I have one of the coolest episodes I have ever done today and it's because I have a real
P&L from an e-commerce business on Shopify doing about $5 million in revenue and I am going
to walk through for you exactly what I told the business operator about their P&L. So I'm
going to show you how I analyze the P&L, show you how I thought about all of it every section
of the P&L and what I think this person should do next to really push towards massive profitability.
So really fascinating business in a lot of different ways that I think is going to be relatable
for a lot of people. Let's walk through a real e-commerce business P&L right now.
Okay. This is one of those episodes where I'm going to do my very, very best to tell you
each part of it as I go. So if you are listening to this and not watching it, you will hopefully
be able to follow along. That said, probably better if you can watch at least parts of this. So
so just just for the record because I'm going to show you the P&L in a second. Okay. And the
constraint here is that I'm just not going to tell you what the business actually is, but that's
okay. You're still you're going to know about this business to where it's fine. So let me give you
some basic pictures of the business. It's it's a pushing about 5 million in revenue, you know,
four to five and trailing 12 months and I have the trailing 12 months P&L. I'm going to show you
the category is CPG basically consumables. Okay. So consumable CPG and and that's really all you
need to know personal care kind of kind of kind of space. That's really all you need to know and
and that will give you a lot of the information you need to understand what's going on in this
business. So I'll just I'll just tell you straight up that when the entrepreneur who operates this
business reached out to me, they said, Hey, I have some concerns about the value of my business. I
listened to your episode with fan by about how so many businesses are getting valued poorly. And
I've been thinking about profitability in general. And I'm just not sure that this business has
gotten me, you know, that this business really has a hope or a future in the way that I want it to
have. And so I said, well, listen, if you send me the P&L, I'll look at it as long as I can make
some content out of it. And so we're doing that right now. And I'm I'm going to show you this
actual P&L and show you whether this person ought to be optimistic. Now, the other fascinating
thing is this is not the first time he's had this thought of really pushing towards profitability.
It's another important piece of context you need to know is that this operator raised money
sort of I think it was on 2021 something like that. And raised raised a decent amount of money
at the time. And of course, the environment in which he raised was really different. So there's
still businesses getting some revenue based valuations at the time that was starting to really
fade away. I certainly wasn't thinking about revenue based valuations too much at the time. In fact,
in some ways, maybe I should have been more. But but but you know, really some changes in the way
that the business has has interacted with the marketplace because now it is clearly incumbent on
the business to be profitable and to be growing profits. And that's the way e-commerce businesses
will be valued in this this operator wants an exit. And so I you know said said he had heard my
podcast like I said and he's thinking about how do you build profit in the business to get an exit.
He's got some really good things going. So let's let's dive into it. So that's that's basically
all the context you needed raised money at one point tried to grow it without too much concern
about profitability and has now changed that. And so so let's get into it. So I'm going to share
my screen now. And we're going to we're going to see here. Let's see. All right. So here is the
PNL. No, I'm going to start with is the original. Okay. This is what was sent to me because before
it. So like the whole goal I had here was this person is telling me they have concerns about their
PNL and and is it actually going to work and like what can I do about that? Right. So I you know,
at that point, want to look at the PNL and the the first job for me is to kind of get my head
around what is actually happening in the business. Okay. And and so let's see, let me go there,
freeze that. And and so that's that's the that's job number one is is actually organizing the material
to figure it out. If you know anything about my content, you know, I'm thinking about a PNL
in a few different buckets. Okay. So I see here a few different things to start, right. Sales of
product income separated from return between returning and first time customers. A little thing I
noticed immediately in this business is that there is much more returning customer revenue than
first time customer revenue. So the section of the PNL I have pulled up right now is May and June
of 2024 in May. It was 330K in returning customer revenue 91 first time in June. It was 300K
versus 71 in July. It was 371 versus 68. So you can see like dominated 80% something like that
of the revenues coming from returning customer revenue. And so immediately without knowing
anything about the business, I thought that's a good sign. That means this business has some LTV.
And therefore that's good. One of the things I'm looking for in any commerce business to be
successful is returning customer revenue. It just makes your life much much easier. Okay. So I'm
starting to think about that right away. And and as I go down the PNL, you know, there's like
lots of little things. Okay. Little bit of Amazon businesses. Maybe the next thing that pops out to you,
you know, 13 grand on Amazon in May last year. You go through the year. It's right right around
there most months, you know, 11 to 13K. So it's very small. So I'm thinking about this really
as a D to C only business compared to, you know, again, you know, in the 400s and in and Shopify
revenue. So the Amazon business is small. And you know, there's like a few things that you see
on top of that, some shipping revenue, et cetera. And then let me tell you one of the things I did
right away with this business, which is I went and looked at how the revenue is recorded on the PNL.
Because if you look here, you've got revenue sorted between returning customer revenue and first
time customer revenue. And then you have shipping revenue separated along those two lines and
separated out as a zone line item. And then separately farther down the page. And then I didn't
even realize it first was discounts. Now there's a huge amount of discounts on this. You know,
most PNLs will have that discounting right towards the top right next to the revenue. So you can see
it. In fact, most PNLs also aren't going to separate out first time in returning customer revenue.
So I went and thought like, okay, now we're seeing these huge discount numbers again to use the
numbers from May just because I'm pulling them up right now. Those main numbers are showing that
430, there's 430 grand in in revenue before shipping another 40 in shipping revenue. So you put
it at about 470 except that when you go down to discounts, there's 116,000 discounts. So the actual
revenue being collected from from the brand is like way lower. It's like 33% of it or something
like that. Maybe not quite that much. No, no, like 20% of it is 25% of it is going out in discounts.
Okay, obviously I could add to the sell to calculate the percentage for me. But again, huge, huge
amounts of revenue that is not actually being realized because of discounts. Okay, so I know that
right away. And then I want to start organizing the rest of the PNL into different buckets.
And so before I'm not going to walk through much more of this right away because it's kind of
all over the place. Like if you're looking at this, what you'll see is that like even under cost
of goods, under that header, you've got supplies and materials as cogs, that's great. Right next to
discounts, okay. Affiliate marketing is somewhere under cost of service. Shipping and freight and
delivery is also is somewhere near cost of goods sold. That seems reasonable to me. Amazon costs being
in there seems reasonable to me as well shrinkage being in there. That's fine. But then you go to
like advertising, which is why why are affiliate fees not advertising? I'm not sure. And then it turns
out as you go further down that you have warehousing and fulfillment as their own line items. And I
can't remember even where they are on this one. So don't worry about it. But warehousing and
fulfillment are separate. And so I learned through looking at the PNL, something I didn't know in my
initial email interactions, which is that this business is self fulfilling their orders, okay. So
that is a little light that goes off right away for me. I actually had recorded before this episode
and before looking at this an episode with Chad Carlton, which has not been released yet, but we'll
be soon just to subscribe wherever you're watching listening to this. You're not going to want to
miss that. Chad runs a 3PL in Missouri has great thoughts on on how businesses can work with 3PLs
together to have a really good relationship and have that be a great service. And that's really
the whole reason I did the conversation was to think about operators like this and what are the
trade offs? This is the first question we talked about. What are the trade offs between 1PL and 3PL
shipping? Okay. So what I did was I went to go organize the PNL. And I'm going to hide a few
rows here actually because those are not so important for the sake of the initial conversation.
But the very first question to me was like, how do I think about this not just like with a whole
bunch of numbers on a page, but through a framework that can help me analyze where this business is
working and where this business is not. So I started moving some things around the page and
adding in some percentages. Okay. The first thing I did is on the sales side of things. I actually,
I know that standard accounting, okay, means that you need to include discounts as their own
separate line item. But discounting that almost assumes that the gross value of a product is
money that you actually can get. Like the MSRP is money that you actually can get. And that if you
just like lower the discount amount, you would get more money. That's just often not true is the
problem. Like the actual amount of money you're charging is the thing that I'm interested in.
The actual amount of money you're receiving. And frankly, I don't really care if it's shipping
revenue or if it's order revenue or whatever. Like it doesn't matter to me because that's still revenue.
Okay. So as long as you get that and we'll get, we'll leave tax out because tax is not revenue.
Okay. But, but as long as you are collecting money from the customer, how you charge for that
between shipping and product sales is just a conversion rate game. You know,
ultimately you're charging for revenue. And so the AOV of your product is really about,
the AOV of your website is really about how much revenue you collect on average per order.
That's it. I don't really care if it's shipping or not. Okay. So, so I combine all those into what is
is actually more like Meta's.
excuse me, Shopify's total sales number.
And now, I have an actual total sales amount
that gets me to $4.3 million for the year, okay?
And it becomes down to now, may of last year,
looks like $353,000 in revenue.
That's shipping revenue, regular order revenue,
and takes the discounts out.
Because that's the number I'm actually interested,
how much money did you get from there, okay?
The next thing I wanna do is organize the P&L
into three different buckets.
And you've heard me say this before,
this is definitely something I learned from Taylor Holiday
and I've continued to think about a lot.
And those three buckets are cost of goods sold,
which is every variable cost associated
with getting the customer the product.
In fact, cost of goods sold is not really
the best language for this.
The best language for this is cost of delivery
because fulfillment costs and shipping costs,
not just the cost of goods themselves are in that bucket, right?
So that's one bucket, that's every variable cost again,
associated with getting in order to a customer,
including some allowance for returns.
Number two, CAC, right?
So it's advertising costs that is highly variable.
It's not the same no matter how much of the product you sell.
And so CAC will put in its own bucket,
even though it is associated per order
and some of those things are semi-similar to variable costs,
but much more sort of easier to affect
at the per order level, okay?
OPEX, which is all the fixed costs left over after that.
That's usually gonna be things like rent and people.
Those are the main costs.
There's some software costs in there as well, okay?
So I start organizing the P&L in terms of those things.
So what you'll see now, if you're looking at this,
is that I've got COGS and ZONE thing, okay?
So the first thing I see is COGS is a percent of revenue
is about 10%, okay?
So that's really interesting.
This brand has killer margins at the level of raw COGS.
I have 90% gross margin to start things off.
That's really, really good.
Now you have to ship the product.
And one of the things I knew about this brand
is that it was going to be in a category
that had some challenges related to shipping.
The product is not particularly light.
You have to, it takes up a lot of space in a box.
So high dimensional weight or high dimensions in general, right?
Larger dimensions in general,
which means shipping it is not that high.
And it's a pretty low AOV product.
So I'll pull these back out.
And what you'll see is at least on new customers,
if you actually check the new customer order AOV,
you're around $35, okay?
So a $35 AOV net of the actual money you actually receive
is going to be expensive to ship
because pretty much no matter what,
it's gonna cost you at least $5 to ship something.
And I was assuming this product would actually be closer
to $6 or $7 to ship, at least to get to the customer.
And so now you look and say on the one hand,
you have this massive value in this category, okay?
And this, again, I had some assumptions about this
and the P&L confirmed this, okay?
Which is that it's extremely high margin
at the level of product itself,
but it's much lower margin at the level of shipping.
And so shipping really eats up a bunch of your money.
And so the postage is a percentage of revenue
for the year ends up being about 14%.
Okay, so you're paying much more,
shipping the product to the customer
than you are actually paying for the raw materials
and the cost of goods themselves, okay?
But nonetheless, those add up, okay?
Amazon costs separate bucket.
Not gonna worry about those too much
just because of all the aforementioned reasons
that Amazon is probably not even worth their time
the way this business is looking.
We'll leave that aside.
Next, merchant account fees, okay?
Merchant account fees would be basically
the cost of running the credit card.
In this case, it's a little bit high as well at 3.76%.
That's probably because of things like after pay
and some of that where you're paying higher fees per order,
but reasonably high.
And again, that's associated with every order.
So at 3.76%, you gotta apply that to your cost of delivery
because again, that's a variable cost associated
with your order.
(upbeat music)
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And so now, when you roll all that together,
you get a cost of delivery that ends up being about $79,000
against 352 total in product.
Actually, that math is wrong.
Hold on.
All right, so if we look at the year total,
you've got a couple of little weird moments here,
but you're looking at about 30% in total
for the year, about 30% in cost of delivery.
So 70% margin left over after cost of delivery.
So even with the high shipping,
even paying more of a margin of account fees
than a lot of folks are paying,
you still are in a spot where you have a really good margins.
70% landed to the customers really, really good.
So I'm feeling great about that all the way around.
And so I keep scrolling down and I keep looking at the rest
of the business and I go, let's go on to CAC.
Now, CAC is wild in this business
because for many brands, meta ads is like the highest thing,
is one of the top two line items in your business.
But this business is just not there.
They, over the course of the year,
they only spent 18.6% of their revenue on ads.
And I've got that laid out for the year
and it's a really fascinating thing
because you would think a business at this stage
would be spending much, much more on ads.
So that, that was another thing I noticed kind of right away.
Like, why are they spending so little on ads?
And one of the realities here, of course,
as I talked about earlier, is that the returning customer
revenue is such a high percentage of the revenue
that something else is going on here
because that's how they generate a whole bunch more margin.
But there's also a question about like,
should they be spending more?
Because they have so much returning customer revenue
that maybe something is weird here
and maybe they ought to be spending more money.
So I have CAC laid out here,
but I'm also gonna add another metric to this right now,
which is AMER, okay?
So new customer revenue over total ad spend.
And if we do that, and we say new customer revenue
over total ad spend, and we run that for the year,
we're gonna do this as a ratio metric, okay?
What you see is actually something
really, really, really promising here
about how this business ought to go,
and particularly in relation to growing ad spend.
And that is that over the course of the year,
as they have both spent more and seen AMER go up, okay?
So I'm just gonna read these AMER numbers by month.
1.45, 1.1, 1.08, 1.5, 1.4, 1.2, okay?
1.22, 1.2, 1.1, all of those are there
while they're averaging as something like 40 to 60 grand
and spend kind of varying there.
But then at the end of last year in the beginning of this year,
their spend numbers go up.
So they go from 40 to 60 grand a month and spend
to 1673, 73, 80, 85.
And while they do that, their AMER goes from 1.2 to 1.5
to all the way to 2.2 on their most recent month spend, okay?
And that's, again, a really awesome thing to see
because it suggests to me that they have some room
to keep scaling, they're growing their ad spend.
And yet they're not seeing any real slowdown in revenue.
In fact, they're seeing or in efficiency.
What they're in fact seeing is a more efficient spend
as they go, which is really, really good.
So for the course of the year, it's a 1.5, 1 AMER
with their margin that looks like a perfectly healthy number
to me.
They've got some money left over afterwards,
making a little more money on first purchase.
And again, some good things happening
over the last couple months, okay?
So you're seeing those things as part of the business,
CAC low as a percentage of the total revenue here.
And so there's that case.
That's the first thing we noticed.
Cost of delivery is very low.
70 points of land in margin to the customer.
CAC, even lower, you've got only about 20% of the money
going out the door, even a little less than that.
into advertising, probably want to figure out how to get that up if anything actually to be spending
more money and acquiring more customers, talk about that more in a minute. And then we get to
the killer. So you look at this business first of all and you think they must be smashing.
That's what I would think, right? What I just told you is that CAC is 30% of the business,
and we'll just make the numbers round. Excuse me, CAC is 20% of the business,
cost of delivery is 30% of the business, and you go holy cow. This business must be printing,
because what you all know about running any commerce business is that they run at a very low cost
of a very low fixed op-ax. And so you can run a business really, really lean. But then when you
add all these numbers together, you run into a different, you see something very, very different,
you see a very different story. And that story is, this is the op-ax as a percentage of revenue,
the fixed cost, everything left over as a percentage of revenue at the stage of the business.
I'm just going to read the percentages by month for you, so you know how high this number is.
55, 58, 45, 57, 64, you get the idea. Very, very, very high. Now, the number goes down over
the last couple of months of the year. I'm going to talk more about that in a second. But it's 48% of
the revenue has gone out the door in fixed costs. So what in the world is going on there? And this
took me a minute to figure out what was going on. The first thing I saw was I got all of the costs
related to the office that they have and the building that they have. And what you see there
is that over the course of the year, about 9% of the money is set in office and fixed costs.
Rent, utilities, cleaning, trash, all of that kind of stuff, even allowance for depreciation on
some machinery or something like that. There's all that. Which we're going to come back to that
in a minute. That's something I didn't catch on too right away, but it's an interesting thing.
And then salaries and contractors. And there's a specific note here. If you're looking at the
panel, non-warehouse. And so now maybe you're starting to see what the issue is here.
The non-warehouse salaries are about, let's see, for the course of the year, it's about 21%
of the revenue. 880 grand over the course of the year. I'll 4.2 million in revenue.
Earlier last year, like on further back on the trailing 12, it was close to 28%. So it actually
has gotten better over time. Now again, we'll talk more about that in a little bit and what's going
on there. Okay. And then after that, warehouse and fulfillment. Now this is one of the things I
know is right away. Is that they're paying a whole bunch of money in expenses labeled warehouse
labor and production and fulfillment. Now that is, that is an interesting cost. So that warehouse
and fulfillment is 16% of their revenue. And you put all those together and you get this really
big number. And then there's a little bit left over for another one and a half percent. But that's
not really so important between subscription fees and some of those kinds of things. Okay. So the
three big buckets are office, like the building, salaries and contractors and then warehouse and
fulfillment. And so this led to what was for me, the central part of thinking about what's going
on in this business and the way that it's going to generate revenue. And my almost immediate thought
was you had to fire people. That's actually why I'm not doing this as a coach and call. Because
and why I'm doing this a solo episode and because the the operator was actually willing to share
what the business was. But I realized pretty quickly that I was maybe going to have to go on a call
and tell him that he needed to fire people. And if that was the case, that would be a really
frustrating and sad thing to see published on the internet if you were part of this company. Okay.
So just didn't want to do that. And so we're doing it a slightly different way. So at the level of
warehouse. So at each of these then when when we had our call to talk about all these numbers,
we began to dig into this. And what I came to discover was the first the first thought I had was
the fulfillment costs in the business, the warehousing costs seemed extremely high. And I saw
this label as fulfillment. And I just thought like why in the world is this something like 16% of
your revenue going out in fulfillment? That doesn't make any sense at all. Like there's just no way
fulfillment. If you go to a 3PL, it's going to be like two bucks per order or something like that.
Even if there's some customization, maybe it goes to three. But it's not going to be anywhere close
to these numbers. Now $3 per order on a $33 AOV is actually still 10, you know, almost 10%. That's
still really high. And so who knows what the deal is there. And I figured that out. But I came to
discover something else about this business, which is that it is not in fact just a warehouse and
fulfillment cost. It is a first party production cost. So this business is manufacturing
themselves. And maybe some of you were latched onto that right away. And you saw this and you were
out in front of me. It's good for you if so. But I didn't put that together. I assume they were
ordering through a manufacturer had incredible cogs. And that was that. But it's not it's actually
not the case. So so instead of it being something where they were we're doing that, they are actually
both manufacturing in house and then fulfilling in house. And when you do that, that's how you end
up with 50 to 55% of the revenue that is that is marked as like a fixed cost. Okay. And so what it
really means is my cost of delivery calculation is worthless. It's totally meaningless. It doesn't
mean it like I'm going to come back to how they can raise their AOV later because it's a really
important point about that. But and I think you're going to be interested in what I have to say about
that because it's a really fascinating customer acquisition issue. And so that would also help
with the situation. But but this is just not operating like a normally commerce business. And
when you think about the profitability of the business, this is definitely one of things that's
going on. Okay. So so let's talk about this first. And we'll talk about the rest of the business.
So what I ended up the conversation I ended up having with this operator was do you have any expertise
in manufacturing? And he says, no, actually, this is a product that we made me and my wife in our
house. Okay. And and we started scaling up production because maybe we thought own manufacturing
was a good thing. And and we're doing something a little bit different. But you know, when I looked
at the product, it didn't seem to me there was any real proprietary knowledge here in this. So far
as I can tell, it's just that that's just the way they had built things. Okay. And then at the same
time, because they have their fulfillment or their their their facility there, they're also just
shipping it right out there after they make it. Now, there's some real advantages to this. Okay.
The first is you can make claims around we make the product ourselves. Okay. That's good. And
if there is anything proprietary, in fact, that may be something you really want to hold on to.
Even if you don't have expertise in manufacturing, because this is what I was saying to the operator was
essentially like you are trying to run three businesses at once right now, right? You're trying
to run an e-commerce business. Okay. And a manufacturing business. And also a 3PL. And you actually
didn't come into this with expertise in any of them. And they're all different businesses. And
they're all hard. Okay. Because every business is hard to be really great at it. So you are
playing the game on hard mode right away, just like from from the jump. Okay. So why would you do
that? Well, there are reasons to do it. And I just want to be clear. Like I got one hour with this
guy. I didn't have a chance to go into every possible detail of the business. But with one hour with
him, you know, the place where I told him to think about this at least is, are you actually
providing value to your business as the manufacturer? Or are you just a cost center in the business?
And that could be in a few places. Like it is actually possible, first of all, that your cogs
get straight up cheaper when you go to a better manufacturer because they're just going to be
better at it than you are. Okay. So aside from any time cost and opportunity cost on your
brain space. Okay. Because again, running a warehouse and running a manufacturing facility is
difficult. Like it really may be the case that a manufacturer's ability to buy ingredients in
bulk to do to do all kinds of different things like just to have better machinery, that kind of
stuff, better access to labor cost depending on where they are, you actually may be able to get
the same or or even cheaper cogs by outsourcing and manufacturing. That's like that's like really
possible. Okay. So not necessarily normal, but it's really, really possible. So the first thing was
like what I told him about that was you need to think you need to understand more clearly how much
time and how much the total costs are and this is going to be actually a little bit of a difficult
calculation. How much your cogs actually are in this business instead of these two different
things, which is cogs in the PNL, which turns out to basically just be raw materials. So now it turns
out it's not true landed cogs is 10% of the revenue. It's just raw materials is 10% of the revenue.
Okay. But then secondly, the labor costs, the machinery costs and the time costs, all those
things involved, any other ingredients that are involved with making the actual product,
if how much is that actually costing you to make per unit? And then that needs to be a separate
line item that you think of so that you can actually understand where the scale opportunities
are here. Certainly it is not the case that at a $4 million business, you're getting really
economy of scale. And what every manufacturing business knows is that manufacturing businesses
make money at scale. And so what he needed to do is figure out how much this was actually costing
him to make. Okay. And then start shopping manufacturers and going like, okay, if I tell you the
exact recipe and I own the recipe and the manufacturer does not own the recipe, okay. But you just have
to get the materials and all those things. How much would this actually cost? Now again, I have
worked with brands that had first party manufacturing and there's advantages and here's the other
advantage. The other advantage is you're going to reduce inventory risk. If you go to a big
manufacturer, you're probably going to be a small fish in a big pond at $4 million in revenue.
You're just not doing that much volume. You're going to have to order out ahead. You're going to
have to deal with payment terms. A whole bunch of stuff that happens as you outsource. So it is not
so obvious that you definitely ought to outsource this. But most likely, the trade-offs are worth it
in my view in a business like this where there doesn't seem to be anything proprietary about it.
There's no real specific reason to manufacture yourself and you have no particular expertise
in this part of the business. Much more likely, what you actually want is to go work with a
manufacturer who can help you actually scale this up and who can do that with
potential volume discounts and some of those kinds of things, especially in a category where there's
going to be plenty of manufacturing competitions. There's going to be plenty of folks who can make
this product. So you can go shop a whole bunch of them. Get on the horn with my friends. It's
had move supply chain, right? Just like added bonus here and have them go find 50 manufacturers.
You can make this product, start getting samples and see what the costs come in at. So that's the
first thing that I said. Secondly, the exact same dynamic is in place at the level of fulfillment.
Okay. Now, now this brand sells a lot of products to new customers on. Well, okay. So first of all,
the brand is coastal. Okay. And so being coastal, that means they're shipping some amount of their
products all the way across the country, which also means that they are paying to some number of
customers. They're paying like zone seven or whatever it is costs for a decent amount of the volume
that they are moving. They're paying high amounts of postage and could probably save on postage
meaningfully just by having their 3PL in a different location because being coastal makes it
harder to ship across the country. It does it makes it makes things more expensive. Okay. So there's
that like at a baseline straight up postage cost based on location, whether you're 3PL or 1PL,
that can be the case. Okay.
You've heard me talk about them before and I'm so glad to be telling you again about Vermont.
Vermont is the best landing page funnel building software. I know of in e-commerce for a very
simple reason, which is that you can build extremely customizable, really, really good high performing
landing pages really, really fast. The mission basically at Vermont is to empower growth marketers
to be able to build really high performing funnels without having touched the website because
you know if you've tried to build funnels for a client at some point that you want to go and mess
with a PDP or launch some test there, there's like a million people who are going to throw the flag
and tell you no you can't do that, you can't change this, you can't change that. Well, Vermont allows
you whether you're an in-house growth marketer and agency or whatever else to very quickly and
easily hammer out landing pages. They've got all kinds of great AI tools to make that really fast
and they've built on top of Shopify in a way that allows you to do really, really cool stuff like
custom upsells, custom carts. You can build custom PDPs with custom bundles all on without having to go
mess with anything at the product level and Shopify and with the result is that you can test all
of that in Vermont's testing environment, which gives you really easy AB tests whether you're testing
in Vermont or Vermont pages against external pages that are really easy to set up and the net
result of it is that it allows you as a growth marketer to rapidly iterate all kinds of pages.
Sometimes what that means is just building a funnel where you take a very specific value
proposition and add and you match the value proposition to the landing page or you more you tighten
things up. I got a brand for example recently that took an approach to one of its products that
was like instead of talking about how great the product was, we started talking about recipes
that use the product. Okay, well, we change the lander extremely quickly and easily to go create a
recipe based version of the lander that goes from recipe to product in an explicit way, but that
allows the customer to have a seamless experience on the back of the page. We're going to test that
against the standard version of our lander and the standard version of our funnel and it's going to
be really easy to do. We've done all kinds of offer testing, crazy gifts with purchase offers,
different discounting, free shipping, subscription offers, all of it. It's super fast, it's super
easy and you'll love working with it. If you want to, if landers are a serious part of your growth
marketing playbook and your business, if that's a real way to move the needle forward, you should be
considering Vermont. You should at least be doing a few months trial. Go to VermontCommerce.com/AF,
VermontCommerce.com/AF to get a look at Vermont and get started today. But secondly,
warehouse is another thing where if you have no expertise in running a warehouse, you are almost
certainly losing out on all kinds of efficiencies that people who know how to run a warehouse is run.
This is why I've seen smart operator, after smart operator go from fulfilling their own products
in the early days to outter some to a 3PL basically as soon as they possibly can. It's fine in the
early days if you want to ship your own products. For the brand I'm starting, we're planning on
shipping out of a garage to start. That's just like what the early days of business are.
But pretty much as soon as you can, as soon as it makes sense, going to a 3PL makes a huge difference.
Again, there are challenges here. You have to plan for things in a different way. You have to find
a good 3PL. You have to find the right relationships, all of those things. But there's a lot of ways to do
this. There's even possibilities, by the way, of working with 3PLs in Mexico or Canada where the
labor costs are drastically reduced and can actually ship in a way that is really advantageous.
So there's all kinds of potential solutions here. But almost certainly, you are not getting
the best price that you can on shipping products out. And crucially, you have to run a warehouse.
Okay. Now, it's the same thing. This was actually an easier one to calculate. I told them,
you need to find out how many labor hours and how much space you are taking up and how much rent
there is in your fulfillment cost and assign a per unit fulfillment cost per order fulfillment cost
to your orders. And if it's anywhere above like two bucks, you should be considering going to a
3PL because the product doesn't have any need to be very complicated to ship. It should be relatively
commoditized and something that should be relatively easy. There's some storage, temperature things,
but I don't think it'd be a huge issue for most places. And there's one bit of customization that
could create a problem, which is that they are acquiring a lot of customers through a build your
own sample pack. But I actually think even there, it's possible that there's a couple of problems
that they're letting themselves have because they fulfill themselves. So each unit here, and there's
typically five units per order, it's going to be its own pick, which is going to add up and cost
for 3PL. So maybe doing that yourself makes it a little bit cheaper. I don't know. You know,
maybe not also. But why do that? Why not actually? And they also have like 18 different possible
variants of this product that you can use. And so what this, what I was saying as operator was,
what if you did two things at once? First, kill your slowest moving skews. Just get rid of them.
So you should get now into like probably 13, maybe even 10 depending on how much volume of each
one is moving. I didn't have time to look into that. But basically anything that's less than 5%,
that's in less than 5% of your orders, probably is not really helping you that much. So you can
reduce some complexity there at the level of manufacturing and fulfillment. So there's that. But then
secondly, you could start pre-kitting your orders. And that way, you could actually, if you want it,
and again, there's trade-offs here at both the level of the customer and the fulfillment. It's
possible that giving a customer 18 different variants to choose from as they build their sample pack,
okay? It's actually hurting conversion and that you should pre-select three or four different
bundles that are like, you know, the best sellers bundle and the, you know, whatever explorer bundle
and whatever, just make them up yourself, okay? And you pre-select those and you may actually find
that by pre-kitting, you get better conversion and better operational efficiency at the same time.
Do that with a 3PL and now you've saved a bunch of money per order there. Put that all together,
okay? And what you potentially have a solution for here, and this won't happen overnight,
but what you potentially have a thing here, a solution for here is cutting your warehouse completely,
okay? So that goes away. Instead, you have a 3PL, okay? Cutting your in-house manufacturer. Instead,
you have a co-man or a manufacturer, depending on how you set it up, right? Just a straight up
third party, okay? And go work from home and now cut your office face, okay? Or get a smaller office
for those things. You do those three things together and it is feasibly possible that you drastically
reduce the fixed costs in your business while at the same time making it so that, no, look, a bunch
of that cost is going to have to get reassigned into the cost of delivery bucket to be sure. You're
not just going to get 40 points of margin back here, right? That's not what I'm saying. But what you
may be able to do is get to a point where the business just works much, much better, okay? Above all
of that, and this is maybe the most important thing, getting the brain space back can be a huge deal,
less people to manage, less space to worry about, less businesses to think about operating
efficient efficiently. Instead, you outsource all that stuff to people who have real expertise
and understand it. And as you do that, you get a bunch of brain space back to focus on the thing
that you can do better than anybody else, which is acquire customers in your business. Think about
who your customer is and how you can serve them and how you can grow the business, okay? So that
is like this core shift that I think needs to be at least addressed in the business. And again,
maybe they do some of that, maybe they do all of that, like it's too much for me to say with one
look at their P&L or whatever. But it's really, really worth considering, I think, okay? So
that's a huge part of how to move forward. Now, let's talk about some other parts of it,
and we'll go back to the P&L here to look at it to see. Now, thankfully, your friend in mind,
Maitab Bogal had already had a coaching call with this person. And this person talked to Maitab,
and Maitab said really clearly, hey, you got to cut some salaries, okay? And now, so in all of this,
if you have fixed costs as a, and I'm going to come back to that comment from Maitab in a second,
but if you have fixed costs that are a high percentage of the revenue,
one of the ways that you can generate more margin is really simple is to generate more revenue,
okay? So there's two sides of the equation here, because if you scale up revenue, but your fixed
costs are truly fixed or even somewhat fixed, right? All that's going to do is increase margin, okay?
So there's two things at the same time here. There is a move where you need to cut salaries
and run leaner, and at the same time, you need a little more volume. And while that sounds like
those are in some ways opposed to each other, they're often not. Almost everybody has
some amount of bloat that where they don't really actually need somebody that they think they need.
I come back to my interview with Ben Perkins a lot. We're Ben.
said that they ended up cutting half their staff at one point at Ann Collars and when they did their revenue
Wasn't negatively affected at all and they just and and it's for a lot for a lot of reasons again
It's not about people being bad or lazy or dumb or any of those things
What it's about is that it's really hard to manage people and it's really hard to be great at utilizing talent and so
And so one of the things you can do is just like be careful about adding too much talent because people will find work to do
As Taylor Holiday says work as a gas it expands to fill the space a lot of to it and the time a lot of to it
And so people will just kind of find that they do even if it's not actually moving the needle so
So cutting some salary and growing revenue the same time is actually pretty doable and that's exactly what this operator did
And it's so good to see so what you see in the last couple months of the year is that
Is that the revenue was growing even while they cut and so you see in March and April
Serious increases in revenue averaging about 420 and revenue per month
That's up from an average the previous bunch of months
337 so meaningful revenue increase so that's going to help a lot and of course in point of fact
You got a bunch of margin back. So if you look at
The op-ex is a percentage of revenue it went from 45 or 49% to about 35 to 36%
Okay, and because of that
That opened up profit. So we actually haven't talked about this part yet
But the profit really did increase throughout the year through
Last year the last bunch of months of last year may through December so not true chilling 12
They they lost 13,000 dollars starting in January and February they started to make some moves and get in
Actually had profit of about 38,000 dollars 7% and 3% month for those two months
But then when they made the move of actually cutting
Some salary and at the same time increasing revenue
They were able to get to 18% and 12% profit margins 80 grand and 46 grand and around pace to a whole bunch to like a really profitable
Year so they've really turned it around now you're talking about a $5 million business doing between 11 and 18% profit with clear steps forward
For how to generate a bunch more that's a really good business and you can see again expenses are
And more of the money is going towards CAC at the same time
So as they fit as they change focus over those couple of months
They suddenly started spending a bunch more money 80 and 85,000 dollars generating new customers seeing better ad performance as
attention went to those places
And and really things look a lot better all the way around by the way at the salary level for those two months March and April
They did just over 51 grand and salaries 63 in February before that they were averaging between 79 and 100,000 in in in salaries
Okay, so we'll just actually pull the actual average number here. It was yeah
79,000 K 79 5 and they went all the way down to 51 2 that difference that
That that gap of $27,000 is a huge portion of their profit in the last couple of months
And you can see it really made a big impact on the business
So that one to punch of increasing revenue to get more volume and
Decreasing and and decreasing salaries by just getting leaner as a team has a massive impact on the way this business works
And now they can move their attention towards growing the business with CAC
Growing the business with ad spend and trying to maintain a decent CAC while doing it that they can do that
Then they can really be cooking so now what you end up with is a picture of a business
That's pacing towards it did about 4.2 million last year. It's pacing in the last couple months more towards 5 million
Off that trailing 12 you've read you've made yourself a little leaner your CAC is going the right way
Your AMER is going the right way
There's more focus in that place and you've got a little more volume and and now you're actually really and you're strongly profitable
Between 11 and 18% profit over the last two months
You put that together and that's a really optimistic outlook for a business that not very long ago was not even profitable
Now I and I think there's potentially some challenge with if they were if they were growing
Unprofitably and acquiring customers unprofitably those customer that's that's they're being buoyed by that right now because they're
reaping the returning customer revenue that they had
Probably driven from unprofitable ad spend earlier on in the business
So there's a challenge there, but almost certainly that was also really under optimized and if you get into the actual ad account
And I'm going to talk about one core part of that in a second. There's probably some some big gains still to be had
And you know the more I've thought about this business the more that I think it probably is the case
If I just think about the potential margin profile in their category
The more likely it is that cleaning up the things I started by talking about the fulfillment and in-house
Manufacturing stuff that you probably actually will get margin back like I just think this category really does that
And so so the operational side of the business has this big potential impact on profit
And I really want to highlight that in this conversation because I'm going to talk about offers in a second and some of those things
You that are more ad account focused. I'm not going to actually show the ad account in this case
I can't do that here
But it's also in some ways
Worth pausing and thinking about because like
So many people all the time wants to put all their attention on the ad account and they want to say
How do we squeeze more out of the ad account and listen? I make a ton of content about that. I think that's really good
I'm never going to be a person who thinks that's a bad idea to put your attention there because a lot of money goes there
But when you look at this a business like this like they actually have a lot of things where if there's just a little more
Operational efficiency then they'd be set up to be there and in fact by cleaning up something operational things
They may have a more upper more operational attention and money to put into improving the ad account
Like you if you're getting between 12 and 17% profit you may be able to bring on you know
Some a bunch of influencers for example that's actually one thing we talked about you may be able to really start saying like
How do we start coordinating influencers and get really serious about generally a bunch of influencer content and seating at real scale
Which I think really matters and this brand has a little bit of a niche element to it to some degrees to wear like influencers
I think could be a really big impact. Well, I mean that means somebody's got to organize it and send out the product and get the posts and all those things and
Potentially like there's just it's not overwhelmingly expensive, but you know, it takes time it takes effort again
It takes management attention and if you're spending all that on the in in-house
manufacturing on the in-house fulfillment
Like it's going to be harder to do those things and so that's and then of course all that stuff can create content in the ad account
I can be a really big deal. So there's something like that and you know
Thinking about being able to spend more on like just increasing the volume of your creative production and things like that
To see what you can accomplish there and maybe there's an agency that's a really good fit for a brand in this stage
You know and and probably don't want something prohibitively expensive still
You don't want to just like turn around and plow a lot of money back in an agency. It's going to cost you a ton of money
But you know, it's it's there's a lot of opportunity because of cleaning up the operation side of the business
And one of the things I really wondered is after looking at this business is just how many businesses
Are out there that actually have this opportunity in front of them if they can just get some help cleaning up those things and and reducing some bad cost and
And getting a lot leaner because when I look at this like before I say anything about offers
I'll just tell you like I'm really optimistic about this business
I look at it and say there's a real way forward. I think they raised at like a few million dollar valuation
And so not a crazy valuation like it seems really reasonable to me to sell this business for 15 or 20 million bucks at some point and who knows what
You know if everything goes great more than that now. It's not going to happen today
You need to run up a bunch of profit to do that, but like you know, I don't know
It seems it seems not crazy to me or even 12 to 15 you know investors could forex their money or something
And and I think everybody feel really good about that if you're not looking for like venture scale like and you know founders can do really really well
Life changing, you know, you would never have to work again kind of money
Even if you don't own 100% of the business like just really really good possible outcomes in this business
And I think if they can keep that going forward. I'm optimistic about it lean out. You've got some stuff there LTV
Probably solid margin even after all the work is done. You can really get somewhere really good and and clean up op-ex
Especially again with that LTV part
That can really help make CAC a small percentage of revenue so many brands would kill to have CAC be less than 20% of revenue
And this brand has that opportunity to do that because of the LTV component because that returning customer revenue
Is big. Okay, let's talk about one other thing as we wrap this up and that is
Offers, okay, there's another element in this business. It's really interesting to look at and and I just want to talk a little bit about it
It's a little bit of attack on relative to the PNL, but I think it's an interesting thing
This brand is actually running something I haven't seen anybody run for a while which is a free plus shipping offer
So they they say they say we'll send you our sample pack for free and you if you do that
You just pay for shipping and they expect the LTV numbers to work themselves out
So I'm going to show you Shopify's cohort report and so you're going to see now
How that is working out for them. Okay, so I'm going to share my screen again
All right, so what I want to show you first is the total last 12 months in the customer cohort analysis
If you look into your reports and look for cut this phrase customer cohort analysis
You can pull this exact same report up and it's a really helpful thing
It gets you really really far on like customer cohort information. Okay, so here is
um
Here are the last 12 months trailing 12 months. Okay, um overall what you see is
And I've got by the way I've got this set so that right here what it's showing
Is the amount spent per customer it will actually off if you've never used this report it will opt you into customer retention rate
But these are two different things and they're both really important the retention rate is the percentage of customers who come back
Okay, um, but that's different than the amount spent per customer and how that changes
Um, and one thing I like to do especially if you're like this is to go click on to show first order
Because what that will do in this amount spent per customer tab is it will show you the first order the AOV on some of these orders
Okay, so if you look last 12 months the amount spent per customer
Is you know 52 dollars or whatever but the AOV is actually between you know is actually
34. Okay. So that's on average. Now these averages, I don't know exactly how they play out with the fact that some of these cohorts, you know, all of them, but one are incomplete cohorts. But, but what you can see, right, is that that A O V is at 34 bucks and it ranges some goes up and goes down, etc.
And, and so there's that. Now the first thing you notice is to the point that we mentioned earlier about their retention, especially if we get some larger cohorts that are more complete, right, like starting last year, you're 12 month cohort of $63 on average, some of these going up to 72.
You know, that's off of a first order of 33. So nearly doubling the value of a customer over the course of a year, that's just like all customers blended together with these different groups. Okay. So that's great to start. There's, there's some really strong LTV in the business and and probably projectable LTV. You can see down here, those numbers actually get quite a bit bigger. And what you'll also notice is that the first order number is is bigger than they are back over here. And that's because this brand is running a free plus shipping offer. Okay.
I'm going to show you right now. I'm going to filter this by that free plus shipping offer. Okay. So what you see is I, I changed the cohort definition. And so it's contains and I've blurred it here. My editor has. Thank you. Jared probably appreciate it. My, I've blurred it so that you can't see what it is, but this is what it is. It's a, it's a free shipping. And so now you see the first order is $15. Okay.
We've gone up some over time, we've got some more money on shipping collection or something like that, but, or, or had some upsells or something, but the, the first order is $15 on there. And what you could see about these customers is no, no surprise. Right. They're, they're actually, they're not terrible customers at $34 and value over the course of 12 months in the sense that like they are more than doubling in their value over that time.
So if you can get these in enough scale, it, it could work. But what I can just guarantee you is that they are getting obliterated on margin at this point. Obviously that giving away the product for free is really brutal.
You know, the AOV is low. Everybody's going to complain about that. You can actually make a really low AOV work on, on meta in general, although, like at the meta level, it's not as concerned me as much. What concerns me is that it's already expensive product to ship relative to the average or value that you get.
And you can see they've acquired a lot of customers through this deal. Now, one at the same time, you can also see they went away from it from July to November over that time period.
We'll actually pull back up last 12 months and they kind of came back to it a little bit over this time, which is maybe not something that you like to see quite so much.
And so, so they've, they've gone back and forth and maybe that's even part of how they did increase their ad spend when they did.
But at the same time, if we go to this and we switch it to does not contain what you'll see is that they're also acquiring lots and lots of customers, in fact, more than ever before without the free plus shipping offer.
And, and so these numbers actually look much healthier. And now you get a $47 average order value, which is really within the range of reasonable.
I also think there's some things this particular brand can do that, you know, they don't have a post-purchase up sell. For example, there's real money being made there. And, and so there's, there's a possibility of actually pushing that forward in the ad account.
What's more, of course, these customers on first order at $47, you get to month 12. Again, let's pull back the 2024. So we get some more complete cohorts here.
On month 12, you see again, around doubling and value some of them a little bit more. So they're actually not increasing in value quite as much. Part of that's probably just a reality of the math here that if you go from free plus shipping to one additional order at all.
And it is impressive to me that they're actually getting any retention rate on those free plus shipping customers. If we go pull the retention.
In this case, you've got, you know, month zero month one for these, these are the, of course, customers who are not getting the free plus shipping offer. But if we go back, you go to the free plus shipping, you see they get way lower.
Okay, way, way lower retention rates. And that's for the obvious reason that there were customers. So it's just that the small retention rate produces very big second order a of ease. And therefore, even though only a few of the customers actually come back, the math works such that like the value on that second purchase skews the average because the first order is such a low, such a low number wealth of the average.
If you didn't follow that, don't worry about it too much. But, but there you go. The point is, one, one thing that I think this brand has a possibility of really unlocking is ditching that.
Free plus shipping. Now, I didn't have time to dig into the cogs all the way down and understand exactly what's happening here. But I can just about guarantee you that those free plus shipping customers are really not working out very well on the whole. And there's not a lot of money being made there.
If you do it enough volume, you can make a low a of you work. Like I said, like people, you know, big businesses sell a whole lot of gum at the supermarket, for example. But, but, but that's that's really not I think probably the best way for this brand. That's why brands so many brands have gone away from this as an old tactic of doing things.
Again, when you look at this business and you think about adding margin back into the profile of the business, like it looks to me like a business where just by getting rid of that offer, then you are going to end up being in a place that is much, much healthier. And now you can run a more traditional ad account.
You can run it with regular money. It's going to make your cash flow way easier because, of course, you're losing money for a long time on that free plus shipping offer. That's going to make things really, really difficult. And then at the same time, you potentially would be acquiring customers who are much more, more, more valuable to not potentially you will.
You will acquire customers who are much more valuable to you, better customers, people who aren't just looking for things for free.
You add that into the mix. And now you, again, you've got a brand that I feel really, really optimistic about, even without having even dug into the ad account or anything like that.
So that's the picture. There's, you know, a couple of other little things that I could definitely think about in this business that that I told them across across the board.
But at the P&L level, what I really want you to see there is the way that by organizing the P&L into those four buckets, having a model for what a good P&L looks like,
think about the way that customer increases in revenue over time should affect the way CAC looks in the P&L, understanding how all those dynamics are moving, salaries, rents, the relationship between, you know, how increasing volume can sometimes get you away, especially in that $5 million range of this business is in.
Like, they're really in a spot. We're getting to seven is going to really open up a lot of a lot of operational efficiency in the sense of like, you know, even getting to seven to eight, especially to 10, like just that fixed cost is going to look much lower against the total business.
Even after you work out the manufacturing and fulfillment issues, I've talked about, so I want you to see all those dynamics in the business. Huge, huge thanks, huge shout out to, to this brand for sharing this incredibly kind of them.
I really was thinking about this and I don't even think it matters that much exactly what the brand is for this to be a really useful exercise.
So it's a big, big thanks to them. And, and yeah, if you have questions about this particular episode in this in the P&L and some of these things, I would really love to hear them. Maybe you notice something that I didn't see there.
And, and, you know, there's a lot of numbers on that P&L. So I'd love to see it. Ultimately, though, a business that's profitable over the last couple of months, pretty strongly so throughout the year, and it's going to have a chance to really succeed.
I'm excited about it. I'm optimistic about it. I know if you are the person who's watching that, I assume the person who sent me this is going to be watching this video as well.
You're doing a great job. It's a hard thing to get to where you've gotten to. And so there you go. If this episode was helpful to you, you should subscribe wherever you are watching or listening. I would love for you to do that.
And I would love to hear back from you about it.
[email protected], like I said, if you have questions about it, thoughts about it, the comments are an even better place to do that. So we can interact with other people, can see it, or even publicly at Andrew J. Ferris on X is a great spot to do those kinds of things.
And if you would like me to analyze your P&L, I'd love to do that. I can do it just like I did here where I'm doing it anonymously and just naming the category and that's it.
So just reach out to me,
[email protected]. Let me know if that's something you want to do. Of course, everything I'm doing is at ajfgrowth.com, including if you want to work with me, there's still a wait list right now, but there's the possibility that would open up at some point down the line.
So reach out to me there, or I may have a great recommendation for you for someone who would be a good agency fit for you.
And what else? Oh, my sponsors are great. Rich panel, you should definitely be talking to Rich panel because especially if you're in gorgeous or zendesk, what are you doing today 30% guaranteed on your customer service help desk with an AI first product with Rich panel, really awesome stuff there.
And Vermont, I love working with Vermont. I use them with my clients. They're great. And the best way to build lots of landers at real speed, full funnels, all kinds of customization. Yeah, it's great. You heard me talk about from our other. I don't need to rehash it.
Subscribe wherever you're watching your listening. Got so many good episodes coming up. A bunch of them are actually already recorded. You're not going to want to miss them. Thanks again. Talk to you soon.
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