In this conversation, Nathan and Thomas (from StoreHero) discuss the importance of contribution margin in e-commerce businesses and the shift away from relying solely on ROAS as a metric. They also delve into the impact of operational issues on marketing performance and the need for businesses to understand their true gross margin and operational expenses. Thomas emphasises the importance of building a lean team and aligning revenue goals with profitability. They conclude by highlighting the need for business owners to identify profitability red flags. This conversation explores the importance of understanding unit economics and profitability in e-commerce businesses. It emphasizes the need for e-commerce business owners to have a clear understanding of their breakeven point and profitability goals. The conversation also highlights the shift towards a more financial-focused approach in e-commerce, where agencies and brands are starting to prioritize financial metrics and contribution margin. Additionally, the conversation discusses the role of omni-channel retailing and the potential benefits of retail partnerships for e-commerce brands. It also addresses the challenges faced by online retailers with tight profit margins and the importance of accurately calculating gross margin. Overall, the conversation predicts that contribution margin will become a more widely discussed metric in the e-commerce industry.
Takeaways
Chapters
00:00 Introduction and Background
03:12 The Importance of Contribution Margin
08:07 The Shift Away from ROAS
13:39 Understanding Gross Margin and Operational Expenses
26:19 Operational Issues vs Marketing Issues
28:36 Identifying Profitability Red Flags
29:34 Understanding Unit Economics and Profitability
35:03 The Financial Challenges of E-commerce Business Owners
37:27 The Shift Towards Financial Operations in E-commerce
41:40 The Importance of Gross Margin and Financial Metrics
46:21 The Role of Omni-Channel Retailing in E-commerce
52:00 Managing Tight Margins in Online Retailing
55:13 The Rise of Contribution Margin as a Key Metric
In this conversation, Nathan and Thomas (from StoreHero) discuss the importance of contribution margin in e-commerce businesses and the shift away from relying solely on ROAS as a metric. They also delve into the impact of operational issues on marketing performance and the need for businesses to understand their true gross margin and operational expenses. Thomas emphasises the importance of building a lean team and aligning revenue goals with profitability. They conclude by highlighting the need for business owners to identify profitability red flags. This conversation explores the importance of understanding unit economics and profitability in e-commerce businesses. It emphasizes the need for e-commerce business owners to have a clear understanding of their breakeven point and profitability goals. The conversation also highlights the shift towards a more financial-focused approach in e-commerce, where agencies and brands are starting to prioritize financial metrics and contribution margin. Additionally, the conversation discusses the role of omni-channel retailing and the potential benefits of retail partnerships for e-commerce brands. It also addresses the challenges faced by online retailers with tight profit margins and the importance of accurately calculating gross margin. Overall, the conversation predicts that contribution margin will become a more widely discussed metric in the e-commerce industry.
Takeaways
Chapters
00:00 Introduction and Background
03:12 The Importance of Contribution Margin
08:07 The Shift Away from ROAS
13:39 Understanding Gross Margin and Operational Expenses
26:19 Operational Issues vs Marketing Issues
28:36 Identifying Profitability Red Flags
29:34 Understanding Unit Economics and Profitability
35:03 The Financial Challenges of E-commerce Business Owners
37:27 The Shift Towards Financial Operations in E-commerce
41:40 The Importance of Gross Margin and Financial Metrics
46:21 The Role of Omni-Channel Retailing in E-commerce
52:00 Managing Tight Margins in Online Retailing
55:13 The Rise of Contribution Margin as a Key Metric
Alright. Welcome back to the Blues Brothers podcast, the podcast where we talk about scaling ecommerce brands through paid acquisition from seven to eight figures. In this call, I'm joined with Thomas from Storehero. How you doing Thomas? Hey Nathan, thanks very much for having me on. Really, really looking forward to having a good chat this morning. This evening. Absolutely. So for context, Thomas is out in Ireland and it's morning for him and for me it's 6 p.m. in the afternoon. Dragging me up in the middle of the night for this, Nathan. Ha ha ha. So firstly, obviously you're one of the founders of Store Hero. Do you want to talk about why you started Store Hero in the first place? Absolutely. So just to give any of your listeners context, you mightn't be familiar with what Store Hero is. First of all, the Store Hero is a SaaS platform for ecommerce brands and agencies to really try and centralize the ecommerce, finance and marketing operations of their business to try and get a real time sense of the margins, unit economics and profitability. Why did I start Store Hero? Really probably a longer story, to be honest than most. as you kind of alluded to there, as most of your listeners can probably hear, I'm based in Ireland on the West Coast in a place called Galway. My mother has had an e-commerce business for 20 years at this point, so it would have been set up I think in early 2004, so before Shopify was even born, you know, quite a long time ago. So yeah, we got grown up, we grew up in a house with e-commerce, we had no real choice but there's other than to hear. the everyday kind of intricacies of actually running an e-commerce brand today. And while there were certainly definitely advantages to starting that early, it also came with all of the challenges. The ecosystem is so well developed today that a lot of the stuff that's in place today obviously wasn't there prior to then. And even the challenge of getting a website set up online in 2004 was much more difficult than it is today. So I suppose as kids we would have been involved in everyday running of the e-commerce brand from... Instead of cleaning our bedrooms, we might have been had to do SEO on our websites. We would have been involved in the unloading of shipping containers, taking customer orders over the phone. You have to remember this is 2004. It wasn't just kind of an ingrained habit that you made an order online. You know, there was a lot of making sure people knew this was a legit business. So a lot of the customers, even though it was an e-commerce business, would still take those call those orders over the phone and that kind of thing. So. You had all of the challenges of a business back in the day that maybe you don't have today to a certain extent. I had a couple of different e-commerce brands myself over the years. So my first business would have been, it was actually personalised children's books. So my granddad would have been the illustrator and I would have actually written the books and that was my first business. I actually set it up about 10 years ago. And then I had to kind of follow on e-commerce businesses after that as well. So grew up in the family business, had run a couple of them myself. I was always really, really interested in the space. And then around, I think it was July 2019, I went to work at a company called Shopify, which I'm sure anyone listening to this is fully aware of today. That was an incredible experience, an incredible experience. It kind of taught me so much. And you know what, like looking back at it, I was really, really lucky because I started in July 2019, six months to seven months before. the C word kind of hit town. So I was kind of well ingrained into the organization, knew the run of the place and was quite familiar on it before March, 2020 hit. And things just went absolutely mad. It was crazy. I was working in support initially, and all of a sudden, like it was just anyone who wanted overtime could do it as much as he wanted. There was the phones were hopping, the chats were hopping. And it was an incredible experience to be there and be part of Shopify. When that moment kind of hit, I remember probably originally. You know, everyone was worried about their jobs. The first kind of businesses that might have been hit were dropshippers because China shut down first and that supply chain kind of, you know, stopped. Um, and it was really, really interesting. So we were all initially quite worried. And then it was, okay, this is actually going to be the perfect company to be based in for a black swan event, I suppose, to a certain extent. Um, so the journey of Shopify was amazing. Um, from there, I kind of went into a merchant success manager role, which is essentially for anyone. who's listening, who isn't aware of a Shopify merchant success manager. You're essentially helping larger Shopify plus merchants with their e-commerce marketing and general Shopify roadmap strategy. So for me, this was an incredible learning curve. All of a sudden, not only were you in Shopify, but you were working with the biggest brands on the platform. You were speaking directly to the owners. You get to talk to them about all the problems that they're having, all of the opportunities, what they're really focusing on. And you kind of couple that with being there through the COVID kind of boom and growth phase. For someone like myself who was already interested in this page, you were soaking up so much knowledge like a sponge to a certain extent. So that was kind of the Shopify background. What I was trying to do for my parents, Nathan, was, you know, there was always, I was running the ad account for my parents' business for Facebook and Google. And my dad is an accountant, an older school accountant than my dad. Accountants by their very nature can be, what's the word? apprehensive to actually spend on marketing. You know, I would be often going to him with terms like, you know, the ROAS and Facebook is phenomenal this week. The ROAS and Google is great. We've great customer clicks here. Be looking at me like I've 10 heads. You're like, I don't care. Like, tell me what the profit is. You know? So I found it difficult to get more sign off for budgets. I had budgets from him because he didn't trust what I was saying because it was marketing doublespeak. Um, so what it kind of forced me to do was around 2018 or 19 to start creating a spreadsheet to really aggregate the Shopify metrics. So sales, average order value, returning customer conversion rates, all that kind of good stuff. Then all the core metrics from Facebook, from Google, from Klaviyo. And then as I mentioned, he was an accountant, so he would make me bring in staff costs, software costs, rent fees, all of the rest of it to really understand, you know, what was working and what wasn't working from a profitability standpoint on a weekly basis. What I probably thought initially was a mismatch in my house between my mother who ran the e-commerce business and did a lot of the marketing and my dad who, you know, really understood a P and L but doesn't understand marketing at all. Um, I probably thought that disconnect between those two functions was quite limited to my house, you know, but as I was kind of going through my regular calls with a lot of Shopify merchants and some of them are particularly big sizes. I often start referencing the spreadsheet I was working on for them. And I kind of start showing some of them what I was working on. And, you know, I quickly realized the problem that I had at home was definitely a much bigger problem industry wide. And so I suppose I left Shopify in left Shopify in what was it? It was December 22, so about 14, 15 months ago now. Seems like two months, but it's moved quickly. I joined I joined up with my co-founder, Karl O'Brien. And yeah, we have basically built a SaaS platform for e-comm brands, as I mentioned, to really try and gauge real-time profitability. And yeah, it's been going really, really well. Yeah, that's awesome. It would have been crazy working at Shopify during our March 2020. Because obviously, that boom was insane. One one question I had for you is obviously the story or a platform is really orientated around contribution margin. It's something that I talk a lot about. It's something that is raising in prevalence within ecommerce, like discussions, but it's still if you bring contribution margin to your average econ business owner, they have no idea what you're talking about. With that being said, there's a big push at the moment away from ROAS. It's let's index towards MER, let's index towards CAC. How are you still approaching the ROAS discussion? Do you still think it's important? Are you still bringing it into conversations? Or are you telling business owners, let's completely index away from it entirely? Yeah, it's a really, really interesting one. I think it's really worth touching on why it was used as the proxy for success for so long as well, you know, because e-commerce is, it's definitely not a very mature industry, but it's not a new industry, you know, and this was the primary gauge of success for quite a long time. I think it's probably worth touching on why it was useful for a long time versus why it's not. I don't think it's too useful going forward. You know. Pre iOS 14, the attribution from Google and Facebook was much better than it is today. So you could probably trust the data that bit more. And also prior to iOS 14, you know, with COVID in general, even before then, you had less people selling online, you could target better and generally the efficiency of that ad spend was a hell of a lot better in that, you know, the reason I think contribution margin is probably working is such a good proxy for success now is. There's no there's no muddying the water between actually what's working for the business and what's not. You're really trying to consistently get that gauge of success between, OK, have I increased or decreased marketing spend and have I generated more contribution margin dollars in the back of it? If you've spent more and you've generated more dollars, keep going. If you haven't probably pull back and realign what's gone right, what's gone wrong. What do I need to re-improve in terms of the ROAS conversation? Do I still use it on a daily basis when I'm talking with merchants? You know, I do. Like Mer, CAC are fantastic. Um, but you know, to, to get down to the campaign level, I think ROAS is still a decent proxy for success on a more granular level, but as you get up to a business level, any agency who's purely talking to you about ROAS is missing a lot of the picture. And if your agency isn't kind of really looking at Mer, CAC or contribution merging as an overarching kind of gauge of success for the business, as opposed to individual campaigns, um. you probably want to just make sure that they're doing it for the right reasons because I see a lot of mistakes there as well. Like you kind of mentioned the average e-commerce owner maybe not being fluid and being able to speak about contribution margin. I've spoken to a lot of agencies in the last year who aren't familiar with a lot of these terms that you kind of outlined there. And if you're looking at like the paid media budget line for any agents, for any e-commerce business, it's a huge line to the P&L. And you have to think like if you're giving that out to a paid media agency, um, they're responsible for, I'm not going to say the absolute most important function of the business, but for an e-commerce business, it pretty much is. So you want to make sure whoever that paid media agency is that they're looking after your business, they hold such a massive responsibility for success. You want to make sure that those guys are understanding the right metrics for your business. And if they're solely looking at ROAS, that's the wrong metric this year. And I can Just say that without complete certainty. Yeah, I couldn't agree more. I think the way that you said it, we're still indexing towards growers at the campaign level. But then taking in the larger picture of emmy on CAC makes complete sense. And I actually see this all the time with any of the Australian businesses that we work with, and then they expand into the US. The second they go and launch a US store, you see the revenue equals whatever was attributed for marketing, because there's no other sales channel, it has to all come from marketing spend. So you know that if we spend $100 and they did $1,000 yesterday, that they were at a genuine 10 ROAS if you're looking at store level. And what I see almost every single time is number one, Facebook will under attribute by about 30%. And so Facebook should have generated$1,000, but it'll only attribute 700. But then when you look at Google, you'll see an additional thousand. And so when you add the two platforms together, the attribution will be way higher than actual revenue in the backend. But if you look at them in isolation, they'll be under attributing. So there's so much additional nuance that you only can take consideration of if you're looking at MER as well in conjunction with your platform ROAS. Big time, big time, big time, 100%, 100%. And I think, you know, like as we're moving towards a more cooky-less world as well, you know, there's a lot more of these privacy changes coming out. This is only going to get worse and worse. And one other piece I'd probably say about ROAS as well, it doesn't take into account the underlying margin infrastructure of your business, you know? Like if you were operating with a 40% gross profit, and then another brand that you're working with has a, I don't know, a 70% gross profit. you know, as a paid media buyer, if you're getting a three ROAS on both of those accounts, you might think that's great because that's kind of industry standard. But like the business that has a 40% gross margin that you're getting the three ROAS for, that's not a great deal, but the business who's getting a three ROAS on a 70% gross margin, that's fantastic. Keep scaling there. But it loses so much context and nuance that without understanding the kind of contribution margin in the back end of it or the MER in general. without a view to having a look at the underlying margin infrastructure, you're missing so much context on what's actually the right move for the business, I suppose. Yeah, I'll add one thing there as well is I see... So many time and time again, people neglect discounting's impact on contribution margin and its positive impact on ROAS. And so you'll see people run sales, return on ad spend jumps up 30%, but they don't realize that the only way to maintain profitability is ROAS has to jump 70%. And so they're actually worse off running the sale and discounting the way that they did because the paid media agency was siloed off into ROAS targets without any consideration of the impact on contribution margin from discounting. And there's one more, like, I know you guys have it in Australia as well, but like in Ireland, you know, in Ireland, you, you pay a hundred dollar, a hundred euro for something. The VAT or the GST as we call it, is incorporated into that hundred euro. So if you spent, let's say you spent one dollar on Facebook, you get bills, one dollar plus the GST or plus the VAT for that kind of the ad spend. But when you get that purchase from Shopify. you know, that tax is fully inclusive as well. So that's not it's not the same as it is in the US where the tax is added on. So, you know, you're comparing apples like you're comparing a non a non valuable Apple that you've spent with the fully valuable pair that Shopify you're kind of selling back to you. So, you know, there's other kind of distinctions and little things to be kind of cognizant of there as well that you are seeing an overinflated ROAS purely as a result of the jurisdiction you've been and how the tax is applied. Yeah, absolutely. When you were working at Shopify, or even now at Storehero, did you ever work with a brand and realize as maybe they asked for that spreadsheet, and I started putting the numbers in, you realize that just the basic unit economics of the brand were broken? Big time, yeah, it happens all the time. Genuinely, yeah, they're hard conversations to be honest, Nathan, they're difficult. But, you know, I have to have them and I prefer leaving the conversation. There's a couple of conversations I've had quickly in the last month or two that haven't, like, I wouldn't say they've ended badly, but I've had to really realign somebody and say, look, I need to tell you this just to be completely open and honest with you. You're kind of delusional in terms of what you think is possible here. There's a couple of reasons for that. You know, there isn't often there isn't a culture. And I think this goes back to maybe pre COVID and ROAS being so strong for a lot of brands, you know, there wasn't too much of a need to look at the boring side of the business that much. You had a really good product. You had a good dialed in ad account. Your paid media agency took care of that. Everything else kind of took care of itself, you know, as long as your operational expenses were completely out of whack. your margins took care of themselves because the efficiency on the ads was so good. So I think for a long time, they joined up thinking between the e-commerce function and then the marketing team and the finance team together hasn't really needed to happen. Um, a couple of problems, I suppose, with why I think that's happened for years. I don't know if you see this, but I see it all the time. Somebody would come to us and say, look, my margins are 60%. My gross margin is 60%. And when I plug in StoryEar, or when you run your spreadsheet, you know, It's nowhere near 60% because they haven't taken into account all the discounting to do. They haven't taken into account to give free shipping. The 3PL provider fee isn't in there. Maybe they use Clarina or Afterpay, you know, for most of their payments. And what they thought was a 60% gross margin business could be 45. And while that doesn't sound like a massive difference, it's a huge difference. And it changes all the fundamental unit economics of the business. And one other point I'd add on that as well is, and it was actually a case for one of the businesses that... I kind of had to probably really realign in the last couple of weeks is, you know, a lot of businesses come to us and say, look, my agency isn't doing a good job. And when I actually plug into it, you know, one business I spoke to last week was doing a million and they had 300 K in operating expenses and their gross margins were 40% and I kind of had to be frank, I said, look like the best paid media agency in the world. will struggle to make this a reality and struggle to make this a great business because of the volume that you're doing with the margins you have with the operating expenses that you have. So you kind of have to realign people in terms of show them where the problems are. In this case, I kind of said, look, you're maybe your paid media agency isn't doing the best job. I've had a look at the ad account. I could think they're doing a good job. Um, I think personally, your problem here is you've a massive operating expense bill relative to the level of sales that you're doing. and your gross margins don't really allow for that to be in place. So that's probably not a brilliant answer, but just to give you one kind of tangible example. No, I think that's a great answer. What are the typical operational expenses that you're seeing in these smaller end brands that are inflating their operational expenses to 30, 40% of total rev? Yeah, it's an interesting one. Often there's too big of a team, you know, often there's too big of a team. Like if you're a brand doing a million or less, like if you're working with an agency, you probably shouldn't have a full-time senior e-commerce manager along with the founder, along with somebody in marketing as well. Like there are three roles plus an agency in a business that doesn't warrant that level of kind of. personnel scale, I don't think, you know, particularly if nobody is working in fulfillment in-house and that's been outsourced with 3PL as well. Like try and keep your, your team as lean as possible. One thing like it's, it seems really, really obvious, but a lot of brands still kind of need to grasp it. I think like, you know, one dollar in sales is not a dollar in profit, but any dollar you save in operating expenses flows directly to the bottom line. And that's a really, really important and non-obvious thing to say, I just know from speaking with so many brands, I think since 2020, a lot of brands probably scaled quite heavily. And with that scale, probably came a lot of scaled operating expenses from software costs to team, often to nice fancy offices. If you're struggling this year and you really need to kind of realign the ship, think about every operating expense dollar that you're spending because from what I've seen in the last 12 months, you know, there's been a lot of brands that caught the OpEx burden a lot more than they think. Like one brand we actually worked with last year, they were working with, I think, a number of different external parties and they had a senior e-commerce manager and they really massively tried to consolidate that down. Their sales actually dropped by 4% last year. Contribution margin went up by, I think it was 11%, but so they had increased contribution margin. But because they cut the operating expenses so much, the net profit of the business actually more than tripled. And again, I think it probably goes back to a lot of businesses, and I'm sure you see this as well, are overly focused or fixated on achieving a certain revenue figure for the year. And while that's great, is that aligning with the best interest of what's actually the best for the business? If the business's main goal is to extract enterprise value in the form of EBITDA or net profit, Aligning simply towards revenue goals does not always equal the highest profitability because you get towards the end of the month and you're nowhere near the revenue goal. Whoever's KPI with hitting that kind of revenue goal could start pushing out spend, they might start heavily discounting. And yeah, you might get there, you might hit that revenue goal, but you really have not served the business's best interests at heart because you might have done it with a perverse view to kind of eroding a lot of the potential profit margin that was there in the first place. Absolutely. I think there's common business advice that gets conflated quite a bit, particularly in small business, small econ businesses, which is offload, low value tasks as quickly as possible by hiring for that position. And you just end up with an overinflated team. And I think there's a lot of value in maintaining a lean team as you scale. This concept of reinvest into the business. ends up positioning you in a way where you're just an unbelievably high risk business because you're operating such low net margins that just the stress goes through the roof. The team's competence will normally suffer as well because you're hiring too quickly and you're not being selective. You don't have the time to manage the team accordingly. I was trying to build a framework the other day about how many people should you actually have in a D to C econ brand that has a 3PL. And it's really not a lot. It's at a five mil brand. You really don't need more than four core people in the team. Now there's, there's the outside. So there's probably customer support. There's probably a few people there. Maybe you have a few VA's and then someone that runs it. You have the three PL. But other than that, it's really a marketing manager that manages the agencies and has a full scope understanding that's come from agency side. And then what else are you hiring for really? I think you've nailed it. A good kind of proxy we typically look at. So within StoryReel, we can have the kind of staff cost as a percentage of net sales as a KPI, and I'm typically saying to people like, you know, try and have that, have that between probably 18 and 12%. That's kind of a rough proxy. Some brands have it much lower. Um, but then I have the other brands, some other brands have it much higher and the brands that have it much higher. That's a really hard business to extract a good profit from because you're overinflated. And you know what? It's difficult with Ecom as well because it's very much at peaks in trough industry. Like Q4 is absolute peak and then you get to February and well, I know in Ireland anyway, it's a bit of a trough. So it's not like a standard business where you're kind of at the same level of busy all year long. They're massively, that's why a 3PL I think is so... cost effective for an e-commerce business because it's marginal cost and it scales up when you need it and it scales down when you need it as well. But I think what you said there, and it's amazing that you can build a $5 million business with potentially four core employees because that's incredible to think about it, isn't Yeah, yeah, absolutely. Even tying back to what you said before about the business owners not understanding their actual gross margin percentage and how you said in that example, it was 60% and reality is 45. The difference in Mer targets at a 15% difference in gross margins is insane. enormous. even, yeah, even tying that into staffing costs, how you want to keep that between 12 to 18%. If you're assuming a 60% gross margin, and that's how you're making decisions for hiring and projecting moving forward in time, you're going to end up in a position where you have an overinflated team that is just not required to continue to push the brand forward. What I can say to people is like, you know, building an econ brand is like building a massive high rise block of flats, right? And we're at the stage here where we're doing the discovery and we need to figure out, okay, what does it take to build this business? So we're digging out the foundations and we're putting the structure in place. What you want to make sure is when you're digging those foundations and that structure the first time that it's completely correct. Don't skip over this part because what you could end up with is you've built a massive high rise block. And next thing you're looking up at it and it's a leaning tower of Pisa and you haven't figured out the business as well. If you have enough cash, you can scale any business. It will grow. It's easy to scale the business. It's hard to grow a great business. And I think, I just think too many people skip over the very first person actually understanding definitely what those margins are. An e-commerce business is very, very different to a retail business where you walk in and buy your, your makeup off the shelf and you walk out and it's just a transaction fee. You don't have the level of discounting. that happens in store typically than what happens online. You don't have a free shipping that often needs to be taken into account. There's a three PL cost. These are all marginal costs. They're not operating expenses. Some people categorize them as operating expenses. But, you know, if your business double next year, the level of marginal costs will double along with that as well. So I just think make sure and obviously returns is a huge one there as well. Make sure when you're building out your MIRR forecast, as you kind of alluded to there. that you really understand exactly what your true gross margin is. Because as you said, if you get that wrong, it can be detrimental to the success of the business. Yep, absolutely. You have access to, so every client that you work with, you have access all the way down to the financial level, I assume in terms of contribution margin, usually even net margin. How often, because you have that level of access, how often do you see that these brands don't have a marketing issue, but instead it's usually an operational issue? Um, it's probably 50 to be honest. Like again, a lot of people put a lot of people think the operational problem is a marketing problem. And they think that our agency isn't doing a good enough job. Um, but in reality, it's just the operations of the business, whether from a margin perspective or from an operation expense perspective, the best agency in the world are not going to be able to fix this for you. Um, and I actually feel sorry because I think I think a lot of business owners came online for the first time during COVID and might have some kind of unrealistic expectations in terms of what their agency should be capable of. And that's a hard position to be in as an agency where you're trying to justify it on every single Monday as of to why the last week went the way it did. But I mean, like one instance, like I had a brand recently with an average mirror of I think seven, and they were telling me it was the agency's fault that the business wasn't profitable. But again, it was just the gross margin on the product was not. preferable and the operational expenses of the business were so high. And I was like, look, to be honest with you, which all due respect, your agency are actually knocking it out of the park. Seven Murr is fantastic. You just have problems elsewhere in the business. So I think you should probably pull back a little bit on your discounting. Maybe rethink your free shipping discount, your free shipping threshold. And also potentially look to consolidate some of your operational expense stack there as well, because. I mean, if you can do those three things and the agency keep doing what you're doing, all of a sudden your business has a complete turnaround and just don't pin the blame consistently only on your agency without looking at the other aspects of the business because agencies and the marketing of the business is usually the first one to get the blame. And in my, in my instance, there's often other really obvious problems in the business that often tend to be solved last. Do you have a mer that any Econ business owner can look at in their own business and say that's a red flag that you're not profitable at that MER? So, and again, I think I would have shown this, yeah, we can probably do another video on it at some stage. We have kind of a templated calculator sheet that we typically do with brands where we will pop in their sales goal, their gross margin slash cogs kind of percentage, the operating expenses that they need to cover. And what we also put in then is like a profit percentage. So we almost look at this profit first. So we know the sales, we know the cogs and the gross margin, obviously, just derivatives of each other. And then we take away the operating expenses and we kind of treat profit as a goal that needs to be paid. Once we have those core numbers, it will give us the more targets and the marketing spend and the breakeven more in marketing spend. These are very, very different. I'd be really negligent of me to kind of come on and give a one answer here because it's incredibly different. Like I have one brand on the platform who's knocking it out of the park with a tumor, but most businesses that we're working with, if they try to operate on a tumor. would go out of business tomorrow morning because they're not very clear, not clear on the unit economics and can scale that. If you are thinking about operating your business with a tumour and you're trying to scale that, please speak to somebody just to make sure that that's feasible and possible before you do that because it's a rare subset of businesses that can do that at scale, but they are out there. So I think it's really clear. It's really important to get clear on where your breakeven point is and are you trying to be profitable and taking that kind of profitability component into the mix. What does your good mirror look like? Don't just take a figure from DTC Twitter or LinkedIn and say this is what my business can operate on. Your business is very, very different to every other business out there. Just because you're operating an e-com, doesn't mean you have to follow every e-commerce, other e-commerce business. Figure out what works for your business and make sure that it works for you. And make sure it's realistic as well, because you might come on and put in your numbers and say you want a 20% net profit margin, and then it requires you to hit a 25 mirror. agency, go and make that happen. But you know, that's not realistic either. So you need to have kind of make sure you make sure you understand what you need to do and then make sure that that's actually somewhat tangible or realistic for somebody to actually go and achieve for you on your behalf. Yeah, funny enough, we have almost an identical calculator internally that we get all clients to fill out when they onboard. And we have had situations where we get that Excel target Mer 25. And it's because the net profit is set crazy high and then their operational expenses are so overinflated that it skews all the numbers. I think though that it's a nice exercise for people because sometimes, from my perspective, I don't know if you're the same now, but sometimes they can actually spend a lot more than they actually initially thought they could. And then you do have the other cases as well where they're just trying to be, and it's only as a result of not actually having this clearly laid out in front of them before. They can come across as being too greedy, you know, the expectations are not really aligned. Absolutely. In that Excel that we have on the right side, we plot increases in spend in proportion to MER targets, like eroding over time. And it gives a lot of brands initially as they onboard the ability to go, Oh, if we triple ad spend operational and fixed expenses become democratized at scale, so they become a smaller proportion of total revenue. And so we become more profitable from a percentage net profit level. by spending 3x more than just staying where we currently are. So I think that's also another huge shift in frame of mind that econ brands can get just from understanding that fixed costs shouldn't scale in proportion to top line revenue. 100%. And I think what you touched on there, which is interesting, is that like, if you have a brand that comes to you and say, look, we're not going below a three mer, I actually had this very recently. It was a brand in Europe doing about 10 million a year. And they said, look, three mer is our kind of bottom line. We're not going below that. So I kind of went through that, that Excel doc, I think we were both referring to there with them about the end of January when we compared it year over year. And I could see from we plugged it in that there was like I think they had increased ad spend by 78% and contribution margin had rose by 102% year over year. So I was like, look guys, your contribution margin is raising at a faster clip than your ad spend. It's like, I can just see that you're massively underspending here. So they had massively pushed the boat out in what they actually had originally intended to spend in January. It got to February and I think they, they spent. Spent another 60 or 70 percent and contribution margin rose again by another 50 percent on the back of that increased spend. But they did that at about a 2.85 MIR versus 3.2 in January. And it just goes to show you like getting overly fixated on hitting a certain MIR target, while you think logically that's going to save you money and make you more profitable, if you can be very, very clear on the economics and the margin infrastructure of the business, often a lower MIR. will result in higher profitability when done correctly at scale. But it's, you need to speak to an expert on it because trying to do that if you're not completely sure on what you're looking at can be detrimental to the business as well. So really important if you understand what you're looking at but make sure you know what you're looking at, I suppose. Yeah, absolutely. I have a theory here that I want to run by you and I want to hear your thoughts because you're so entrenched in the space as well. I've worked directly with over 140 Ecom business owners now direct founders. And there's a commonality between the majority of them, which I think ties directly into the whole purpose of this podcast, which is that generally speaking, founding Ecom owners aren't strong financial operators. And it's typically because they don't come from financial backgrounds, but instead come from generally speaking, uh, product people. So they're incredibly good at curating a product and they're very orientated around the product and they want to neglect the financial side. Because at the end of the day, the financial side is incredibly boring. It's like, it's not, it's not, it doesn't have all the bells and whistles. The product does when you can make a cool product. That's what everyone's so attracted to in e-commerce. It's not the financials, but the financials, as you said, build the foundation for the building that you then want to scale. Have you seen something similar? 110 percent absolutely and I got yeah 100 percent absolutely. I think a couple of reasons for that as well. I think Shopify like if you think back to even when my mother would have started her business, the job to get online and get a product online and connect to payment gateway, this is pretty stripe. Like that was a nightmare. It was an absolute nightmare to get set up. Connecting a Google Ads account back in the day was just like, it was a nightmare. You know, Shopify really reduced the bar. for what it actually took to get online and actually sell your wallet or sell your phone or whatever it's gonna be. So to your point, anyone who was really passionate about products now has the ability without needing to be a developer or a software engineer can pretty quickly get online, connect to Payment Gateway and start selling their t-shirts, their soaps, their makeup, whatever it's gonna be. That bar to actually get online has been completely democratized. So if you're passionate about your products and you can create good content, you know. you can get online, you can create a business really, really quickly. Um, on the flip side of that, then you had Google and Facebook who were providing really, really cheap ad space for a long time as well. So you had these two forces at play where the bar to get online and the bar to do really good marketing were extremely cost effective for so many people. So all of a sudden you had really good product fanatics with big businesses now. And this, they didn't set up their, their. They were just passionate about their soap or their clothes or their wallet or whatever it's going to be. And all of a sudden now they have lots of staff and they need to look after P&Ls and balance sheets and speak to accountants. And I think the ad spend was so good for so long that it actually inversely actually bred a lot of terrible habits into the industry as a whole because for years you could get away with just looking at products and just looking at marketing. And because the ad spend was so good, the rest of it kind of took care of itself. But to your point now, I think... I actually think e-commerce is, it's a financial game wrapped in a marketing clock to a certain extent. But if you can connect the two dots, I think that's where the superpower is going to really life you in the next couple of years, because as the ad costs continue to rise and, you know, as the cost of business just keeps going up, the real secret sauce, I think, is going to move away from marketing. It's still going to be really, really important. But if you can understand that kind of link between the two, I think that's where the best brands are going to really thrive over the next couple of months. Absolutely. I like how you said e-commerce is marketing, cloaking, like call financial issue because it's something I say to a lot of clients, a lot of clients say, how do I improve my Google ads? How do I be the best number one? How am I always ranking for the top key terms on Google ads? And I tell them the harsh reality is you have to have the best gross margin. because the brand that can afford to pay for the highest level placement on digital platforms is the one that has the biggest gross margin and can operate at the highest CAC possible. Now, marketing is always gonna have a 30% swing there. You can have better messaging, you can have better conversion rates. That's all gonna help. And it's gonna give you that little extra 30% juice. But at the end of the day, if you have a big leading competitor who has a lifetime contribution margin of $400 no repeat purchase rates and you have a$50 contribution margin on first order. You're just never going to compete because they can go and spend $100 to acquire a customer and you can't even spend $40. And so at the crux of it, if your financials are in place, marketing becomes a lot easier. But vice versa, if your financials aren't in place, it becomes very hard to really start to scale these platforms because you just don't have any cash to give to acquire the customer in the first place. Big time, big time. I say this all the time, but like you guys seem to be out ahead of it in terms of the agency game, particularly because I speak to agencies all the time. And, you know, most agencies are still overly fixated on ROAS, whereas, you know, we've had a good few conversations at this point. And you guys are clearly in the weeds with understanding the more financial lens to the marketing. Personally, I think that's where everyone, that's where the paid media agencies are going to go in that direction. What kind of, I suppose, not to be asking you questions on your own podcast, but... Was that a conscious shift that you guys had to make? Because it's a no-brainer from my perspective, and I just can't understand how this media agency is operating in any other way than being able to kind of fully understand or grasp that kind of more financial lens to the business and actually try and connect to it with marketing. We had to make the shift and quite honestly, we had to make the shift because we were losing clients because of poor dialogue around understanding the platforms and then how they directly relate to top line revenue. And at the end of the day, if you have a client on paid media for an entire year and you can't convince them throughout that entire year to increase ad spend, you can't expect a large increase on top line revenue throughout the year. And so you go an entire year saying, hey, you need to put my money into paid media. You need to put my money into paid media. And it just never gets put in. And then at the end of the year, they go, where's the growth? And you go, well, there's only so much efficiency we can squeeze out of a 25 row as in platform and a 30 Mer. And so it started just forcing us down to this line of, we have to start communicating what all the way down to the financial level and get an understanding of, hey, by the way, you should be allocating 20% of total rev to ad spend given your operational expenses and your cost of goods sold. It's just ridiculous for you not to. And here's five other brands that we work with that are doing that. And they're operating at five X of scale. And here's the case studies to prove it on how we've scaled them over the last year. And so the conversations in... sales calls as well as checking calls with clients just started completely orientating around financials and financial discussions and educating clients around hey don't look at ROAS because ROAS is skewed by double tracking when people pathway across the platform. ROAS is either going to under attribute or it's going to well over attribute. And it also has absolutely no consideration around discounting contribution margin, individual skew contribution margin. None of these things are being taken into account. And so it just slowly built into the service and the education within the entire performance marketing team until about six months ago, we sort of took a step back and went. I guess we're sort of more financial operators now than we are marketers. So we started pivoting our messaging accordingly. But as I said, I think you're ahead of that curve. I think that's the way every agency is going to have to go because once you kind of see the light, it's kind of like, well, how does any paid media agency operate without understanding this? Because for years, you probably could have got away with it because the efficiency was there, but as those ad costs continue to rise, I think you need to become a more strategic budget allocator. I think as an agency, you get a lot more respect from the clients. You probably... understand the client's true needs once and what's actually right for their business a hell of a lot more and Yeah, I think you can just really be more Strategic growth partner for the for the brand as opposed to just being somebody who runs their ads I think that's going to be the big shift over the next couple of years Absolutely. I was even in a preliminary sales call a few days ago with a lead that might come on as a client. And before we even take clients on, we make them fill out the unit economics sheet. We get an actual understanding of their contribution margin rather than a gross margin figure that they'll throw at you. We get an understanding for their 12 months trailing acquisition. month on month for the last 12 months to get an idea for every time they tried to scale ad spend, what happened to acquisition mirror as a consequence. And so we begin having these really high level in-depth conversations with business owners who have never had these conversations in their life, even when working with agencies and they're getting this during the initial sales calls. And they said directly to me, because I had to hop on one the other day to run them through some numbers in the projections and their historical data. And they said, we can't even believe the questions that you're asking us. We've learned more in the last two sales calls with you guys than in the last four years of working with agencies. And I almost couldn't believe it. It's, it's sort of a, it's sort of disappointing to the wider agency space that there's, there's such a lack of education during client management or even during the sales process. That's a nice comment to get, I suppose. You know, but it is. I also think it's a huge opportunity though for like yourselves or whoever else to capitalize on it because. It's such a no brainer. No, this is, this is where everything is going. You need to get ahead of it really. Sorry. Yeah, so that's fantastic. Great to hear. Yeah, as I said, I knew from one of our first calls that this was the angle you guys are really going with. But I mean, as a brand, if you're working with an agency, I think as a brand and your agency talks to you about these pieces, what they're also doing is when you're optimizing towards contribution merit and really reporting on that, you remove any... ability for the agency to conflate or lie about the results because there's no attribution taken into account in contribution margin. It is what it is. I think a good agency is going to speak to you about that consistently and a bad agency probably won't want to show it to you. So I think you guys are doing a good job. Yeah, yeah, absolutely. And the other piece of paid media agencies as well is their number one goal is customer acquisition. But you'll almost never see a paid media agency index themselves towards new customer revenue or acquisition there. It's always top line revenue. And so even though there's enormous fluctuations in returning customer revenue based on sales, product launches, et cetera, that are going on, the agency will claim any fluctuation independent of the source of revenue, which is also another piece that sort of just built out of the financial piece where you start to get an understanding of the underlying data. And you start to realize. what the actual KPIs are and where you should actually be looking and focusing your attention. 100%. I'm sure we probably have similar conversations with merchants, but as you said, it's often the very first time that they've had these questions asked of them. And you can often see the light bulb go off when it gets laid out on a sheet like this in terms of what's actually possible, because you're speaking about profitability to them to a certain extent and what are all the micro KPIs that need to be hit towards hitting profitability instead of just hitting a three ROAS because nobody... really understands how that actually mapped towards profitability. So I think we can kind of just start with the end goal and work backwards towards it and actually map out all of what those kind of more nuanced metrics looks like that kind of contribute there. I think it's just a bit of a game changer for a lot of a lot of business owners to see a plan that they can actually get behind and rock in towards. Yeah, absolutely. I read a piece the other day and I thought this was interesting and I wanted to bring it up with you about how Facebook and Google ads. Let me backstep a little bit. D to C brands had a huge opportunity in the last five to 10 years because Facebook and Google ad costs were incredibly low. And so D to C brands were able to be some of the most profitable brands selling products in the market. because they could have a 10 ROAS, for example, or a 10 MER, and they would only have to allocate 10% of total rev to advertising, and they could acquire customers incredibly quickly at scale. And that gave them advantages over every other product brand who would retail, because the retailing cost is about 30%. But as of late in the last one to two years, as all of the platform costs have gone up, particularly because of COVID, which 5X or 10X the amount of e-commerce that are out there now, it actually becomes almost more favorable to be in stores, retailing, than it does to just be soloed in the line of D2C e-commerce. And so I sort of wanted your opinion on, do you think it's valuable to be an omni-channel brand? as you launch, should you be looking to retail as well at a certain scale? Or do you still think there's a place in the market for pure DTC? Morats. Sure. I mean, look, yeah, there's definitely still room for a DTC, pure DTC brands in the market. I think if you are struggling with like one brand we're working with at the moment, the menswear brand here, they're struggling with CAC big time in the last probably six to 12 months. But they also want to go into a new international market. So part of their kind of international market strategy is going to be going wholesale into retailers within that market. kind of get a larger distribution of the product. I mean, you can look at it as a way to, yes, get more product out there, but it can also kind of semi-subsidise your customer acquisition costs. Because if you can get distribution through retailers in the vicinity, when you start running ads for your DTC on top of that, people will start to see the brand around the place and hopefully you'll kind of gain from that kind of brand recognition piece as a whole. There's been a big shift with a lot of store hero brands, particularly in the last 12 months of moving into B2B, not all of them for the first time. Some of them for the first time. Others have kind of dipped their toe in it, but are really using it as a focal point of the kind of calendar year for 2024. But yeah, I mean, to your point as well, I think, I think rising CAC forces brands to look elsewhere and maybe, maybe the margin wasn't there in 2021 or 2020 in the wholesale space, but you know, maybe then there isn't a whole lot of difference today or maybe even the B2B side from the retail perspective could actually be even equal to or even slightly better margin than D2C depending on your CAC fluctuations. So it's definitely something, it's definitely a huge trend that I'm seeing with a hell of a lot of merchants this year. So I'm sure you guys are probably seeing something similar as well. Yeah, absolutely. There's a lot of brands that we're working with that are now going for the B2B play because... the margins end up being similar. And there's that omni-channel presence that just causes a positive uplift in CAC for all the paid media as they're actually retailing in stores. And you also get to pull that piece of social proofing onto all of your advertising then. The fact that people say that you're actually locally stopped, it immediately pushes social proofing that might've stopped quite a few consumers from actually following through with an online purchase. Big time, big time, big time. I can't remember what the stat was. I saw it at Shopify before. I think it was like, if you set up an online retail unit in a city, you're typically gonna see about 30% rise in online sales that week as well. And again, it's that social recognition piece or brand recognition piece as people see you in the locality. Yes, they might strap in store, but it does kind of reaffirm that this brand is legit and your online sales will also see an uptick. So yeah, it's... It's not a no-brainer for every brand, but I do see an awful lot of brands moving towards it and for good reason in the last 12 months. Yeah, funny enough, a few retailers that we work with, the best performing Facebook creative for them, and this has been the case for the last two years, is always walkthroughs of in-store. They always perform the best, because it's just instant social proofing that they're an actual brick and mortar store. And so the click through rates are incredible and the conversion rates are incredible straight through them as they treat them as if they are a local store. It just has such a positive uptick on trust. On that, I do have one question for you regarding online retailers because we work with a few of them and they're the toughest brands to work with because they don't have their own brand. And so they don't own, essentially they don't own the contribution margin because there's another player taking a cut out of the cost. And so generally speaking, their products are sitting on a 20 to 30% gross margin on the best products. Some of the poorer ones sit at a 15%. And so I'm sure you work with a few larger retailers, in which case, how do you approach it? How do you view it? Do you have any feedback for me on how you would approach working with brands that really need a 10-mer to be profitable and to be able to scale? Yeah. I mean, I actually had one of these conversations on Friday with somebody. In their case, they actually weren't fully aware of what you just said there in needing the 10 mer. Um, the brand wasn't like, they're trying to push for profitability this year. Not majorly, but trying to get a couple of points of profitability on the board. They were actually misaligned in terms of what their gross margin was versus what store hero showed it was when we actually plugged in the numbers. So to your point, I think it's about like, yes. And they were very similar in that a lot of the products were 30 percent, but they do a lot of discounting and a lot of the products originally weren't 30 percent. So, like what they actually perceived as a 30 percent gross margin business was, I think it was like 14, so less than half of what they perceived the gross margin to be. So I think it's really, it's really important to be really clear on exactly what the margin structure of this business is in play, because I think a lot of people are, and this is no different, but as your gross margin gets smaller. The margin for error on what that margin actually is needs to be smaller as well, because a 5% difference in gross margin, if you're a 70% brand, it's not fine, but it's manageable. Whereas if you get down to a 25% gross margin business and you're off by 5% there, that's a massive difference. So the smaller your gross margin is, the less room you have for error in terms of calculating that and building a plan to kind of map towards that as well. So what I would say to any business who is operating... with these kind of really tight margins, it's way more important for you than the standard DTC retailer to get this down on paper and to firmly understand exactly what's going into that gross margin calculation. Even one other point, because I had another online reseller quite recently who had their transaction fees, their shipping costs and fulfillment costs in his operating expenses, and the gross margin was purely done on the product level. So just simply taking out the product cost. And that's all. For an e-commerce business again, the transaction fee, if your business doubled tomorrow, your transaction fees are going to double. Your shipping costs are going to double. Your 3PL costs are going to double. They're all very much marginal costs. So make sure that if you are building out your gross margin calculation, that you're bringing into account product costs. Yes. But we're also making sure we're bringing into account fulfillment fees, transaction fees, shipping costs and return fees. Because if your business doubled tomorrow, all of those costs are going to double as well. They're definitely not fixed costs. So. It's really important to make sure it can't hammer that point home enough. Make sure your gross margin calculation has been done correctly. And the smaller your gross margin is for your business, double, triple, quadruple check it to make sure it's completely right before you go building out any kind of forecast because getting that wrong will be a death, will be a death knell to the business pretty quickly. Yeah. Last question from my end before we wrap this one up is a future prediction. What do you think Ecom business owners are gonna be talking about at this point next year in 2025? It's kind of kicked off in the last six or seven months, but I think contribution margin as a term will just be on the tip of everyone's tongue. Um, obviously you're, you're very much aware of it and you're very much in the weeds of it as am I, but it kind of still baffles me how many agency owners aren't and probably more, how many brand owners aren't, but more concerningly, uh, most agency owners still aren't aware of the term or mapping towards it. I think that has to change. It's, it's just, um, If you're operating a brand today and you're not mapping towards pure contribution margin, you're operating blindfolded and you need to be operating with both eyes fully open and in the weeds of it. So I think there's a big shift happening at the moment, moving away from RoAS towards contribution margin. And we just look at the dominance of how much RoAS was used as that kind of main proxy for success for such a long time. That's a big industry shift to kind of move away from that dominant figure that was used for such a long time. towards something new. So my prediction is for the next 12 months, the contribution margin as a term just becomes much more normal to speak about. I still think too many people think that when I mentioned contribution margin, I'm asking them to become a CPA or a bookkeeper. I'm not. It's a really, really simple calculation, but it's an incredibly important one to get a hold of. We're not asking marketers to become accountants and I'm not asking accountants to become marketers, but there is. simple metric here that kind of does give a little bridge into both parties worlds. Yeah, I couldn't agree more. I don't think it's going to move that quickly. I think in a year, a lot of people will be talking about it, but I still think we won't get there for a few years. Potentially it's going to take a lot of e-comm brands getting crushed by increasing ad costs that it's going to enter in the dialogue a little bit more. But I absolutely think you guys are on the forefront of it. And A lot of my education has come from the Store Hero platform and talking to you and consuming your content. So I do appreciate it. I really appreciate you coming on and talking to me for an hour at 6 a.m. in the morning. We'll make sure to do this one again as well in a couple months. I'm sure we can go a lot deeper than what we've done in this one. Definitely. 100%. Thanks very much for having me on Nathan. Really, really appreciate it and looking forward to working with you soon. My pleasure. See you Tom. See ya.