Enabling Profitable eCommerce Growth with Carla Penn-Kahn

Carla Penn-Kahn shares her experience in the e-commerce space, from working in investments at Credit Suisse to starting her own e-commerce businesses. She discusses the challenges of launching perishables by delivery when delivery was primarily for letters, and the operational complexities involved. The conversation then shifts to the importance of financial operations and unit economics in e-commerce, with a focus on the changing landscape of paid media and the need for strong financial operators. Carla also emphasizes the significance of product selection and category in determining lifetime value and the challenges of building customer loyalty. The discussion concludes with insights on tracking metrics, including contribution margin, and the importance of balancing cash flow and fixed costs. ProfitPeak aims to be a true enterprise resource planning tool for e-commerce operators, providing a central core for understanding financials, inventory management, and advertising impact. It offers a single customer view and focuses on profitability rather than just revenue. Common pricing mistakes include not considering future discounts, setting prices too high or too low, and discounting the entire product range. When it comes to marketing, a normal MER target is around 30% of revenue, while spending 40-50% on marketing is considered a danger zone. It's important to allocate marketing budget to both new and returning customers, but the emphasis may vary depending on the brand's goals. Discounting should be strategic, with a focus on profit contribution and limited to three to four times a year. Profitability is challenging because many brands lack control over advertising and marketing expenses and fail to track and leverage contribution margin dollars.


Takeaways

• The operational complexities of launching perishables by delivery in the early days of e-commerce
• The importance of financial operations and unit economics in e-commerce
• The significance of product selection and category in determining lifetime value
• The challenges of building customer loyalty in a crowded market
• The importance of tracking metrics, such as contribution margin, and balancing cash flow and fixed costs ProfitPeak aims to provide a centralized platform for e-commerce operators to manage financials, inventory, and advertising impact.
• Common pricing mistakes include not considering future discounts, setting prices too high or too low, and discounting the entire product range.
• A normal MER target is around 30% of revenue, while spending 40-50% on marketing is considered a danger zone.
• Marketing budget should be allocated to both new and returning customers, with a focus on acquiring new customers for most brands.
• Discounting should be strategic, limited to three to four times a year, and focused on profit contribution.
• Profitability is challenging due to lack of control over advertising expenses and failure to track and leverage contribution margin dollars.

Chapters

00:00 Introduction and Background
03:04 Operational Complexities of E-commerce
06:00 The Role of Financial Operations and Unit Economics
07:27 Challenges of Paid Media
14:21 Product Selection and Category: Determining Lifetime Value
23:06 Understanding Gross Profit and Contribution Margin
24:21 Avoiding Common Pricing Mistakes
26:21 Optimizing Marketing Budget Allocation
29:17 Analyzing Metrics for New and Returning Customers
34:55 Strategic Discounting for Profitability
38:06 Introducing ProfitPeak: A Comprehensive Solution
44:26 The Challenge of Achieving Profitability in E-commerce

Transcript

0:02

Welcome back to the Blues Brothers podcast. In this episode, I'm joined with Carla Penkarn. Carla's been in the ecommerce space since 2010, with moving from corporate to owning her own ecommerce businesses and as of recent, joining the SaaS world with ProfitPeak, which is a software solution enabling ecommerce operators to better control the financial position of their business, which is exactly what I talk about in all these podcasts. So I think this will be a really good one. Thanks for joining me, Carla. Thanks for having me, Ethan. I'm excited. Awesome. So I thought the best place to start this would be to pre -frame your experience the last 10 years, the last 20 years actually in the Ecom space. Do you want to talk to your transition from credit Suisse to starting your first Ecoms business? Yeah, sure. So I worked in the investments team with the ultra high net worth families at Credit Suisse. So I was very privileged to get a lot of insights into how deals got off the ground. And one of the deals that I worked on before I left the corporate world was actually the float of Maya on the ASX. looking back now, I can't believe we got it away at the share price we did. But ultimately, that gave me a lot of insights into the retail sector. And part of that flow was actually talking through the e -commerce strategy that was to come for Maya. So this is back in 2010. And we were looking to the US market to see, you know, how Macy's transitioned to an omni -channel business before there was even a term omni -channel. And so that really sparked my interest in e -commerce. And so I decided to step away from my investment banking career and go out on my own and just try ecommerce and find a gap in a market, try throw a little bit of money at it and see if it works. But ultimately, the first one had the worst unit economics possible and didn't work. That's pretty standard. Yeah, it's a learning experience, right? So I always see failures as a starting point to learn. And you learn at your best when things aren't actually going the way that you hoped. Because that's when you really have to get iterative and really like double down on what you're trying to achieve and is it the right, right business at the right time, the right unit economics. And that's ultimately how I scaled multiple brands over the last few years was just getting that right. What made you decide to go into e -farmers market as one of those e -commerce brands? purely selfish reasons. Love food. I used to love going to farmers markets and just walking around with my dog and talking to people and trying new artisan foods. And so I thought, why do I have to only do that in Sydney? How do I give myself access to great produce from the Brasser Valley or for Margaret River or other parts of Australia where they have incredible artisan, enterprising small businesses, but they're not actually getting that footprint across Australia. So I wanted to solve that problem and solve it at a time where Australia Post was really still a male business, sending flat envelopes around the country and not able to really handle perishables or never mind breakables through the freight network. So ultimately, a very, very difficult problem to solve and probably way before my time trying to do it. Yeah, I was about to ask, how did you deal with the operational complexity of a business like that? What were some of the core challenges that came with launching perishables by delivery, as you said, when delivery was really just letters back then? Yeah, look, it was hard. Australia Post was very expensive for parcels back then, especially the minute you put a breakable sticker on the box. They wanted to charge you a lot more back then, which they can't get away with doing now. And also when you start out really small, you know, there weren't options like Sendle for us to use as a small business. So it was complex. It was challenging, but that wasn't the only complexity. I mean, back then was Shopify I didn't even know about in Australia. So we had a Joomla custom built that used to freeze every time we uploaded a product for about 90 seconds. So if someone was shopping on the front end they couldn't shop if I uploaded a product. Yeah, yeah, that's crazy. Do you think because of how low the barrier to entry is now to launch into e-commerce, do you reckon that's one of the core issues as to why financial operations and unit economics is so overlooked? Or was it still being overlooked back then when there was still a really high barrier to entry and creating a website where it would crash if you're putting a product up? It's crazy to think that so far away from where I finished where we were loading 100 products a day with active customers shopping all day. But I think... It really is like this democ, like Shopify is all about this democratization of entrepreneurship and, you know, allowing anyone to be an entrepreneur. I think it's a bit like when you have children, I'm a mum and no one teaches you how to be a mum. Equally, no one really teaches you how to run a business. You just have to work it out for yourself. And some of those instincts come naturally to some of us. Some people are absolutely incredible with developing product and being super creative or influential in how they sell. And other people are really, really strong in unit economics and actually understand the fundamentals of business. And it's almost that hybrid approach that you really need maybe potentially two founders in a really good e -comm operation where one's really strong on the numbers and one's really strong on the creative side. I think that's potentially the balance that's ideal. But then we're seeing this emergence. I'm definitely seeing it and I've seen quite a bit of commentary around it where they're talking about like the next generation of e -commerce businesses being more like incredible business analysts. So they're almost product brand agnostic. whatever it is that's trending in that exact moment and has the right unit economics behind it, they're selling. So it's almost flipping the coin on its head for e -commerce where it's going to be potentially less about brand in the future and more about being first to market and being in an incredible position to offer great pricing but equally make enough money on the back end that it's the right product at the right time. It's interesting because that like what you're describing is somewhat the dropshipping model, which is dropshippers are trying to find products where the unit economics work for a very short period of time. They can squeeze out a cap where there's enough margin that they can make profit. They can leverage it. And then the product goes to its life cycle. Everyone saturates and then they're onto the next. So that's what you're sort of describing, but at a larger scale with really sophisticated operators, but they're holding stock. and 100 % and I was at a conference recently and I was hearing someone from Meta talk and they were seeing some of the most successful new e -comm brands that they're seeing set up are exactly that. They're really strong business analysts and operators that are product and brand agnostic and they're moving super fast with the right you know economics and they're making the most money. Yeah, it's interesting. Since 2010, what do you think the biggest challenges are that you've seen for new e-commerce businesses now compared to back in 2010? The number one biggest challenge is obviously paid media. So back in 2010, 90 % of our traffic was organic, free. You would open a Google browser, there was maybe a couple of ads on the right hand side. But ultimately, what you saw first was organic listings. So it was really a lot easier to drive organic traffic to your website. Equally less competition meant that more customers were finding your website because you weren't competing. Granted, there was less traffic. But really the cost today to acquire a customer, I heard at a conference recently$95 for a shoe brand that sells $280 pair shoes. You know, those unit economics are pretty scary. And if I think back to my early Google ads days, you know, we were paying around $4 to acquire $150 AOV order. So a lot has changed. Yeah. Yeah. I was saying the other day, and I was about to put a post up about it, which is that in 2010, 2015, even arguably 2018, there was such leverage in paid media platforms like Google and Facebook because it was so cheap. And so anyone could get away with any kind of marketing effort. And then on top of that, you had agencies which would take enormous cuts and outrageous fees. Yeah. what they were doing, it made no sense. But it's because when there's such value arbitrage in an opportunity, you can substantiate the pricing that you pay because of the value that's coming out the other end. And so they were just leveraging this golden opportunity, which was Google and Facebook ads in its prime when it was cheap. And now that all of those costs have risen, it really takes strong financial operators to be able to understand. even just the mechanics of pricing at a product level, to be able to have enough gross margin or product margin that's going to enable you to acquire customers. Or even you can go down the rabbit hole of optimizing around second, third purchase and really having a repeat P &L, so a repeat purchase P &L that's driving profit contribution, and then acquiring customers at zero dollars or break even, which is what a lot of big businesses are starting to shift towards. And that requires a degree of financial operations that I don't think most beginner e -commerce operators start with. It's really just, hey, I have this incredible product idea. Let's see if I can sell it. Absolutely, but even in the mid market. You know, it's really hard to build loyalty. And I know from running my business for a number of years to actually change the lifetime value equation of a brand is extremely challenging. And you need to be selling in the right category, the right product to be able to be an LTV play. You know, you really need a subscription model because customers are increasingly bombarded with copycat products or similar products. And, you know, there's so much choice that you really can't rely on a coming back. And I think if you are relying on a customer coming back, even if you're a big business like Country Road, for example, you know, they have to give away a lot of money in their spend and saves to really, you know, afford themselves the luxury of lifetime value, even though they have an iconic Australian brand, right. Yeah, absolutely. How much incremental lifetime value do you think that is in focusing on marketing towards retention? Because I'm of the understanding that there's a little bit of incrementality there, but majority of lifetime value comes in the merchandising of the product range. And so if you don't have a product range, you're not within a niche that is orientated towards either consumption or high repeat purchase rates, then you fundamentally are restricted in how high you can get your lifetime value, no matter how hard you try. in your advertising across Google and Facebook. absolutely agree. I think one of the biggest issues is one category in the style of product, which is why if you're in the furniture business, you really need to be profitable from the first order because the next time a customer needs to buy furniture, it might be five to 10 years. Similar goes when I look at a brand like July with luggage, you know, how often do we all purchase luggage? And then you obviously reach your addressable market really, really quickly. But then if you're a beauty brand, you're fortunate, your customer needs to buy your product every three to six months. JS Health another great example of an Aussie brand that scaled incredibly well with no doubt great lifetime value. So a lot comes down to the product and the category that you're in. So I don't think there's incremental lifetime value if you are selling furniture that can actually be achieved. But if you are changing your product, and maybe you're moving into linen, or pajamas or something like that as a furniture business, then that new product or category introduction can potentially provide some incremental lifetime value. If you were to give a recommendation to a new ecommerce operator in their first year, and they were trying to, let's say they tried a few brands, they failed. And now they're going into another brand and they heard what you just said, and they take away that I should probably just start a brand that has strong lifetime value. Because lifetime value has strong repeat rates and then I'm likely to be more profitable. It's an easier business model. Is that what you would recommend for new brand owners? Or would you more so push them towards larger high -ticket products where they have more gross profit on first purchase to play with. It's such a hard question to answer with a flat yes or no. I mean, all honesty, I think it comes down to us is finding a gap in the market. So if you're coming out with subscription vitamins, for example, and you're going up against massive brand players in the hopes that you're going to secure lifetime value, because it's a subscription model of vitamins, you know, you're obviously going into a very crowded category and that customer acquisition cost the first time is potentially going to be extremely high. And then if you're selling furniture, for example, you know that your guests you're going to the dollars at the start, but you're not going to get that repurchase. So I think it's a balance between deciding where there's a gap in the market where you can execute something that's unique and have a moat around what you're selling for a period of time, but equally acknowledge that that moat isn't going to be there forever. Tmoo and Sheen, however anyone wants to pronounce the brands, they're here to stay and they're watching everyone and what everyone is doing. So you need to be constantly innovating even if you are a brand. I think that's a good answer. How do you approach getting unit economics right? If an operator is starting a new brand and a new venture, how can they make sure that their unit economics are quite right or in the right position to be able to actually acquire customers and become a profitable business that can scale year on year? Yeah, so I think there's two parts to this question. So the first part is you really need to factor in that you don't want to go and spend heaps of money in inventory and secure the lowest possible cost to land the product because you may end up buying 10 ,000 units and only being able to sell 200. So you've got to find the right balance. And sometimes paying a little bit more to secure those first 200 units is actually smarter than getting the cheapest price upfront. But I think having a very, very clear path when you purchase those 200 units to say, if we do sell these at a or four times markup. Will we then go and purchase it again? You know, we then got a five to six times markup, which means we can get a lot more aggressive in terms of what we're offering in terms of margin for advertising or margin for discounting or product bundling, things like that. So I think it's important to have a plan in place, but also not go too crazy. The first time you bring in product, it's finding that balance and knowing that when you do know the product sells that you can reinvest and you've got enough money to reinvest. I think I spoke about it yesterday on LinkedIn. A lot of people will buy in product, but then they end up when they sell through actually having less money to repurchase the product. So you need to really make sure that you set it up in a spreadsheet upfront and say, this is what I'm landing it for. This is what the full retail value is. These are the potential discounts I'm going to offer. How does that actually look in terms of gross profit now? What do I estimate my CPA to be? What do I estimate shipping costs to be? What's my merchant fees? And then you get to your contribution profit. And then you look at, okay, I'm using a 3PL and the pick pack cost per item is X. plus my, you know, a kinder or Shopify, whatever other fees you've got in the mix. This is what it's going to look like once I sell 200 units. And then you've got a full net profit statement per product sold. And then you look at that and you say, okay, it's only positive a few dollars. That's a good place to start rather than buying 2000 units and having a positive$100. Yeah, I think a lot of startup ecommerce operators don't think about inventory management or their cash conversion cycle and even get too fixated on the P &L, not realizing that you have to invest in the inventory and then also invest in the marketing spend on top of that, which puts you in a really poor cash position, particularly when we work with a lot of startups. It's funny because the reason why we got down into the finance rabbit hole in the last two years was because we would come to clients and we would say, Hey, we were sitting at a 15 MER or we're sitting at a blended CAC of $9. This is an incredible opportunity to scale. And then we will get the same answer, which is there is no cash to scale. And so we would look at them going, how is this possible though? Because we're making $45 in contribution profit on every purchase. And then it would be just over -investing in inventory or too many SKUs. And so all of their cash would immediately get tied up or they have large loans, which is just eroding any of their profit contribution. because they're financing majority of the inventory buyers. And so I think there's this whole other skill set, which is in inventory management and financial operations that gets thrown on you out of nowhere. And you don't really realize it because I think people walk into e -commerce thinking it's almost drop shipping, where it's just sell a product and then I purchase the product, which would be a fantastic model. How? 15 years ago. Yeah, correct. I want to ask you, what do you deem as the most important trackable metrics for brands to be looking at on both the daily, weekly and monthly cadence? Because I know the metrics might change there. Is it lifetime contribution margin to CAC? Are you looking at strictly contribution margin three on a day -to -day basis? Is it MER as a CAC? There's so many different metrics that people throw around. I'd be interested to know what you deem the most important to always have top of mind to where an e -comm operator could go. That was my number last week. Yeah, for sure. So I think what's really important, it also depends on who you are in the business, right? So I think that there's different levels of control to the P &L in a business. So the metrics that you're held towards within the business needs to be aligned with your level of control. So if you're a CEO or CFO, you can certainly be managing to contribution margin three, because you have control over the fixed costs in a business. But if you're a digital marketer or an inventory buyer, you don't actually have control at that level of the P &L. So to be tracking on a daily or weekly basis to that level, not really within your scope. So I think the first thing is to establish who it is, is tracking the metrics. And if it's the whole business, so you're aligning the team around common metrics, so you're not just the founder CFO, but you're including your inventory buying team, and you're including a digital marketing team, contribution margin, without a doubt, is the best way to start. So that is obviously your gross profit. So what you sold the product for, less the cost of landing the product and buying the product, and then you're taking out your variable expenses. So things like advertising, costs, merchant fees, that's all taken out and packaging at that point. That number is a really good way to know when your business is going to break even during the month and when you can start to get creative with your marketing, for example. So one really good thing is contribution, margin dollars banked per day. That's a really good place to start. And then you need to know what your fixed costs are every month. And the minute that your contribution, margin dollars banked per day during the month exceeds your fixed costs in the business, you know that you're longer in a break even state, you're actually reach profitability. And once you've reached profitability, this is when I talk to our customers about incrementality testing, say, hey, now we're going to add in a new campaign that strategically added in so we know when it was added, and then see what the incremental benefits this new campaign has brought the P &L. So not how much more revenue has this campaign generated for us, but what's the incremental benefit of adding this campaign in? Did this campaign actually drive more contribution margin dollars? Or were we actually less profitable than 30 days after launching this new campaign and therefore there was no incremental benefit of adding this campaign. And the same goes with discounting. So when a lot of our customers talk to us about discounting, we say, you know, let's think about introducing the discount once you've already broken even for the month if you do need to generate more cash flow. And then let's see what's the incremental benefit of that. Did CAC lower as a result? So contribution margin dollars banked were the same because you picked up revenue and CAC came down or did this new discount actually mean less contribution So all you did was generate cashflow, but now you've got less money in the bank to repurchase inventory. So I think contribution margin is the place to start, but need to be aware of what those fixed costs are and balancing cashflow requirements as well. So if it's a monthly basis, you really want to know your free cashflow as well. When you say contribution margin, are you referring to the dollar figure or the percentage of contribution margin? I like to look at dollars banked and that's because it works across a lot of different categories. So, you know, if you're looking at furniture versus socks, if you're tracking those dollars banked and you know what your fixed costs are, it's really easy to understand that breakeven state. But when you start running on percentages, you don't know when that percentage is the breakeven point to cover your fixed costs to know that you're in a profitable state during the month. Yeah. Is there a specific gross margin percentage that you would be targeting if you were to start an Econ brand? And is there a specific gross profit percentage that you would look at in a brand and go, that needs to be fixed before we can scale. Yes, there's ultimately as much as you can bank is what you want to bank, right? I would say below 75 % gross profit margin, so not contribution margin, gross profit margin, I would say below 75%, you don't quite have enough to invest in a proper customer journey advertising setup. So what I mean by that is actually running not just Google campaigns, but introducing meta campaigns as well. You're going to start to get tight on margin. So I think above 75 is a really good place to start. And if you can do that from your first 200 test case order, awesome. And then you can probably find yourself a pathway to getting to 100 % GP on your next order when you have confidence that the inventory is going to sell through at a decent rate. And to clarify GP is that including all variable expenses being transaction fees, fulfillment fees. 75 is your GP. So for me, GP gross profit is the standard accounting waste. So it is your net revenue. So net sales. So that's X of discounts, refunds, GST and shipping paid by the customer. And then you're subtracting your COG. So your cost of goods sold from that. So you would want at least 75. If you're doing CM contribution margin, that's when for us, we take out our variable costs. Perfect. What are some common pricing mistakes that you see and how can a e -commerce operator immediately identify mispricing if they're watching the podcast right now and they can go and have a look at their current pricing model. Yeah, I think the first thing to do when you're setting pricing is understand what discounts you plan to offer upfront. So if you can build the future discounts that you are going to offer your customers into your product pricing, you are incredibly lucky. And that's part of the advantage of being a new brand, because you can actually build discounts into your pricing model, establish brands, it's a lot harder to do that. I would also say that you've got to find the right balance between your product being a really high price and not selling, and your product meeting the market and selling because fairly priced in a market and especially at the moment with current economic climate price sensitivities are a real factor. Unfortunately it's not COVID -19 crazy retail days anymore and customers are more frugal with how they spend their money as a result. So you really want to make sure that you find the right balance but you also are able to discount if you do need to move the needle to generate cash flow and I always recommend our customers if you're going to discount to move needle, try not to discount your call range because you just get less money back to repurchase that call product. Discounts are there to really help you move seasonal stock or product that's slow. And the minute you start discounting call range, you just have less money to repurchase it. Yeah. When it comes to marketing. So let's say you're not an e -commerce operator. You're not the CEO. You're the CMO. So you're in head of the marketing division and you're not looking at contribution margin. Let's say you're looking at MER or CAC or acquisition MIR. What do you typically see as a normal MER target or an acquisition MIR that you would say that makes sense for this brand to be scaling? And what would you look at and potentially say that that's a red flag? Because I have, we do a lot of audits every week. We order maybe five to 10 brands and we have brands that come to us and know their numbers really well. And they say, our MER target is a 2 .5. However, that needs to maintain incrementally with every single increase in ad spend vice versa. We have other e -commerce operators that come to us and say, we need a 25 MER. And to that we say, probably not scalable if only two to 3 % of your total revenue was going into marketing. So what kind of band for top and bottom would you say are reasonable numbers for an ecommerce brand to sit in for acquisition more Mer or Mer? So we're seeing a lot of customers spending 30 % of revenue on marketing. That seems to be quite a common benchmark that we're seeing. We're seeing other brands spending more. But 30 % seems to feel about right. So for every $100 of revenue, they're spending about $30 in marketing to achieve that $100, which shows you why getting those unit economics right is so important. Because if you bought that product for$50, you've only got $20 left to cover all your variable other expenses like shipping and merchant fees. you've got to cover your fixed costs as well. So you can't just have a single markup. So really 30%, I would say is OK. If a customer spending 40 to 50 % of revenue on marketing, I would say that they're in a danger zone no matter what product they're selling, because I don't see marketing costs getting more efficient over time. I just see the costs increasing. Ultimately, the ad platforms themselves have to deliver to their shareholders financial returns. And they do that by obviously increasing the prices we pay for clicks, impressions, everything like that. Even when impressions are down, we notice that even though it's supposed to be a bidding system, costs don't come down. Costs have gone up since things have changed and there's not as many impressions as they were two years ago. So I would say if you're sitting below 30% and your margins are at a strong level, you may want to consider loosening the shackles as we call it. But if you're sitting above 30%, I would really be looking at running some incrementality tests to isolate, is it certain campaigns that are potentially and not providing incremental value to your customers and your customer journey and if you turned off this campaign would there be an impact on your revenue and if not then great keep that campaign off and you may actually see then contribution margin improves or is there you know something else that you can do by taking out a different discount campaign or changing your welcome email flow to obviously provide you with better leverage on the revenue side. Do you ever find that there's value in delineating MER versus acquisition MER targets for a brand? Let's say that 80 % of daily revenue is coming, or maybe more realistically, 60 % of daily revenue is coming from repeat customers. Would you still be looking to allocate 30% of revenue to marketing despite a lot of return customers, or would you reorientate towards just the percentage of new customer acquisition? Bye. So when we look at numbers, we like to split it out. So you've got your new customers, you've got your returning customers. You obviously also don't want to be spending 80 % of your marketing budget on returning customers. And we've seen a lot of customers join our platform with an incredibly high amount of ad spend going to returning customer retention. And that's definitely not a brand's goal. The brand's goal is when they're investing in advertising and marketing is actually to drive new customer and brand awareness. So definitely for every metric you look at your business, you should have a view into what that it means for a new customer versus a returning customer and how much marketing budget is going to each category. But equally, you've got to remember that discounts form part of your marketing. So if you are discounting as part of your retention strategy, that's almost a marketing cost because you're potentially not giving those discounts to your new customers or maybe you're giving them to both and giving too much away. So absolutely every metric that you track should be looked at through three lenses, total, new customer and then returning customer. Do you have a recommended percentage budget allocation to returning customers? Let's say that a brand has a 20 % daily returning customer revenue. How would you advise their budget allocation to returning customers? Really good question. And I think it also comes down to the goals of the brand. So if the brand has come. and said something along the lines of, you know, we're really struggling to retain customers. We want to get more aggressive at our retention strategy. You know, then you may want to assign more marketing budget to them. But most brands that we're talking to are saying to us, you know, we feel like our campaigns and our flows are helping us retain our customers to the level that we can, given the lifetime value nature of the product we sell. But what we really need to do to move the needle is actually acquire new customers. or create more brand awareness and more touch points in that new customer journey to make sure that when they do decide to purchase, it's with us. And so in that situation, then you wouldn't be advising that they obviously put more budget into returning customers. And I think what's also really important in this whole advice piece is not actually asking customers to spend more money. It's I think what is a lot easier for a lot of customers, especially in a tough market to talk about is budget reallocation rather than going and finding more budget. And a lot of marketers that I speak to that are working within brands, they say they think they're doing the right thing, they just don't know. You know, they trust the agency that's managing their ads and that they're doing the right thing, but they just don't know. And I always like in this whole, I just don't know to when I take my car to the mechanic and the mechanic tells me I need a new engine. I mean, I know nothing about cars, so I have to trust him. And I hope he's not making me buy a new engine for no reason, but he may well be. It may be for but it's that level of trust that we all hand over when it comes to digital marketing because we really don't know what the truth is. And that's why I love incremental testing as much as possible because that really helps you isolate what is that truth at that point in time. Yeah, that's the exact answer that I gave to a prospect the other day when they asked, what percentage should I allocate? I said, look, we just have to run incrementality testing on it to determine whether we can drop budgets to existing customers and whether it will affect returning customer rights. know at the end of the day, you and I have no control over meta and Google's algorithms. So the long and the short answer is, is no one knows. But the best that we can do is try different strategies and measure the incremental improvements. Yeah. And I actually, I wrote this down the other day. I was watching a video and this person said that we'd love to tell ourselves stories based on data from one perspective. And so you always put a narrative around anything you say, because you love narratives. You'd love to tie things towards stories and reasons. I'm angry because of this or this happened because of this, but it's all just narratives that have no proof behind them. And I think that particularly as marketers, we'd love to do it. We'd love to say, that happened because of this. We'd love to attach a mental model that has absolutely no validity in data and it has not been replicated in any situation. But it's a nice to have. Whereas the reality of, I think a lot of these circumstances is you just have to run the incrementality testing and find out what is going to happen for your specific brand. you do. And if one of the incremental tests that I love seeing is a lot of customers tell me, I need a discount to acquire new customers. And so I said, let's track those customers that you acquire with that discount code and actually see if there's any lifetime value there, right? So you've offered them a discount to shop to acquire them. But when did they shop again? Did they shop again? Or did they only shop again on Black Friday? So did you really acquire a good customer with that discount code? what do you normally find on the back end of that data? People don't like what they see. What tends to happen is if you acquire someone with very aggressive discounting, they associate your brand with very aggressive discounting. It's a learned behavior as well, and it's a very hard behavior to change. So I saw it in my own business. We sold kitchenware. We were never full price. We were always discounted. So if we launched a new brand that was full price, it didn't sell because our customer would wait for it to be discounted because it was a tall behavior. So if you are teaching your customer, to expect discounts, they're going to wait for them. I spoke about the other day, I only ever shop with Seed Heritage when they're on their 30 % off site wide sale, which they are right now. So I went shopping. Hahaha Yeah. Yeah. I think that's something that a lot of, particularly our clients struggle with is this push and pull between hitting sales targets and then knowing that there's a lever there that they can pull on, which is discounting. And so we can always hit sales targets if we discount. Should we pull on discounts? How often should we be discounting? At what point are we eroding brand equity within the market? And then as you said, training that behavior. Do you have any more like holistic advice for the average brand on how often should they be discounting to where they're not having negative impacts on their brand. Yeah, I think the I think if you're following the department store discounting strategies, so you know, they have the season mid season sale, the end of season sale, the click frenzy sale, the Black Friday sale, the end of financial year sale and boxing day sale. I think that's too much. and we fell into that trap in our category because we were competing with department stores. So we had to discount as frequently as the department stores did. I think if you own your brand and your brand also isn't being sold in the department stores at that level of discounting, I think you should be capping it at four times a year. Personally, I think, you know, if you're not participating in Click Frenzy, you don't have to make a scream at Click Frenzy unless you're overstocked and you need to move seasonal product. You obviously cannot ignore Black Friday. But I do recommend a lot of brands consider buying in products specifically for Black Friday. You don't have to discount your core range on Black Friday. You can use Black Friday as a means to bring in promotional product that is ideal to be discounted, heavily discounted, and it's a one -off purchase for customers rather than selling your best sellers at 40 or 50 % off. You're obviously training your customer next year to wait for Black Friday to buy that summer outfit that they're going to need on Christmas. Yeah, I think that's great advice. I think also on top of that, when you are discounting as being strategic in consideration of profit contribution, which is I think a lot of brands like to just slice a 20 % discount store wide, which let's say you have 50 % gross profit, you're slicing half of your profits right off the product. And so strategically discounting through increasing units per transaction or bundling products together or having some kind of free with in consideration of profit contribution is in conjunction with only discounting three to four times a year is probably the best approach. And you don't have to discount everything. You don't have to go on a site -wide sale. I think a lot of brands feel like they have to. take your highest stocked lowest selling products and bundle them together. And if you feel you need a like a loss leader in there to get people into the category to actually buy, maybe just put one or two of your core products in where you are actually overstocked and you've got too many weeks of cover. Don't be putting in core range that's going to be selling out within the next six weeks and you know you're not going to get any more stock before Christmas. Yeah, absolutely. I want to shift gears a little bit to ProfitPeak, which is obviously, I think we've already answered the question which I was about to ask, which is your journey to developing ProfitPeak. I think that's pretty obvious by now. But more specifically, what problems are you aiming to solve for e -commerce businesses with ProfitPeak? Yeah. So our goal for ProfitPeak is to really be a true enterprise resource planning tool for an e -commerce operator. And what we're seeing is a lot of e-commerce operators either have an ERP system, which is very focused around the inventory piece, or it's very focused around the warehouse fulfillment piece. But there's nothing really out there that's providing e -commerce businesses or even omni -channel businesses, which are predominantly e -commerce, you know, founded e -commerce and have since moved into stores with that true central core for their business. So understanding their financials in real time across their entire business, understanding how advertising impacts inventory, inventory impacts advertising. I don't understand how anyone can look at inventory and not look at it from a lens of what I'm spending advertising it. And again, I also don't understand how you can optimize advertising if you don't understand what inventory you have. They really go hand in hand because the best marketer can only sell what is in stock. And so you can't look at them in silos and also then providing our customers with a single customer view. So a lot of the CRM systems out there, they separate customer views. They don't look at the holistic customer journey and how your customer shops between your physical stores, your online store and what they're buying in both segments. So our goal is to give our customers that single view of their business and from a profitability lens. Forget revenue, revenue is great, but where are you actually banking the most contribution margin dollars or if you are the the CFO, where you generate the most net profit. Which products, which advertising campaigns, which stores, which channels, and then which customers. Who are those customers that we value the most? It doesn't matter where they shop with us. It's how did we acquire them? How do we get more of them? And how do we keep them engaged? I'll let you turn the light on. knew that was going to happen. Yeah, well, so am I correct in saying that profit peak is also in attribution as well? So we do look at attribution a bit in order to really understand how a product is sold. So we take a different approach to attribution. We're less focused on driving, you know, spend into different channels or different ad sets. We're more focused on what orders did we acquire from this ad set? What product was sold as a result of this ad set and what is the profitability? So once you've sold this product through this ad set and this total customer journey piece, what are the true delivered unit economics? And then if you're looking from the order lens, was there a discount code included and what was the impact then on unit economics with that advertising journey? Because no one's really looking at that advertising journey, the discount code and then the unit economics on the delivered product. And that also includes your true shipping cost. Because, you know, if you're selling like we were, you know, the difference between a KitchenAid stand mixer that weighs 15 kilos and a knife that weighs one kilo, you can obviously spend a very different level of advertising on different items because of the shipping impact. So you really need to know what's going on. shipping costs. Is that an API integration with ShipStation or something or is that manual uploads from AusBurst? Yeah, so at the moment, what we're doing is we take in your AUS post rates, which you get standard with Australia post that comes in and we look at post codes and weights. In the future, we're going to do like a ship station and a ship at integration as well. Yeah, well, and am I correct in also saying that inventory management is also a part of Profepeak? It is so we look at all the different data. So we look at exactly which ad campaign drove the sale for your product. So if you're running a meta carousel ad, for example, and there's no product, it's just, you know, beautiful creatives, we can actually tell you what product is driving the revenue and the profit for that ad. How much stock on hand you have, what's your weeks of cover, what's your delivered margin, how much of it's come back. So if you're running a great creative and you're selling heaps of product, but it's all starting to come back, it might be time to turn that ad off. One of our customers found that. Yeah, well, I didn't know the proper peak went into that much detail across those many services all collected in the one dashboard. That's super impressive. Is it still in beta? How do people get a hold of it? Yeah, so we're working with 20 customers at the moment. We're calling them our early adopters. And that's really been a process of iteration and really being able to work closely with early adopters to unlock the value they need. But any customers who are interested, we're offering a 30 day free trial as part of the beta program. It starts at $399 a month, which is very affordable in Aussie dollars, not US dollars if you do want to continue on. And pricing is tracked on order level, not revenue. So we don't penalize you for being a high average order value And our goal is really to help you unlock profitable growth. And whether that's from a customer lens, a product lens or an advertising lens, it's just about profitability. Yeah, that's amazing. I'm keen to see behind proper pay because it sounds incredible, especially as a marketer. If we can be attributing contribution margin at an ad level, as well as being more in line with inventory analysis, it's something that we're trying to push for really heavily with our clients. And internally is being a lot more across inventory management, so that we can better align all the acquisition efforts. But it is very, very tough without having a centralized software really to be looking at all management, because especially if you're an omni channel brand as well, that's where it starts becoming really difficult as a marketing partner without having to add three x time to our workload by cross referencing omni channel inventory presence and what we're actually selling online. I have one last question for you before we wrap up the podcast. It's a pretty broad question, but I think it's a good one, which is why is it so hard for most brands to operate at a 20 to 25 % EBITDA? in the D to C space and what are the common mistakes that you see leading them to poor profitability? Ultimately, it's because that they don't know what is really happening day to day in their business. We don't have control over the number one expense in our business and the number one expense is advertising and marketing. And because we don't have the level of control with that expense, getting to profitability, never mind a great state of profitability at 20 to 25 % EBITDA is extremely challenging. So you need to be looking at contribution margin dollars bank today, which takes into account your daily ad spend fluctuations. and your total fixed costs in your business and leverage that knowledge and information at your hands and not ignore it when you have a bad contribution margin dollars day don't ignore it that's your chance to take action and I think it's really easy to ignore the numbers as long as revenues tracking in the direction that you want it's easy to ignore the rest of the numbers but ultimately it's the rest of the numbers that matter And I think a lot was driven by public listings of early DTC founders. In the US, you know, we saw Allbirds, we saw Walby Parker, we saw all these great brands exit on a massive revenue multiple. So we, myself included, thought, hey, if I scale for revenue, I may get this great exit. But ultimately, the market shifted and businesses are now trading on an EBITDA multiple. So you need to be focused on EBITDA multiple numbers and stop looking at your daily ROAS because it doesn't tell you how you're performing. especially if it's in platform because you know if you sum up those revenues you're running a very different business. Exactly, exactly. Thanks for taking the time out of your busy day, Carla. Where can people find more content from you? Yeah, you're welcome to follow me on LinkedIn, Carla Penn Khan. I'm very active. I love sharing content on my experiences in ecommerce founder and if not there, profitpeak .io. Perfect, thanks Gala.