Blue Apron (NYSE:APRN) reported a surprising decline in customers in the second quarter. After pulling back on marketing spending last year, Blue Apron started ramping up its advertising at the start of 2018, and most investors expected that would result in more customers. After adding 40,000 net new customers in the first quarter, Blue Apron lost 69,000 in the second quarter.

On the earnings call, CEO Brad Dickerson said the marketing efforts are doing a great job at attracting people to the Blue Apron brand, but it's having a hard time converting website visitors into paid subscribers. When asked about customer retention -- a metric Blue Apron refuses to provide investors -- Dickerson replied, "The challenge for us, we believe, is more on the acquisition side of the business, not on the retention side of the business." He added the retention rate in the second quarter was consistent with the same period last year.

But it's been clear since Blue Apron's IPO that the company has a problem keeping subscribers from cancelling. A refusal to focus on improving retention before ramping up customer acquisition efforts is a recipe for poor marketing efficiency.

A family of four cooking together.

Image source: Blue Apron.

What customers want

The top reason consumers cancel their meal kit subscriptions is because they feel they're not getting enough value for what they're paying. Blue Apron charges $60 per week for a couple that wants three meals a week. The USDA estimates the average couple spends about $600 per month on groceries using a modest-cost plan. Subscribing to Blue Apron eats 40% of your food budget and only provides about 12 meals per month, leaving just 60% of your budget for the other 80 or so meals you could expect to eat during the month.

Consumers will pay a massive premium to Blue Apron for the convenience of not having to plan a few meals per week. And with the growth of online grocery ordering and delivery, it's getting harder and harder to justify that premium.

The one area in which Blue Apron provides a significant value proposition is if it's used as a replacement for eating out at a restaurant -- not a replacement for grocery shopping. At $10 per meal, it's a good substitute for restaurant meals. Of course, not every Blue Apron cook is capable of producing restaurant-quality meals regardless of how clear the recipe is.

How Blue Apron plans to improve customer acquisition

While Blue Apron might be focused on the wrong end of the sales funnel, it's worth looking at what it plans to implement to see if it addresses customers' biggest issues.

Blue Apron is working to make its meal kits available on demand instead of through subscription. It started earlier this year, when the company partnered with Costco to make its products available in stores. It will later expand to offering on-demand delivery through its e-commerce platform.

The moves should expand customer reach, but it will come at the cost of profit margins. Costco charges less for meal kits in stores than Blue Apron charges online. What's more, it's a lot less efficient to ship a single meal kit than a set of three, and if a customer has to pay for shipping, it makes the offer significantly less attractive. This new move doesn't address the core customer concern of getting value out of what they pay for.

Blue Apron is also expanding its menu options and making it easier for customers to change orders. Giving customers greater choice could help more subscribers get more value out of Blue Apron. If certain customers have specific dietary restrictions and Blue Apron makes it easy for them to comply with a certain diet, it could be worth paying the premium prices Blue Apron charges.

Ultimately, however, Blue Apron is doing very little to address customers' top complaint. Management noted it experimented with pricing but didn't make any comments about whether its experiments were successful.

The fact that management doesn't see a problem with its customer retention despite the fact that it's bleeding subscribers as it ramps up marketing is somewhat alarming. And pushing more customers through the top of the funnel while they're leaking out the bottom won't lead to consistent customer growth or marketing efficiency. Investors should have a sour taste in their mouths after the latest earnings update.

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