Blue Apron (NYSE:APRN) saw its number of active customers decline 10% sequentially to 646,000 in the third quarter. Active customers are down about 25% compared to the same period last year, and management expects those losses to keep coming.

CFO Tim Bensley told analysts he expects customer count to continue falling in 2019 as the company focuses on attracting high-quality customers with better expected lifetime value. Blue Apron is shifting its focus from growing its top line to improving its bottom-line results far earlier than anyone anticipated when it made its market debut last year.

A family cooking a meal together.

Image source: Blue Apron.

Searching for better customers

Blue Apron started pulling back on its marketing spend last year after running into operational issues at its new Linden, New Jersey, facility. As a result of the decreased marketing spend, Blue Apron saw a decline in customer acquisitions.

When CEO Brad Dickerson took over the company late last year, he intended to ramp up marketing spend again in 2018 once the challenges in Linden were resolved. But after reaccelerating marketing spend in the first half of the year, Blue Apron didn't have much to show for it. While it added customers in the first quarter, it lost more in the second quarter.

So, Dickerson shifted the focus to marketing efficiency. He wants to attract more of its highest-value customers, even if that means attracting fewer customers overall. The third quarter saw a significant pullback on marketing spend, down to $23.3 million from $34.2 million a year ago. The company is showing modest progress with marketing expense as a percentage of revenue falling 90 basis points compared to last year.

Dickerson believes the company has identified common characteristics of its most valuable customers. It will use its customer data to refine its messaging and determine which channels to advertise in to attract more people that look like its top customers.

That could result in higher average customer acquisition costs, but it'll produce much more valuable customers over the long run if successful.

Making valuable customers more valuable

Management expects revenue to suffer as its customer count drops next year, but Dickerson said there's still an opportunity to "deepen engagement with our existing best customers by creating more customized products and services that specifically address their needs."

Blue Apron's third-quarter customer-engagement metrics show a lot of room for improvement. Average revenue per customer fell to $233 from $245 during the third quarter last year. Orders per customer also fell to 4.1 from 4.2 last year. Investors will want to see those metrics moving in the other direction as Blue Apron shifts its focus to high-value customers. Otherwise, they're not that high value after all.

A niche product

Blue Apron's IPO filing was full of optimism about its total addressable market. The company pointed to both the grocery and restaurant industries as its opportunities to take market share. But after six years of highly unprofitable operations and growing a customer base largely inflated by heavy marketing spend, its new leadership is decidedly focusing on profits.

Dickerson reiterated his goal to reach breakeven EBITDA in 2019. While EBITDA loss improved year over year last quarter, it remained consistent with the first two quarters of the year. Dickerson didn't share whether the company is still on track to reach breakeven for the fourth quarter, but Bensley said he's confident it will post positive EBITDA in the seasonally strong first quarter.

Management has realized its product isn't for every household. As it focuses on its most valuable customers, it could become a profitable business, but a much smaller one than investors anticipated just a few months ago.

Adam Levy has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.