Live eCommerce P&L Teardown with Valentin Kuznetcov

In this episode, Nathan and Valentin dive into a real P&L and discuss the importance of understanding accounting principles and how to read a P&L. They highlight the limitations of a basic P&L structure and the need for a more comprehensive breakdown of revenue and costs. They discuss the impact of discounts and refunds on the business's profitability and the importance of optimising contribution margin. They also touch on the significance of OPEX and the potential for reducing costs to increase profitability. Overall, they emphasise the need for a proper P&L structure to facilitate better decision-making and finance management.

Chapters

00:00 Introduction
02:25 Limitations of a Basic P&L Structure
04:17 Breakdown of Revenue Items
10:36 Variable Costs and Contribution Margin
18:12 Low Contribution Margin One
20:57 Impact of Discounts and Refunds on Profitability
23:25 Marketing Effectiveness Ratio
26:30 Importance of a Proper P&L Structure

Transcript

0:01

Welcome back to the podcast. is episode three or four with Vel from Optimizator. In this podcast, we're going to be spending 20 to 30 minutes diving into a real data set. Let me restart. I messed up twice. Welcome back to the podcast. In this episode, I'm joined by Vel. It's his third time on the podcast and we'll be deep diving into a real D to C P and L that we've pulled. We've messed with the numbers by about five to 10%. So that the P and L isn't recognizable when Vel starts tearing it down. We'll be touching on accounting principles. We'll be diving into how to read an accounting P and L and translate that into how to read top to bottom through an actual D to C structure. I'll definitely have some comments to add there as well, because I think that's a common misconception as to how majority of clients majority of DTC owners look at their PNL. There's a lot of common mistakes that I'm sure we'll touch on, but we'll also try to keep this tight and concise. Cause I know that most viewers don't want to watch people looking at a PNL for two hours straight. And so we'll try to keep this one under 30 minutes, but thanks for hopping on. Appreciate being here, Nathan. Thank you so much. Awesome. You've got the P &L on your end. So I'll actually pass to you to intro with anything that you want to start off with before we actually dive into the real numbers. Sure. Yeah. Before I screen share the prepped up version of the P and L, just want to briefly touch on the importance of the fundamentals to have a proper P and L in the first place. And I'll show to all of you exactly what I mean by that. But accounting lays at the foundation of finance management. So I know it's, it's a boring topic and there is accountants and bookkeepers that a lot of operators, business owners rely upon. But it's important to understand accounting at the basic level so that you are aware of the pros and cons of whatever the current accountants or bookkeepers are doing with your business. So that you can ask questions, ask them for explanations, clarifications, and ensure that your finance management is at its peak. I'm going to click the button now and show you the P &L. and we can get started. Let me know when you can see it on your end. Perfect. Okay, let's do it. So this, the starting point, the original P &L that we've pulled again, we've changed the numbers just a little bit, but the overall picture remains the same. We're gonna start by the, we're gonna start with the structure of the P &L first and foremost. So I wanna draw your attention to the left -hand side here. Again, you can see the structure of the P &L. It's pretty much all over the place, right? It's the absolute basics and you will observe this with every G2C business. A lot of brands think that this is perfect. It works for them and they've got used to it. Accountants are fine with this because it simplifies their processes, but this is actually very, very limited. It doesn't paint a complete and accurate picture of the the business's performance and it needs to So let's start with the first section. The first section is the revenue section. You can see that it's split up with Afterpay, other PayPal, Shopify, Zipmoney. So these are typically payment processors. now in the business itself, I can conclude that they're basically going by the deposits. So whatever bank deposit is shown through the bank feed, they're going to record on the accounting side. And that will be registered as revenue, which is not the case. It's a payment deposit. Before money is deposited, it needs to go through some sort of calculations and breakdowns. For example, you have your gross sales, have your discounts, you have your refunds, you have shipping that you collect. Then you subtract transaction fees and only then you get a total number, a total figure for the deposit. So when you skip all those things, the gross sales, discounts, the refunds, you don't really know how the business's revenue performance looks like over time. For example, if we run a huge promo and we have to discount a lot of our products, we won't see the impact of that discounting and that promo on the P &L if we structure it this way. We'll just see the final deposit. We'll look at it and say, OK, it's a pretty good deposit. We're happy with this. But what if it costs you a lot of money on the discount side? What if there was a lot of refunds that followed afterwards in the following months? won't be able to see all of this in here in this P &L. And that's quite essential. Every decision we make in the business, we need to understand its impact later on, later down the line. Because again, the purpose of the P &L is to give you an overview of the business's potential and its potential future performance. So when I don't see discounts, refunds, I can't really know its full potential because I want to be able to look at the discounts, refunds, shipping that we collect and use them as levers for decision making and finance management. So this is the first kind of red flag or cross with this P &L. We don't see the breakdown of revenue items. Now, the second thing is the variable costs. Again, the structure is very limited. We look at cost of sales, we see closing stock, domestic supplies overseas. So again, without much context. it's unclear what exactly is communicated here, right? What are we doing? Is it the supplies? Is it cost of goods sold? Is it raw materials that are purchased to build the products that we then sell? So it's not really clear. And we see the closing stock, it has negative figures. So I'm not really sure what exactly that means. It doesn't mean that they owed inventory to someone else. It's not a correct figure. I can tell you that much because closing stock cannot be negative. It means that it's an adjustment, not so much an actual close in stock. So we can see that it's a huge, huge area for improvement and opportunity. And the other issue with this section is that it doesn't really tell you the cogs. And let me explain. So there's two different accounting methods, one accrual, one cash basis. A lot of businesses, especially small businesses doing under $5 million in revenue, follow the cash basis. And the reason for that is because it's much simpler and it's good for tax purposes. So for tax purposes, if you want to minimize your taxable income, you want to follow cash basis because we typically see a lot of investment in inventory with businesses. And that means more write off for your taxes. So if you invest more in inventory, you buy it upfront before you sell it. It means that you front load the costs and that means less in taxes. So you can play with Now, the downfall of that is the internal interpretation of the financial performance. Cash basis is not really reflective of the, again, potential or real P &L. It just tells you how cash moves through the business, which is good for the cash flow statement, but not so much for the P &L. So I highly advise you to follow the accrual basis. Talk to your accountants, talk to your bookkeepers. ask them how you can structure processes so that you follow the accrual basis. And that will translate into proper numbers in your cost of goods sold section. So right now this business is following cash basis and they're simply recording what they purchased or what the cash outflow for inventory is because you see huge fluctuations, right? Again, the revenue, know, 272 ,000 for 1 million, but 366 ,000 for 471 It's a huge discrepancy, right? You can't really rely on these numbers to tell you what the actual product margin is or the cogs is because there's a mismatch. They simply follow cash basis. When they purchase inventory, they record that, but when they sell it, they don't record that. And that creates a huge discrepancy. So again, that would be sort of the, and you can see like this closing stock here is probably used as an adjustment because you can see that there is actually some good adjustment and the numbers do Level out eventually in this section, but you want to see it in here directly you want to see the cost of goods sold line that actually tells you what the real You know the real cost of goods sold is without using the closing stock as an adjustment You simply want to use those numbers and again if you if the reason for this is because it complicates the accounting I can recommend some technology like a 2x for example to build the integration between Shopify and your accounting system so that the cops or cost of goods sold numbers are transferred accurately and automatically because you want to avoid this breakdown as much as possible as it simply doesn't make sense and the closing stock is not accurately used as an adjustment here either. So that be the first note for the variable costs. Now on the other side there's other variable costs like shipping fees or transaction fees that are not really included in this section because gross profit margin is the profit that keep after all variable costs are deducted. In this case, we're calculating gross margin before we deduct other variable costs. And they actually show up in the operating expenses or the fixed cost section. So you will see the postage and shipping here, right here. I'll just highlight it real quick. Postage and shipping is a variable cost, right? So we have postage and shipping Australia Post. We've got postage and shipping 3PL. which they switch to later on. And we also have online transaction fees here. So that's another thing that would need to be prepped up and moved. So I highly recommend that you move these types of costs into the variable cost section so that you can calculate the gross profit margin more accurately. Because right now, as it stands, their understanding of the gross profit margin is limited and actually completely inaccurate. So that's the second thing on the variable costs. Now let's move on to the operating costs. We've got expenses and there is one more step after the variable costs, completely variable costs like cost of goods sold, shipping, transaction fees, and before the fixed costs or operating expenses. We've got advertising and marketing, which is kind of a hybrid cost. It's not exactly variable because you have to pay it upfront. before you incur revenue. You set a budget, you run ads, you incur the cost, and then you expect some sort of return on that ad spend. But it's also not a fixed cost because it does relate to your revenue, which means that advertising and marketing is that sort of hybrid cost that sits between variable costs and fixed costs. And it needs to be separated from the operating expenses and moved into its own class of categories. And what I typically advise businesses to do is to have a third section underneath gross profit. You're going to have direct marketing section, which includes all costs, marketing costs that are direct. Again, they're incurred to drive revenue, paid ads, email marketing, SMS marketing. If you incur costs to send out emails and SMS, affiliate commission. Any sort of commission that is incurred when you ask some sort of affiliate to You know to push a promo or to advertise the products so all of those costs would be direct costs and we would have its own section on the P &L to break them down and see how These advertising and marketing direct advertising and marketing costs and the gross profit make up the contribution margin or profit contribution, what we call it. So then you would have a separate section again, and I'll show you in the P &L calculator how that would look like, but you will have a separate section between the gross profit and the operating expenses called direct marketing that would include all these advertising and marketing costs separately. And then after that, you would have the rest of your operating costs, accounting bookkeeping, bank charges and fees because they're not direct costs. And we would have the overall OPEX. And again, this is just a quick overview of their P &L. No real numbers just yet, but this where we stand with this P &L structure. And again, there's a lot of improvements that could be made to facilitate much better decision making. One more note to mention is the interest expense. It's bundled with operating expenses and I typically recommend to push outside of your OPEX. And the reason for that is because interest expense is just a financing cost that doesn't really relate to the operating potential of the business. It's related to the financing activities in the business. So in this case, for example, net earnings is EBITDA, which is earnings before interest taxes, depreciation, amortization. So we've got our EBITDA, which is reflective of the operating moments of the business. But then we would want to push the interest expense out of the because again, EBITDA is earnings before each interest taxes, right? So interest and taxes, we want to have a separate section below with interest expenses broken down separately. And then we can arrive at the net income or net earnings. So again, in this case, it's all about the language, it's all about understanding and using the proper terminology. And net earnings is supposed to be EBITDA here. And then after interest is deducted, it would be net income. So again, we're, you know, now I'm kind of going on a tangent and talking a lot about the technicalities, which are extremely important for you to have proper accounting and finance management. And I know it sounds boring, but you better talk to your accountant's bookkeepers to pretty this up. Before we go on to the P &L calculator, Nathan, do you have any comments or questions about the P &L structure to spice up the conversation? Our only question from my end is we've talked a lot about how this P &L has a lot of structural issues just in the way that it's being presented and the way that items are being reconciled. Why is this so important? What's the difference between this P &L and the making all of those changes to represent the same business but in a different way? Yes, so to answer that question, we need to understand what each section of the P &L actually serves to tell us. So the revenue section tells us the demand signals or demand strength of the business. If you have to discount a lot, maybe there is a misalignment between supply and demand, and you have to adjust your pricing properly. If you don't see that in here, you can't really gauge your demand properly. Now, the variable cost section, which includes cost of goods sold, shipping, and transaction fees, tells the cost of delivery and creation, right? How efficient are we at creating and delivering products to the end consumer? If we don't know that, and we can't successfully benchmark our performance to other businesses in the industry, then we can't really know if we need to be optimized in this area. The third section is the distribution section. How effective are we at distributing the product to the market through our marketing channels? Again, it has to be split out separately to know how you benchmark against the performance of other competitors in the space. And then OPEX is a gauge of managerial decisions in the business. So how effective is our leadership at making decisions in the company? If they hire too many people, that will be reflected in the OPEX section. will see huge wages and payroll expenses in relation to revenue generated, which is bad sign and is reflective of the managerial decisions or poor managerial decisions. And we'll dive into the benchmarks in the P &L calculator, but I hope that paints you the importance of having a proper structure to make the right business decisions and know exactly where you go wrong in relation to the competition. For sure, yeah, absolutely. Let's dive into the numbers. it. All right, so we'll look at the P &L calculator again. This is the structure that I typically recommend to DDC brands. Again, you will see grow sales, less discounts, less refunds, ship and collect it, and you can add whatever lines you want. In this case, we don't really have this section, right? So we don't have a breakdown of these numbers, so we have to go with the net revenue figure, which is just a summation of all those different payment processors. So we're looking at $8 million in revenue. Then follows cost of goods sold, which is $2 .8 million. And again, this includes packaging. It includes raw materials. It includes freight. It includes customs and duties and current to import the products into the country and make them ready for sale. So this is the landed cost of all products sold. So we're looking at 2 .8 million, which means that the contribution margin one or the product margin is 64 which tells me that we are extremely inefficient at creating the product. Typically, we want to see a brand running a gross margin of 64%, which means all the other costs, shipping and fulfillment, transaction fees, so on and so forth. We're looking at 64 % with this brand. Now, what does that tell me? It tells me that there is One, it could be a misalignment of supply and demand. we could be over, again, without understanding the discounts, we could be over discounting the products. And that pushes our contribution margin one down significantly because we have to discount so much. Maybe there is a lot of refunds coming through the pipelines that we have to account for. Or maybe we're just really inefficient at creating the product, right? So understanding how we're pricing the product. what the maintain markup is, right? How do we market up? How do we price the products? How do we make sure that we are not losing a lot of margin? And I know Chris Daly, one of the retail masterminds in the DDC space talks a lot about it. You have to price all these costs into the pricing of your product. Otherwise, you're going to lose a ton of margin. And that's what seems to be happening here. Now, note of caution as well. We're assuming that these numbers in here in the P &L, are actually correct, that these cost of goods sold figures are correct, which may not necessarily be the case for the reasons I told you previously. There could be an inaccurate adjustment being made. So assuming that these numbers are correct, this is a very low contribution margin one. Typically, I want to see a minimum of 80 % and sometimes 85 % contribution margin one when the products are priced properly. when the discounts and unit economics are understood in the company, you should not be running 64%. Contribution margin one, unless you have a specific business model and you're focusing on volume, you're discounting tremendously. But again, this is not a sustainable long -term strategy for a DTC brand, so we would have to understand the strategy behind these decisions. But if it's just a pure DTC brand that is similar to others, 80 to 85 % is the contribution margin one that I would want to see. 64 % is quite low. Now moving on to shipping and fulfillment and transaction fees. Again, we're splitting these out just to see contribution margin one versus contribution margin two to understand the cost of delivery. And the cost of delivery is the shipping and fulfillment plus transaction fees for us to make that transaction happen and deliver the products to the end consumer. So When we deduct these costs, we arrive at the gross margin of 45%. Now again, the 45 % is also quite low. We want to be looking at 60 to 65 % minimum and ideally closer to 70%. Although based on my research, there is only about 2 % of brands doing 70 % gross margin, which is very low. I would want to see way more brands doing 70 plus gross margin, but I understand that the times are not easy and a lot of brands you know, promos, sales, to generate revenue and that's costing them a lot of margin. But we would want to see 60 to 65%. And the reason for that is because the cost of acquisition has gone tremendously up. Five years ago, we would see, you know, 15, 20 % of revenue being, you know, cost of advertising for brands. Now it's nearly 33, 40%. So it's gone up. extremely high, which means that it's eating into our profitability and something needs to happen to, you know, to allow the brand to stay profitable, which means that the gross margin targets need to go up. And if we're running the same gross margin as five years ago, now we're losing money, 100% guaranteed, right? Because the margin that worked five years ago doesn't work in this current landscape now. So we have to adjust the target gross margin to the new numbers to the new levels and 45 % is extremely low. And again, for a brand of this, of this setup to stay profitable, they have to be extremely lean and they have to have tremendous amount of volume to stay lean. So with 45%, again, if you're not running huge volumes, have to optimize across the board to push the gross margin up. Now, when we look at the paid ads here, again, it's the advertising and marketing section. that is bundled with OPEX. And like I told you, it's a good idea to split it out of OPEX and have its own section in here to understand the contribution margin. So after deducting the marketing costs, we can see that the contribution margin three is 23%. And ideally, I'd want to see closer to 30%, maybe 35%. That would be perfect. But again, understanding that the cost of marketing is extremely high now. we can expect brands to have closer to 25%. But 23, again, is quite low. You have to be an extremely lean business to allow for this type of contribution margin to work, which is the case with this business. So if you look at OPEX, it's $1 million. They're extremely in relation to other brands in the space. So their OPEX is 13 .5 % of their revenue, which is very strong because a lot of brands are running at 15 minimum, 20%, 25%. So because they're lean, they can actually afford to have gross margin. And yeah, to have to lose money at the product margin level as much as they do because they can make up for the losses with their OPEX. Their MER, which is marketing effectiveness ratio, don't confuse it with marketing efficiency ratio, which is just the inverse of that. And I've kind of translated that in here. It's 4 .5 marketing efficiency ratio, but marketing effectiveness ratio is 22 % of the revenue, which is quite strong. Like I told you, a lot of brands now are running at 25, 30 Most brands are doing 33%, which is around three blended ROAS or marketing efficiency. So we can see a lot of brands doing way higher than this. So they're quite efficient, effective with their marketing efforts. They're quite lean on the OPEC side, but it's the cost of delivery that is pushing their profitability. 19 % is quite high. I would want to see closer to 15 % even below that on the cost of delivery side. But again, it kind of makes sense for them because they've recently switched to a 3PL, which you can see here. They're looking at the cost of delivery right here. You can see that the shipping 3PL postage has gone up. So maybe they're going through some transformational period where it them a bit of money upfront, but then they will hit those levels of efficiencies and that will translate into high profitability. So this is nothing to be concerned about just yet. But I am concerned about the contribution margin one. I would want to understand their strategy. Why exactly are the, is the product margin so low in relation to other businesses and how can we squeeze more profit there? So can we do a different pricing strategy? Can we, can we look at our promos and sales and understand why or why not we're discounting or running a lot of refunds? So just understanding what's going on here at the product margin level. would be helpful for us to boost EBITDA even further because right now they're making decent money. 11 % EBITDA margin is extremely strong. Once they get to 50%, it would be a lucrative investment opportunity for a lot of banks and fund managers. So we're looking at a very strong business with the only exception of having a proper P &L structure to drive and facilitate proper finance management. product margin. there could be some plays with on the pricing side, on the discount side, on the sales and promos, on the offer side, on aligning supply and demand a little bit better to ensure that we don't sacrifice a ton of margin. But overall, again, very strong performance and I'm happy to see this brand doing so well. Awesome. I've got a lot of questions off the back of that. and I have a lot of context about this brand as well that I can provide if you have any questions. The first question that I have for you is what EBITDA would you want to be targeting for a brand of this size and scale and the DTC, P and L that we've sort of outlined here. And then where would you be looking to gain those percentage points within the vertical analysis? Yeah, I mean, the for brands who are growing and growing and growing. Indeed, you see space specifically, and I've mentioned this a ton of times and I get a lot of backlash for it, but I think if you build a business, a DTC brand. In the same way you would a corporation, so you have all these C level executives, you have a ton of people in the team. You're not really efficient. You're not lean. and you over hire and over inflate your OPEX and you over stack with technology that doesn't really make you productive, you're gonna see your OPEX plummet. And I've seen this happen with a lot of brands. This brand is doing something right because their OPEX is extremely lean, which means that they've set up the base foundation for their business and they're building their revenue on top of that solid foundation, which means that as their revenue goes If they can keep their OPEX relatively the same, it means that the OPEX percentage will continue to go down, which means more profit in the bottom line. And that's how you go from 10 % to 15 % to 20 % EBITDA by staying extremely efficient on the back end, investing in the right talent, which may cost you a little bit more, but they can actually sustain larger. volumes of revenue because they're more productive, they're more efficient, they're more intelligent, quite frankly. Right? So if you invest in the right people, you invest in the right systems, you lay a solid foundation for your business to grow upon. Once revenue starts going up, you actually don't incur a significant increase in OPEX. It's actually quite marginal. And as a result, the Delta between revenue and OPEX starts to expand. allowing for much higher EBITDA percentage. And that's the main lever that businesses have because honestly, as you grow, your MER or marketing effectiveness ratio will definitely go down because you will have to retarget the same people. You will have to invest more in branding for you to be recognizable. So your marketing efficiency ratio, if you look at the X return, will go down from 4 .5 to 3 to potentially 2 .5. That's expected. But the OPEC should not increase at the same rate because that will altogether marketing efficiency dropping and OPEC skyrocketing will definitely cure your profitability and put you in a much worse position. So yes, to answer your question, the number one lever for businesses to generate higher EBITDA margin is OPEC. That's number one, especially at scale, right? Early on, not so much because you still have to lay some sort of foundation, but get a bonus in marketing effectiveness ratio because you're a new brand, actually might capitalize on that effectiveness. But as the business grows, marketing efficiency and effectiveness will decline and OPEC should stay the same. So fixed cost should stay the same, allowing for profitability to expand or at least stay the Yeah, I really like this saying, which is every percentage in OPEX that you can get back is a percentage advantage over your competitors. Every percentage of OPEX that your competitors have is an advantage that you have because you can take that percentage off their P &L and just put it straight into marketing and advertising and saturate more of the market in comparison to them. Yep, exactly. I've actually built a calculator for that as well. So what happens if you save some money on the OPEC side and invest in marketing that actually generates much more differential profit as a result. So it'd be cool to share that calculator. 100%. Yeah, this is a conversation that I literally have with a different client once a week, which is that they're struggling to reinvest rapidly enough into marketing and advertising because they're overinflated on OPEX and they're trying to cover operating expenses, but they can't even generate the contribution profit to do so because they've layered up OPEX like crazy. One question that I do have is we get a breakdown of OPEX from all clients that are on board. I want every single line item so that I can get an idea of number one, how you're coming to that total figure. Cause most people come to it wrong. They add in marketing expenses or they'll add in a car expense, for example. And it's like, hold up. I don't think this has anything to do with the company. think this is some cheeky tax evasion. But A question here and it's to do with this P &L as well is owner's compensation. Are you counting that in OPEX? Obviously for actual bass submissions, you would have to count it in OPEX. It's a wage, it's a salary. But how are you conceptualizing that when you're consulting across a P &L with someone? Because let's say, for example, of this P &L, about 5 % is actually owner's comp that's disguised as wages within OPEX. So the OPEX is actually a lot better than what it looks like on that sheet. So you're saying this line here only includes the honors compensation or a lot of owners compensation in there. So the fluctuation month on month isn't to do with hiring and firing. That's completely owners comp pulling additional funds. Well, there's a couple of perspectives, right? One is the actual performance and two is the potential of the business. On the actual performance, this is still cash bar, right? So it's still eating into liquidity, which means that we need to represent it somehow. So even though it's not reflective of the potential of the business, the actual performance is still affected by these payments to the owner in the form of cash bar. So on the actual performance, there is huge impact here. On the potential side, yes, you can come in and there's a lot of, you know, that's how private equities, private equities operate. They come in, they see a ton of waste on the OPEC side and they say, okay, we can actually take this brand, clean this up and then operate it more efficiently. And that's what happens with brands running 30 % OPEC because they just have no idea how to streamline and improve their operations. But to answer your question, how would I account for it? Well, I look at the actual performance. and understand the cat burn. And I would say, OK, so we are burning quite a significant chunk if OPEX is huge percent of the business. I would have a conversation with the business owner about how we could potentially make improvements there. How could we possibly restructure the compensation and make it less impactful on the P &L side? But it's also understanding When we look at this P &L calculator, we can see that because there is owner's compensation in this OPEX percentage, we are actually way more efficient than we see here, which means that if I can display how efficient the business actually is and how those efficiencies could translate into more revenue, then I would have this conversation. So I would say, look, 3 % of this is actually your compensation. We could possibly invest that 3%. and marketing effectiveness to grow your revenue even further. Right. And that's the type of talk we would have. So I would say, look, maybe reduce your comp for the next three to six months so that we can invest in growth. And then you're going to get way more output and you can increase your compensation back up and you will have way more dollars in your bank account. So that's the type of conversation I would have and kind of guide the business owner to making the right decision. Yeah, perfect. One more question that I have is that if you were to allocate focus across MER, cost of delivery in OPEX, how would you do a percentage breakdown in terms of where the founder should put their energy and time? at what stage of growth. this P &L, so eight million and they've doubled twice over the last two years. Right. Yeah. So I would definitely spend time optimizing contribution margin one because there's a lot of inefficiency here potentially. So just understand why exactly it's so low. Is it because of this kind of, do you have context by the Yes, it's because of heavy disk counting. heavy discounting, right? Okay, so that's issue number one, understanding if this sustainable business model, because they're front loading their customers, and there could be a significant impact on the lifetime value of customers. So we would have to look there. And if we see a tremendous decline in lifetime value, it means that the more we spend on acquisition, the more we push the discounts down the consumer's throat, the the less efficient we're going to become later on. So at some point, marketing effectiveness ratio will go up, right? So the effectiveness will actually get worse. It will be like 25, 30 % of revenue or marketing efficiency will decline tremendously without much impact. So discounting has its cost. It's just a, it's not a cost in real time. It will be translated at some into profitability later on. So we have to account for that. So marketing efficiency will definitely decline and get worse, which means that we need to spend a lot of time on the contribution margin one side, playing around with numbers, understanding how we can mitigate the impact of discounting. Because right now, they're probably discounting because they've conditioned their consumers to buy at heavy discounts. So how can we move away from those discounts, potentially launching a new product line, a new sub brand of the main brand to kind of start conditioning people into a new category, a new product line that is not discounting all the time, right? And run both simultaneously until we've transitioned people from heavy discounting to good value and, you know, perfect value for them. Because again, when you have to discount heavily, there's just misalignment between supply and demand, right? It just means that people won't buy enough volume at the current price, right? Or they don't like the offer. So there's just a misalignment between the money they have to pay and perceived value. So you have to bridge that gap somehow. But if you've conditioned your consumers to spend way less because of discounts, they're going to continue taking advantage of those discounts. Makes a lot of sense. Is there anything else to add for this PNL data? Really, think right now the brand as it stands is in a very strong position. But of course, we can't paint a whole picture of the business by simply looking at the P&L. You have to look at the balance sheet to understand if they're leveraged, right, because they're paying interest expense. So how much debt are they carrying on the balance sheet? How much inventory do they have? Is there overstock building up that will affect their cash flow in the future? So we would have to look at all those three financial statements at the same time and also look at e -commerce analytics. So again, looking at the lifetime value to customer acquisition costs, understanding if there is poor retention, poor repeat purchases, because again, net revenue combines both new customers and repeat customers. So we'd want to see the split between those two to have an accurate read on the business. But P &L looks very decent. They have a lot of room for errors. And they definitely have some runway to make mistakes and make improvements on both sides. And if they invest their effort in optimizing contribution margin one, they're going to see good results. Perfect. If the listeners and viewers enjoyed it, let me know. We can absolutely do an episode two and episode three if Phil wants to come back on. But thanks for coming on, I really appreciate it. This was super insightful and helpful. Thanks for having