its own original kits in 2,000 stores. Walmart's kits will also be available for online ordering by the end of this year.
  • Albertsons bought Plated, injecting it with more distribution capabilities and marketing dollars.
  • And, as always, Amazon.com (AMZN -1.54%), with Whole Foods and Amazon Fresh, looms over the entire grocery industry.

The last three have considerable competitive advantages over Blue Apron as they operate large grocery chains providing significant buying power, logistics capabilities, and a built-in customer base to market meal kits to.

Customer acquisition costs were already climbing

In Blue Apron's S-1 filing, it said its average customer acquisition cost was just $94 per customer, but that was based on marketing spend and customer additions from 2014 to 2016. In the 12 months leading up to its IPO, Blue Apron spent $463 in marketing per new customer. In 2017, Blue Apron actually lost customers, but Dickerson hopes to turn that around this year.

"The focus for us going forward is, definitely, we want to grow our business through new customers, and acquiring new customers, and getting more customers into our offerings," Dickerson said. To that end, Dickerson plans to ramp up marketing spend again, but he cautioned investors on the fourth-quarter earnings call that the company has lost a lot of marketing momentum.

That's an early warning that Blue Apron's marketing efficiency may be even worse in the early part of the year than it was last year before it pulled back on marketing spend. Investors should keep an eye on it to see if it improves throughout the year as Dickerson expects.

A big underlying problem

Blue Apron can ramp up its marketing spend and acquire new customers all day, but if they don't stick around, Blue Apron won't ever become profitable. When asked about customer retention rates, Dickerson didn't give a straight answer. He also avoided talking about customer lifetime value, something his predecessor said is the most important metric for Blue Apron. Those two are closely related.

Dickerson did say he thinks Blue Apron's product expansion could help improve customer engagement, driving an increase in revenue per customer -- something that has stayed extremely flat throughout Blue Apron's history. Some of the changes Blue Apron has planned include additional dietary choices, options for faster prep times, and the ability to have more or fewer meals delivered per week. Dickerson said the company will also explore pricing that's more in line with the value of each meal -- for example, a vegetarian meal should cost less than a steak meal.

Dickerson sees this flexibility as a key to unlock more customer orders and keep customers subscribed to the service longer. Still, the ultimate level of flexibility will come from services like Walmart's or Amazon's, where you can order a meal kit at lunchtime and either pick it up or have it delivered in time for dinner, not the incremental updates Blue Apron is eyeing. 

Customer retention has long been a problem for Blue Apron, and it goes hand in hand with its marketing efficiency and customer lifetime value. As the company ramps up marketing again, now facing more competition than ever, it needs to make sure it's solving its underlying problems.

Otherwise, Blue Apron will be setting itself up to acquire customers at a higher cost than it has historically without any greater ability to earn its money back. That's a recipe nobody wants showing up at their doorstep.