5 Ways I'd Build A Profitable DTC Brand From Scratch transcript

I want to help you grow your DTOC brand profitably. And I am convinced that the one of the core reasons [music] brands do not grow profitably is because they don't really understand the mechanics and I mean down to the details of how to actually build a profitable e-commerce [music] business. And what I mean by that is that brands do not understand what each element of their P&L ought to be like, where the waste is, and where the opportunities for growth and more profit are.

And so, in this episode, what I'm going to do is break down for you how to think about core ways to drive your business forward in a way that is profitable and that actually puts cash in your pocket along the journey over time in your DTOC business. It's really hard to do, but if you can get your head around actual key clear ways in your P&L where to go save money in places where you're wasting it, and there are big places where you're probably wasting money, you can figure out where to save money in places where you're wasting it.

And then you can also reinvest those dollars in the better places, you can really build a great business this way. I'm convinced DTOC can be a really, really good business for people. Just requires understanding the road map to that success. You got to be really clear about it. So, let's get into it right now. I've got five ways for you to build a profitable DTOC business by thinking about your total P&L where I see the biggest amounts of waste happening in businesses.

And this this episode is really inspired by a really good post from Sean Frank, CEO, as you probably don't need me to tell you, of brand Ridge, formerly Ridge Wallets, but Ridge just in general. And and Sean had this great tweet. He said, "The math of running an ecom brand, laying out the math of running an ecom brand of $50 million in six years." Okay, he lays out the scenario of year one million topline break even.

Year two, 4 million top line, 500k profit. And then 10 million top, 1 million profit, 20 million top, 2 million profit, 35 million top, 3 million profit, 50 million top, 5 million profit. So a brand that's growing pretty rapidly, gets to 10 million in three years, gets to 50 million in six years. Uh and and so after 20 million, you know, they're slowing down their growth rate a little bit as they go from 20 to 35, 35 to 50 as percentages on growth rates.

Okay? Okay. And that that's pretty normal, I think, as a pathway to think about that, but they're maintaining something like a 10 to 15% profit along the way. A little bit more earlier on, uh maybe maybe like a 10% profit along the way. Earlier on, he's got it about 8% in year two. Uh and then do I have that right? 500K, no 500k profit and 4 million top is is bigger than 8% 12%. Uh and then and then along the way, um you know, gets to gets to 5 million.

So, if you're watching this episode, you can see the the screenshot on the screen of uh exactly what Sean's tweet lays out. But um but basically what he talks about here is that in this business, there's going to be salary along the way. But the problem is that around 10% profit at that kind of growth rate, you are constantly taking all the money in your business and you are smashing it back into two places. One of them is inventory.

Most obviously, inventory is just going to be a place that sucks up cash in your business all the time. my business partner Patrick who built and sold supply razors had a great exit had really the dream outcome and you know didn't build it to 60 million $50 million or anything but Patrick when he built his business one of the things he joked about is that you know so much of his net worth of his life all of his money was tied up in a warehouse somewhere in Nevada in in the form of razors that were sitting there and that was like you know he jokes about it now but it was disconcerting at the time because so much of your cash is going into going into inventory inventory plan is really hard and so that happens but then also you're taxed on profit even if you don't have that much cash.

So cash is going out in inventory, but at the same time, as Sean lays out in this post, and of course I'll link the post, as Sean lays out in the post, you end up being in a spot where you're constantly paying taxes while not receiving much cash. And that's actually a really hard thing to bear. Oftentimes, you're funding that growth with debt, which hurts your profitability a little bit along the way, etc. And as Sean lays out here, by the time you get to 50 million, your growth rate has slowed down a little bit, and now you're starting to actually take more cash out of the business, but it takes six, seven years to get there.

That's a long journey. First thing you should think about this scenario is that Sean is right. It is a difficult scenario. It is a slow growth thing. And I want it to be clear in your mind that if you have the idea that DTOC e-commerce is a way to get rich quick to to generate a ton of cash, you are thinking about it wrong. And that's because almost every way to get rich quick is a bad idea. Now there are more cashforward businesses and there are in some ways easier businesses because inventory planning is just so hard and so risky at different times.

But it's a real problem. Alongside this post on X recently, MAB Bogle also recently posted something to the effect of a lot of the businesses that he sees in DTOC are like that are really really good are actually incredibly profitable. And his point is is not to say something that's a tutology or sort of a truism, right? Of course a good business is incredibly profitable. But his point was that the thing that a huge volumes like high percentage profitability does for you is that it derisks your growth and makes it so that you don't make the cash mistakes that a lot of earlier stage brands do.

And so it basically creates a survivorship bias where the kinds of brands that actually make it are brands that don't have an extinction event along the way. If you think about something like COVID, well, iOS 14, you know, COVID for some brands actually where people stopped buying in obviously CO was really good for a lot of e-commerce brands, but in other ways it was really bad for brands that were selling, you know, like I know somebody who had a deodorant brand where sales just like stopped because people stopped buying deodorant because they were inside all the time.

So, some kind of crazy event like that. Um, like I said, iOS 14, uh, when that happened, tracking was lost. That was a really, really big problem. Tariffs killed a lot of businesses. So, having a huge percentage profit creates buffer. Those two ways of thinking about things are really helpful, which is that you need to build a highly profitable brand. In Shan's scenario, the founders of this brand are plowing profits back into the business into growth.

And that's actually a really rational decision if they get the outcome that Shawn talks about because what they're building is a really, really valuable business. As Sean says also in the post, that's so valuable that they're getting a really high return on those dollars. So just from a rational investment perspective, turning profit back into inventory and ad dollars ends up being a way to drive a really good investment returns in terms of the thing that you get at the end of it.

Even if you're not realizing a lot of cash early on, the valuation of the business that you have. Now selling a business is really hard. All these, you know, there's there's some questions about uh about how you actually ever realize cash in that business. But if you end up with a $50 million business doing 10% profit, you have a really good business. Okay? So let's just let's just be really clear about that. Nobody should tell you otherwise.

All right, so that got me thinking, how do you get there? I mean, I'm starting a brand, right? Like sort of on the side right now with a friend. How do I think about what the pathway is? And how am I thinking about operating that brand in a way to actually generate profit so that I can make a journey like that on whatever timeline I make it on as good as possible? And what do I see from the brands that I'm working with that are actually creating these kinds of outcomes, whether they're in year two of that journey or year five or whatever.

When I look at brands that do a great job here, what do I see in them that they're doing that allows them to actually make this kind of outcome happen? And I see five things that I would commend to most people that I would say if you're an operator of a business thinking about how to grow your brand. If you can do these five things really well, you are much more likely to succeed and not step on one of the many landmines that are in front of you as you're trying to grow a DDC business.

Okay, so here's number one for how to do this. Think about this by thinking about where is your money actually going on the P&L. Okay? So, if you want to grow an e-commerce business and you want to make your business better, there's a really simple way of doing analysis here, which is to look at your P&L and say, "Well, where's most of my money going?" If I make a very a line item that's 1% of my total costs, okay, if I make that part of the business 10% better, I did very little to actually improve my business.

I got 0.1% better. Okay? and point.1 points better I should say in terms of what my impact on the bottom line is if it's 1% of my cost. Okay. But if I have a a line item that's 10% of my business and I can make that 10% better. Well now I've actually added one full point of profit to the bottom line. So and of course there are line items in many brands businesses particularly your meta ads and your cogs and I'm going to talk about those in a minute that actually are like 20 and 30% of a lot of brands P&Ls.

Okay. So the way I was thinking about this problem was, well, where are the biggest costs in the business? And how do you think carefully about those costs? And then from there, are there any other places in the business that are sort of the easiest places to make an impact the fastest or places where by just being really clear about what you're trying to accomplish, you can be in really good shape. Okay, so number one, refuse to spend bad ad dollars.

Okay, so this is the biggest line item in your business. Your meta ads bill is very likely the single biggest line item on your business. This is why when we take on clients, it is important to us if what we really care about is growing PDC brands profitably. But what I tell people is if that's what we're trying to do, if we're trying to help you do that, we want to own the Meta account because it's where most of your money is going.

It's where the largest percent, not most, but the largest percentage of your money is going. So, if we can do that really well, we're pretty confident that we can make a really big impact on your business if and and so we overindex on doing a great job there. That's the reason why we do it. Okay. And one of the core things that we want to do and that we believe as an agency is we want to utterly refuse to spend bad ad dollars.

Now, we want to spend as many good ad dollars as we can too. In fact, growing spend is really hard part of the the problem, but we want to refuse to spend bad ad dollars. Now, I've talked a lot about this, but I come back to it over and over and over again because it is such a gigantic source of waste. It is a sickness in the industry of DTOC. And that's partly because of revenue FOMO and just seeing screenshots and growth rates and all these things.

It's partly because there is some level of scale that really helps your business. So, if you can get past 2 million in revenue and get to six or something, it's a lot easier to run the business at some more margin in some ways because of the way GDC scales. Talk about that more in a minute. But also, it's just because a lot of the waste is really hard to see. So, I'm going to give you a few of them that I think are really clear.

You're not going to be at all surprised to hear me say. Number one, I think know your unit economics. Okay. One of the ways you avoid spending bad ad dollars is by being really careful at the product level of saying what is the product that I'm advertising and how much can I afford in a new customer against that product. Net of LTV for sure for some brands that's a bigger factor for some brands it's a smaller one but like what are the unit economics of that?

What's the average order value of that product on my meta ads? How much am I getting in shipping dollars versus how much does shipping cost? What about if customers are coming in over my free shipping threshold? Now I'm shipping it for free and all that. Like there's all of these elements to think about. And this is part of why I advocate for at the very least separate ad sets in your meta ads account for different products, but probably different campaigns because it's just so much easier to see when you open that meta ads dashboard that if you have campaigns separated out by essentially unit economic distinction.

So if you have multiple products and the unit economics are the same, you can put them together, but then then you have inventory management problems. separating out campaigns by product ends up being the way to create financial control over the outcomes of your business in a critical way, no matter what bidding method you use or anything else, okay? Because there are certain products that have different unit economic profiles that have different LTV profiles and all those things.

If you want some help with this, by the way, I have a a free unit economic calculator. It's a really simple spreadsheet that I've used for years that I still use with brands all the time. It's really simple and just lines up all of the different elements of a brand's unit economics in one place. It's really easy to use and you can just use that to calculate what your actual unit economics are, what kind of rorowass you need and what kind of CAC you need to get the outcomes that you want see in a different way.

So that's available at afgrowth.com. That is one of the free resources you get when you give me your email address and I won't spam you or anything like that. By the way, while you're at it, subscribe to this channel while I'm sending you to my website and all those things so you don't miss any episodes in the future. But yeah, ajfgrowth.com. Give me your email address in the footer or on the pop-up that pops up. I'll kick that over to you and you can use that unit economics sheet to do this yourself.

Okay. So, no unit unit economics really saves you a lot of trouble. Number two, again, you won't be surprised to hear me say this, but in the ad spend reduction thing, eliminate your creative testing campaigns. They are probably bringing you down. They are not helpful. Launch your ads against your winners. Even if you're not using manual bids, I think this is still the right way to do things. Your creative testing campaigns are mostly a cost center in your business and a way I see brands losing like hundreds of thousands of dollars.

It makes me crazy. So, I'm not going to belver that point because you've heard me say it a million times before, but it's a really important point. There's just so much money being lost in creative testing campaigns for so many brands for the worst testing methodologies I've ever seen. Yeah, get rid of it. And number three, something I've put some time into recently, know your marginal the marginal return of different amounts of money that you are spending.

This is a harder thing to conceptualize, but the the way I've put it right is if you have an average rorowass of two, that means by definition some amount of your ad spend, and basically that is the highest dollars that you are spending, like the most recent, the last bucket of dollars that you're spending, not last in a day, but of your total spend, the last dollars you're spending are generating probably a below two return.

And that's because a two rorowass is an average. Okay? So that means you might be spending some dollars at a 2.5 and some at a 1.5. And because scale and efficiency are inversely related to one another, it's very likely that as you've scaled spend more, the amount you've scaled is the spend that's dragging your rorowass down. If you know that you need a two to be profitable, your actual rorowass in platform probably ought to be like a 2.2 or something like that.

I'm going to give you a story to illustrate this point. So, so first of all, check the show notes of this. I put a longer time of explanation of what I'm talking about in a recent episode. That episode is linked in the show notes, so go get that. I gave you some visuals to help make this point clearly. But check this out. I was looking at a brand this year that is on pace year-over-year to do almost be exactly flat in its new customer revenue.

Almost exactly like like within $1,000 is the pace right now. Okay. To be almost exactly flat year-over-year in new customer revenue. But that brand is going to spend $40,000 less this year than it did last year. And that's like 25% of their spend or something like that for the month of January. I don't remember the exact amount. That is a huge gap in spend. And the way we found that that was happening in this business was we ran a pulse up incrementality study with my friends at Paramark, a firm that does some incrementality testing for brands.

Okay, so go check them out. Tell them I sent you. Paramark. They ran, shout out Cole. They ran a study for us where we pulled up our spend. So we basically took two cells of our spend and in cell one, the control, it was like, let's call it $5,000 a day. I don't remember the exact number. In cell two it was $6,000 a day. And and so basically what you're testing is what's the incremental impact of that last thousand. That's what I mean by the last spend in the bucket.

Okay. And what we found was that it was producing at like a 0.1 rorowass. Like there was basically no impact. Now I don't think that's true all the time. Okay. I don't think that's always happening including for this brand. But what it did is it gave us an instinct to be materially more conservative in our media buying because we had this sense then like wait a minute it sure looks like the last bucket of our spend, that last pull stop amount of spend, okay, is producing a pretty terrible return.

And so we're willing to miss on the side of being more conservative here because we think we're going to shave the worst part of the spend. Okay? And in doing that, we have made the brand drastically more profitable year-over-year. Now, there's other problems to solve. Now, you want to figure out how to take that and still get spend up and still spend more money. And that's a challenge, right? But shaving 40 grand year-over-year is a big win.

Okay? It's a really, really big win. And so, we're not upset about that at all. even if in the longer term we now want to figure out how to grow spend and do that at a higher return at the same time. But that's not always going to happen. Like it's hard to actually get past certain breakthroughs. And so when you're not there, at the very least, don't spend bad money. Put more money in your pocket. You can still have a really good business.

So yeah, do that. This is also where bid caps are really, really helpful. I think bid caps even more than cost caps or target rowass ads, as much as I love manual bids, are really helpful because bid caps are bidding to a threshold instead of an average. They bid less dynamically. They're going to spend less below your target. I've put a bunch of time into this before. Just search bidcaps on my channel and you'll see what I'm talking about if you don't know what I'm just I'm saying.

But bid caps because they bid to a threshold are just really really helpful for this as well. I also think there's an element of restraint and forecasting that's important here. Part of the thing I want to say when I read Sean's scenarios is that brand is playing the game on hard mode to be growing that fast at only a 10% profit or whatever it is. Now again it's worked out for them that those were all rational investments along the way etc. and maybe they have some cash reserves or whatever it is.

But one way to save yourself from like blowing the whole thing up in the difficulty of growing your business and keeping it profitable and spending a bunch of bad ad dollars and all that kind of stuff is just to practice restraint. Like this really might be, I'm not kidding, a spiritual practice like that level. The willingness to be content with where you are now while also still trying to build. The willingness to say I am not going to force growth.

I can just tell you it's hard. I feel the pressure with my clients where I'm going, if we're not getting it growing as fast as we want, I want to go tick those targets more aggressive and and just say, "Ah, we got to keep growing." What man, sometimes there's a case to be made that you should be doing that. But a lot of times, you know, you really ought to just you have to say that bias towards aggressiveness that I feel internally is actually just my own insecurity about things and I should be more patient, take bigger swings.

I heard Taylor Holidayiday make this distinction recently between sort of the evergreen aspects of content and ad iteration versus the big swings brands make big awesome story you know needlemoving promotions. I put an episode this week into this idea of telling the most compelling story you can somewhere there's this way of operating an e-commerce business where you're thinking about these two things at the same time.

One of them is have restraint and economic restraint in your immediate buying process. And then from a brand perspective, think bigger and more aggressively and more ambitiously than you have. So at your brand level, you're taking big swings, big risks, and they're in some ways they're asymmetric bets. They're also just remarkable experiences that you're giving to brands, giving to customers. And then at the actual media buying side, it's a different instinct.

It's be more careful about not wasting money because it's such a huge cost in your business and it creates all these downstream problems when you do it poorly. So don't spend bad ad dollars. That's number one. Be building your business with help from Rich Panel. Rich Panel is the customer service help desk software of record in the ecom space at this point in that they are making it so much more affordable for you to have incredible customer service experiences than the previous options.

So much so that they will put their money where their mouth is on this. Amit and his team at Rich Panel guarantee you 30% savings if you switch from Gorgeous or Zenesk. Shave some OPEX, shave some software costs by switching over to Rich Panel. And Rich Panel is not just a more affordable alternative than some of those legacy players in the space. But it was built AI first from the ground up. They see an average ticket reduction of 30% at the same time as you see the cost reduction.

And that's because their self-help portal powered by really great AI. Again, built with AI from the ground up. Makes it so that customers can get answers to their questions really, really fast. They also have AI agents that can respond to your Facebook and Instagram comments on your ads for you, which if you've been in the advertising space any amount of time, you know how big of a pain it is to manage. very large brands are using rich panel to do that for them and saving a bunch of money again on people costs and getting a great experience by getting really fast answers [music] to their customers who are asking questions right there on your ads and rich panel can do that for you so really good piece of software only takes two weeks to transition from your current software over to rich panel they know your time is valuable you don't have it to waste on this they'll get your team ready to go having success with rich panel and very large [music] brands are using rich panel nine figure brands like Ridge are using it so you can be using it too it is good enough and big enough to scale with your brand.

Go check it out today. richpanel.com. Tell them I sent you richpanel.com. Number two, let's look elsewhere on your P&L. What's the next biggest cost? Well, it's your COGS. Okay? It's the actual cost of your product. Sometimes that's cost number one, but a lot of times that's actually broken up into a few different things. There's cogs, but then there's separate packaging costs and there's freight to, you know, to your warehouse and 3PL fees and and all these things that actually all the things that go into your cost of delivery are actually a bunch of different costs that are, you know, 10% here and 8% there and whatever it is as opposed to meta which can be like a straight up 30%.

So your cogs and and this is another thing I would say is somewhere in your mind as an operator and as a CEO, I want you to get clear about the idea that it is your job to engineer your supply chain. Again, on that Shawn Frank tweet, Matab Bogle, one of the best operators in the game, he replied to that tweet and said, "There is no way to really do this great without absolutely hammering away at your supply chain." And that is right.

I have said a thousand times and we'll say again, supply chain is the most underoptimized part of DTOC brands because we don't know what to do and how to do it. It's why I'm so happy to have Move Supply Chain sponsoring this episode and a bunch of other episodes like it because they are going to actually help you to go attack your supply chain in a bunch of different ways with real experience and in a way that's affordable.

And you need to be doing this along the way. I'm going to give you a few things really fast to be thinking about from the start. Okay. Number [snorts] one, in the beginning, your supply chain is going to suck. It just probably is, even if you do a great job with it because you're not ordering in large enough quantities. So, in the beginning of your business, worry about this a little bit less. Okay? sub a million dollars, you can worry about this a little bit less because you're just going to be ordering low quantities and there is a manufacturing businesses exist on volume.

That's where they make all their money and so you're not very valuable to them in the early stages and they can't save you much money in really any of the ways that a potential manufacturing firm could until you're getting a little bit bigger and now they can maybe save you a little bit. You can keep showing them and hey, we're growing, it's going well. If you shave another 10% of cost here or 5% of cost there, whatever, like that would be really helpful.

Give me a little bit longer terms, a little you know, chip away at it for sure. show them what's in it for them. But in the beginning, that's going to be the case. As you start to grow a little bit more, you're going to be ordering out ofQoQ's, out of your smallest orders, ordering a little bit more at a time. There should be some savings there right away. Okay. Then number three, something to think about is as you start getting a little bit bigger, a lot of times what I've experienced with a lot of brands I've worked with is that just moving from sort of the mom and pop shop manufacturing facility that you started with who you feel really loyal to because they've been amazing for you in the early days of your business.

A lot of times moving from them to larger manufacturers can, you know, create some challenges because now you're a small fish in a big pond, okay, as opposed to a big fish in a small pond. You're less valuable to that company. But a lot of times those larger manufacturers just can save you money in real ways. And I've watched this again especially in a lot of CPG companies and those kinds of things. If you're getting to that point where you're getting to 5 to$8 million or something you something along those lines, it might be time to start making some calls say what is the next tier of manufacturing up because that can really really be helpful.

Again, get on the plane and go to China and tour factories and see what's available and have conversations and get face to face. It's really really worth it for you to engineer your supply chain that way. And then over time as you keep growing that's where you start negotiating all the things that you can negotiate. Get the bill of materials, interrogate it, understand who your suppliers, suppliers, suppliers are, understand all those things.

And as you grow, again, you can put more resources towards this. And again, like I said, my friends at Move are really good resource in the short term for sponsoring this episode. Big thanks to Move. But that is a huge part of it. Operators need to think from day one. I am not just a marketer. I am not just a product person. I am a supply chain engineer trying all the time to make my supply chain work better and faster and more efficiently.

Number three, a sneaky one that I think brands ought to go after in a roundabout way is get a higher average order value. Now, what I mean is higher relative to wherever you started. And there's a really specific margin basis for this recommendation. It's not because I think high average order value is the only way to grow a big business. There are huge businesses on very low average order values. It's because of something simpler than that in DTOC.

And it's what everybody forgets about DTOC as a business model, which is that core to the model is the act of shipping a product to a customer's door. And last mile shipping is really freaking expensive. And so it's just really hard to not be spending at least $5 on every order to get it from your warehouse to the customer's door on average. Okay, that $5 is a large percentage of your margin if you have a $30 average order value.

Okay, it is a huge part of it. And I know what you'll say. You'll say it's okay because I charge for shipping. No, that means you have a 0%. If you charge $5 for shipping and you are paying USPS $5 to ship the product, that means you have a 0% margin part of your COGS. Okay, that's what happens or your cost of delivery. You have a 0% margin thing. And you would not do that with any other part of your cost of delivery.

You would not buy products and say it's okay, I'm charging for it, right? And it's cost me $10 to buy from the manufacturer and so I charge it $10 to the customer. No, that's a 0% margin problem. So, what can be so helpful here is growing your AOV over time to do this. I did an episode a while back with Brian Porter. I'm going to link it as well in the show notes, but Brian talked about how at Simple Modern, they were able to get their AOV up from, you know, 40 or $35 or whatever they launched out all the way up to like 80 bucks over the course of years.

And that was really important because a Simple Modern water bottle is not very cheap to ship, okay? And they didn't have incredible margins to begin with. So that water bottle, if you're paying five, six bucks to ship this water bottle to a customer because it fills up a lot of space and it's not that light or whatever, right? And you're only charging $25 for the water bottle, you're in trouble. Even if you charge the five bucks for shipping, I mean, it's really going to eat your margin in a really bad way.

Okay. So, if you can get that up with bundling and special releases and all kinds of different things that you can do to get the AOV up, adding different products to your website that are specifically aimed at driving the average order value up and focusing more on those, you know, building some higher priced items into your business. D TOC just is a business where you're shipping a product to a customer. And that's a reality of things.

If your business can't get that AOV up, you are never going to get out from that shipping cost. I ran a business that was like this and it was just we could just never get our margin past like 45 to 50 points of gross margin. And so, we were dead in the water. It just wasn't ever going to be a great DTOC business. In fact, what we really needed to do in that business at the time was turn it into a wholesale business where you were shipping pallets at a time and suddenly these little individual last mileile shipping costs are not such a big deal.

Shipping pallets to retailers would have been a much better way to operate that business for that reason. And by the way, there were people at the time who were saying that and we just didn't listen, okay? Including me because it's just too hard to make that margin work. So, in the meantime, there are things you can do to get your AOV up, right? Because it's such a big deal. Again, go back to that unit economics calculator that I said is on my website at ajfgrowth.com.

Get that, start playing with it, and see what happens when you pop that $5 in in shipping cost and that $1 in and 3PL fulfillment fees or $2 or whatever and and all that. And then you get that AOV from if you've got, you know, and that is another factor here. By the way, before you pay individual pick and pack fees to your 3PL, you're going to have a$1 to $2 transaction fee with your 3PL. You now are talking about a significant amount of margin there.

But if you can take your AOV from 30 to 40 to $50 to $60 to $70, suddenly that's a lot lower of a percentage of your cost and it can really open up profitability on your store. So that's the reason I care about it. A few ways to do that. Bundling I just mentioned. Okay. Number two, post-purchase upsell. I'm a huge fan of post-purchase upsells. It's one of those things that's just kind of a no-brainer. Doesn't hurt your conversion rate.

Does add value. If you want to play with your checkout itself, like your actual checkout upsell in, you know, your checkout process, see if adding some last little product recommendations or things like that in your cart. really cool feature that Intelligjam just released, another sponsor of this podcast. Thank you, Intelligjs, where you can actually build a test in Intelligjs where you can it will add a checkout upsells into the cart, but then also track the conversion rate hit versus the AOV bump and it will track it down to the margin level.

So, you can see like is this actually adding more profitability to each order. Really, really cool feature. So, you can play with that as well. Would recommend that. And then a sneaky one that people don't do enough, value optimization and meta ads. If you're not running value optimized ads, you're probably not getting the best AOV that you can. But if you're running value optimization, you can push that AOV up sometimes 10, 15, sometimes 20% by just telling Meta to go after higher value customers.

If you want to engineer your supply chain the way I'm talking about in this episode, and you don't know where to start, how to do it, you don't have that kind of knowledge, as I certainly did not and would not building a business myself, go to my friends at Move Supply Chain to do it. Move supply chain checks two boxes that I talk about in this episode specifically. Okay, one of them is real help getting your supply chain to be more efficient to have redundancies built into it so that you aren't caught with your pants down at some point when the supplier can't deliver something that you need or when you're scaling fast and you need some extra help.

They can do all kinds of things. Help you negotiate your terms, negotiate your pricing, all those things. and they can do it while secondly being built being based in the Philippines which means they are affordable and not just affordable but also like an hour and a half plane flight away from China and Vietnam with easy visa access and all those things. So they can go represent your brand to suppliers in both of those places much easier than you can get there.

And they can also do that while bringing with them all of the other clients that they represent. therefore increasing your bargaining power in negotiations because move now can speak on behalf of not just you but other brands alongside you as they do that. They are really awesome. I've told this story before, but when my brand was getting started and we were trying to find suppliers, they reached out to they sourced like 60 different manufacturers, reached out to like 45, I don't remember what the exact number was at this point anymore, but eventually narrowed and narrowed and narrowed until we get ended up with suppliers who are launching at COGS and at pricing that we feel awesome about from day one despite ordering atQ's that will only get better over time as we keep doing that.

By the way, they also helped us source US-based manufacturers. So, it's not just overseas for part of the product and then overseas manufacturers for others. They really, really know their stuff because they were actually built out of working with US-based e-commerce businesses on their supply chain. So, talk to reach out to them, movechchchchchchchchchchchchchchchchchchchchchchchchchchchchchchchchchchchchchchchchain.com.

Get on a call, ask talk to Lara or somebody from her team. You've probably heard Laura on this show before. She really knows her stuff to get your supply chain in place." I am convinced, as I've said, supply chains are so underoptimized. Move supplychain can really, really help you. Go to moveup supplychain.com. If you are a sevenf figureure brand thinking about how to do the things I'm talking about in this episode, how to scale up with your supply chain, go to move supplychain.com, get some help from that team.

Number four, you must maintain low opex as a percentage of revenue. Your fixed costs in your business, which primarily is a matter of people, whether that's internally as personnel, externally as agencies, I don't care. There's also some software costs in here. It's actually the thing I'm a little less concerned about. But you should be thinking about people costs and getting those numbers down. Now listen, in most e-commerce businesses that are growing, people costs do not fit the same category that I said before of costs that are very high.

So that if you make a 10% impact on them, it reduces a lot. Like I used the example earlier, right? If you could spend 10% less ad dollars, you might add three points to the bottom line because your meta ad spend might be 30% of your total revenue. And so a small impact on a very big line item creates a really big impact on your profitability and on your cash flow. But OPEX isn't quite like that. Even fat e-commerce brands are not so fat opex- wise that it's going to get to 30% or whatever.

You know, maybe over 20% or something like that would be a really fat e-commerce brand. But most people know, I think at this point, I think they know that you should not have a huge team in your e-commerce brand. And so they can get their percentage of revenue allocated to opex under 17% 15% whatever. And I'll just say here like there's some realities that as you are smaller your opex as a percentage of revenue is going to be quite a bit higher.

It just is. So you really need to get some baseline level of scale for this to work. But once you get towards like 5 million bucks in revenue you should start beginning to see some of this playing out. You know over three you'll begin to see the beginnings of it. Five you're really kind of getting there. And then you know up towards 5 to 10 million you really can run a very lean opex as a percentage of revenue. And you should be I'll just give you a number.

You should be under 15% as a general rule. This is one of the things about e-commerce that is so great, which is that e-commerce scales really well relative to the number of people that you have in the business. The way I always say this, and it's a simple example, but I think it effectively illustrates the point. If you have a million people on your email list, it costs basically the same amount of money in terms of people to send an email to that list as it does to send that email to a thousand people.

And therefore, the graphic designer that you paid to design the email or the email agency that you pay to design the email, they are advertised across a much larger amount of revenue. And therefore, their cost as a percentage of revenue goes down quite a bit. Now, there's a little more cost in terms of Clavio or something. You're going to have to pay them to send all of that email or whatever, but that does not scale linearly with the list size, okay?

It's still going to be a massive reduction in cost as a percentage of the revenue that you get from that list. And that dynamic is in play across a whole bunch of business. If somebody's managing your supply chain and you go from ordering 10,000 units from a supplier to 100,000 units from your supplier, you may well need one person still to work on the supply on that order. This kind of dynamic happens across the business in ways that are really really helpful.

So if that's true that e-commerce already scales well as a percentage of revenue and it's not going to be that big of a line item in the first place, then why do I think this is a place where there can be a really big impact? And the reason is because if with some discipline is a much easier place to make an impact than others. It's just a lot. If you just talk to any brand that's distressed, the fastest way, the fastest and easiest way for them to save a bunch of money is to fire people.

You can fire people really, really fast. It's it happens really quickly. So, you can make an impact on your P&L really fast. Whereas like going to your supplier and changing your order is just it doesn't happen that fast. It doesn't work nearly that way. Therefore, it's like it's much harder to negotiate your cogs down than it is to reduce the number of people working in your business further. And this is the thing that I actually really want to get to.

I continue to think that if your team is already remote, if you do not have a sort of a priori position where you are have decided that you want to have in office teams and and I know there are some people who do that and there may be good reasons for that and you may have some sort of theory about why that could work. If you don't have that theory though, if you if you're not doing that, then what I will say is you must I am begging you to consider how to build an offshoring culture because there are just great people all over the world who will help your business who cost much less for you than hiring those same people in the US.

And that's just the reality of global work. And so because of that, you can and should be thinking that way from day one. And brands just don't. they just often don't think about doing this and they really really ought to and there's a number of reasons they don't think about it. Part of it is because it feels daunting sometimes to hire overseas, right? Like you just are like ah I don't know what the Filipino market is like or the Latin American market is like or the Indian wherever you're hiring.

That's tricky. Maybe you've heard all kinds of different things about the quality of work. You know, oh this country doesn't have anybody good or that country doesn't have any. I've heard this about the Philippines which you know first of all like my entire team is based in the Philippines basically. They're amazing. I love them. They're awesome. And the other thing though is there's 90 million people in the Philippines.

So if you just hear this idea that like there's nobody good there, almost certainly there's something wrong with that idea. There's going to be some countries that are in extremely difficult situations where that might be true where the that the sort of ability for them to work in your business is going to be really really low. Like I get that. However, if you are too quick to say that, it's almost certainly a bias that you haven't actually checked.

Okay? And that's a concern to me because if that opportunity is there, if you can both have relatively few people in your business, if you can be disciplined about not adding people and at the same time the people you do add, you can go get really, really good talent at a rate that's much lower than what you would pay that same cost in the US. You can build a very lean team and suddenly let's say that 15% of your revenue going to OPEX, you can get that down to 13% or 12%.

While it's the case that it it's a much bigger total percentage of impact. Now you have to make a 20 to 25% impact or whatever on that line item, it's actually much faster and easier to do that and you still get two to three points back on the bottom line. And so it's a really critical thing. And when I talk to ecom owners and brands, I just don't understand why they aren't doing more of this. Now, it's not that you should hire every position overseas.

There are times when maybe you can't find the position you want or whatever, but you should be considering it. And now the really smart brands that I see who are doing this, who are really sharp from day one, are combining offshore work with AI and they're finding incredible efficiencies in this area of the business to where this actually I think can be one of the core advantages that makes DTOC as a business model work.

Like it's one of the things that's appealing to me about the total model of DTOC that because you can be fully remote, you don't need an office, that's saved costs right there. You don't need a storefront and so you don't need therefore employees local in that storefront to launch your business and you can do it with a lot of AI and you can do it with a lot of offshore talent. Suddenly you can build a really good business where your revenue per head can be really really really high because of those advantages built into the model of what DTOC is because it all happens online right and so you can build your team online as well.

This is again I think sort of core to the business model and if that's true then you should be looking to exploit that advantage as far as you possibly can. You should be clear about it and how to do it. The things that are going to stop you from doing it are your own management inadequacies because the truth is at the same time most of us did not get into DTOC because we are great managers of people because we build incredible processes or whatever.

And I I experienced this as an agency person like I got into DDC and I got in on the brand side initially. I got into that business as a marketer doing digital marketing on the brand side. And if that's the case, okay, I did not get into it at any point. Even when I was in the agency side, I got to do it because I was a strategic kind of person. I was a strategic thinker about marketing and growth. That's what I was good at.

If that's the case, then, you know, I never really developed a great operational or management skill set. It's also just not kind of how I'm wired. So, you know, even when I started freelancing at AJF Growth, the thing that was stopping me from building an agency for a very long time was that I just did not have the skill set to be great at scaling the operational processes I needed. And so what did I do? I found a business partner in Patrick Kadoo who is amazing at all of this stuff, building tooling and thinking about operations and processes so that we are able to scale services across more people.

And we do that with a distributed team all over the world, some in the US, mostly in the Philippines. And we find I I think we deliver excellent work doing those things and there's more ways for us to keep growing that building that over a bunch more times. Now that's an agency business a service business but the same thing I think is true in DDC that a lot of people just don't have a great management skill set. Again mabogu I've quoted now a few times in this has said a number of times that you know you need a real compensation philosophy.

You need to think seriously about how to do real management real reviews. And the books have been written on these things. Go get EOS, go get scaling up, whatever it is. There's like it's not actually rocket science and people have built these things for you but you can do it. Greg Kerry, who I'm going to have on the podcast soon, who is the person running more staffing, built more staffing, the the Philippines based staffing agency, is building more into their service, actually these kinds of things, workflows, management things, the how-tos of how to manage a distributed team overseas because there are some trickiness.

You got to work out time zones and culture and all of these things, right? But those are problems worth solving given how big the savings are. And that's kind of the point here. If the savings are so good in your business and you can get great talent, then you can really do that. I'll just tell you a second tier benefit that I've come to think about this too is that I also love the opportunity to take the privilege of growing up in the American economy and extend that to people who are all over the world who maybe have access to less opportunity than I do as well to do that in a way that's competitive to local markets, create a great work environment and all those things.

I found that to be a really rewarding part of it on a more subjective level personally at the same time and I think my team would all would all say that they've experienced that same kind of deal as well. So, it's one of those things where I just want to see brands shouting from the rooftops that this is where they should be going. You know, at this point, like with my brand that I'm starting, you know, at this point, like our plan is to build the entire team as much as we possibly can either starting with me and my co-founder and probably his wife will be chipping in in some of those ways, right?

Some of that stuff, those early days. as much as we possibly can be on a couple of those, you know, initial like the two of us and maybe one or two other people at some point along the way. Our plan is to build basically the entire team with help from overseas people, whether that's actually team members on our team or agencies like Move Supply Chain and Behind the Scenes Studio and people like that. You know, the people I've referenced for a long time on this podcast is sponsors.

I'm not just saying it because they're sponsors. I'm saying it because I'm building my businesses with them. And that's our plan to do this as far as we possibly can go. I think when you do that and you build our model, it's one of the places we can make a big difference. I think brands could shave their cost by a whole bunch. A long time ago, I'll give you one more anecdote here and then I'll move on. A long time ago, I had Ben Perkins on this podcast, maybe not that long ago, six months, something like that, maybe a year.

And Ben at one point found that eliminating half of his staff led to zero reduction in revenue. And this is where I think like brands should be just more disciplined about this and really see how far they can push this strategy. Because what Ben found and his comment about it was so helpful. He said, "The reason that that was the case was not because these people were not good or talented or working hard. It's because I wasn't a good enough manager to utilize and deploy them.

And therefore, the cost of hiring them was like not only maybe not a good idea in the first place, but I was not able to set up a system that actually got the most out of them. That's both a recognition of his own faults and his own needs to be better. But at the same time, it's also a recognition of like why it is a bad idea to hire too aggressively. Because if you just go and get a person to plug a hole cuz something's not getting done and you feel like you need it, almost certainly that's not the way to approach this sort of thing.

Almost certainly what you should be thinking instead is okay I should think about the business totally do I really need this position is there a different processoriented way to solve this problem before I just go hire to plug in because I didn't want to do that work or whatever do I really need to do that work all these kinds of things is it possible to build if I do need to go there overseas again mayab has said even Canada alone is typically a 30% reduction in cost so it's just a huge opportunity I I think more brands ought to do this I think there's a serious possibility for building a really good quality DTC business by building uh with an offshored overseas team.

And if you do that, you find incredible people who love your business, are committed, do great work, and if you empower them also with AI seriously, you can really save a whole bunch of money. All right, number five. Number five is the most subjective of all of these, but it is something that I've come to believe is critically important and really, really hard, and that is you ought to seek to grow a little slower at a little higher of a margin.

So, a lot of the reason I I kind of got at this in the ad spend point before, but a lot of the reason brands struggle is actually because they just have it in mind that they must grow faster. And I think that comes from a very human place of insecurity and fear and some of those things. Sometimes sometimes it comes from a well-considered ambition, a read of the markets, a read of the moment, a read of the opportunity.

It's a little bit more objective and somebody is saying, you know, I'm going to keep trying to grow fast. I know it's a little bit risky, but I'm going to do it because if I can get to X revenue number, then I get more scale. Scale creates margin, etc. That's the story from Will Nitsa and IQ Bar, which I had on this podcast a long time ago. Will tells that story. He's in Food and Bev. He raised a bunch of money. All he cared about was scale because scale created margin because in food and bev you don't really get serious gross margin till you're doing massive scale and you can go to large manufacturers.

So for him, it was all about getting to that scale level. That makes sense to me. That's a good reason to go do it. That's not FOMO. That's not fear or insecurity. That's not looking at somebody else's screenshots and being fear. That's a an investment thesis that's being played out. Now, I don't know Will's internal life, and maybe he would tell you there's some other elements of that, but so far as I could tell, it's a really objective consideration.

I really liked that way of thinking. So, I'm not anti-fast growth. Okay. Other times people might look and say, and this comes back to Sean's original post a little bit, is if you just sort of analyzed the opportunity, the return that the theoretical, the hypothetical founder running that business was getting on his money every time or her money every time they invested into product and ad spend, they were actually getting a really really good return on that money.

So, it worked out in that case. And it was sort of the math makes sense. If you just think about what is my annualized return on the dollars that I'm putting into the business, well, it would be really high in the circumstance that Sean laid out. I didn't, you know, go do the math, but it would be really, really high. And in that respect, it would be a rational decision. And some of you may be thinking that way. But what people underconsider is first the risk.

Okay? By running really lean on your net margin in your business, you are inherently taking on a riskier proposition. There is just much more death risk if something crazy happens, right? And to give the old way of saying this, I think from Donald Rumsfeld actually, the problem is unknown unknowns, right? It's like it's a consideration that you don't know will happen to the business and also you don't know that you don't know it.

Okay? So the idea is like some future scenario that you're not thinking about and not only are you not thinking about it, but you don't realize that you're not thinking about it. So you just it's just it's so far removed from your purview and that scenario will can come and kill your business. And the classic examples of this I mentioned earlier, you know, are things like COVID in some industries where it heard it, iOS 14, just major shocks to the system that you can't see coming and you have no control over and that's that.

There is a more likely possibility that your business dies because of that. Okay. But secondly, but secondly, by running your business at a thinner margin, oftentimes brands are overplaying are overrelying on an exit to realize cash from your business. Okay? And that's just like a very low probability outcome. Exits are really hard to come by. They're good stories to tell publicly and I've told a few of them with friends of mine who have exited, right?

They're great stories to tell in part because they're rare. They're hard to get, right? They're really, really tough. I think Taylor, I might have mentioned this earlier. I don't remember. Taylor Holiday after CTC had their transaction said that the chance, the percentage likelihood of building a business that had an exit, something like his, right, was about the same chance that you would become a major leaguer. Is to say extremely low, right?

Extremely low chance. and you should not make that bet. As a general rule, you shouldn't build all of your financial future on making that bet. So, that's a problem there. But thirdly, and related to all of this, you are just playing the game on hard mode. You know, one way to make your cash flow easier is to just grow a little slower and at a little bit of a higher margin. Your cash becomes much easier to manage. If that's your scenario, if you're trying to double at a 5% bottom line margin or a 10% bottom line margin, you're going to have to outlay a ton of cash.

Basically, the scenario that Sean laid out in that post, okay? It's just going to require between the inventory cost and the tax is going to require a ton of money. If you just slow down and you think of growing over a long period of time consistently, you're just going to play the game easier. And you should be honest with yourself about how financially sophisticated you are. Because if the answer is not that financially sophisticated, then you probably should play the game on slightly easier mode.

You should default towards running at a higher margin and a slower growth rate. that will make the game easier and you ought to do it. And so much of the time the reason you are not doing it is because it's hard to admit that you're not financially sophisticated enough. Okay? It was hard for me to admit. I've been there. Okay? It's also hard to watch other people grow bigger and faster because one of the things I'm convinced is like this disease in the DTOC culture is is the idolization of success in a way where you know the story is not even worth listening to if the person didn't get to nine figures really really fast or something.

And that's just not true. You can build a great business without doing that. Comparison is the thief of joy as many others have said and it is those things that often motivate us to do this. Now listen, I know that sometimes it is not possible to grow slower at a higher margin. That the way ad spend works that the way scale works in the business all these things actually work against that thesis. So it is possible that in your business it's actually not an available option on the table.

I understand that. But I also know that it can be because I have dealt with and I'm current and and servicing now at this moment brands who are doing that and they have continued to engineer their business over time to be able to do that. And as they've done it, they have generated a whole bunch of cash in a moderate growth rate in a really super good life and a really super good business. On top of that, a lot of the reason people want to grow really, really fast is because they have some number they feel like they absolutely have to get to in their minds.

But what if you actually reconsidered the goal of the kinds of investment returns you're making on your business? And this is again to quote him for like the 9,000th time in this episode. This time from a conversation that we had at my house just the other night. Matab Bogle said to me that something I thought was really wise and that I really hadn't thought about before, which is my goal over the long term is to create consistent returns, consistent investment returns over a very long time that beat the public markets, not necessarily a huge return for a short time and then to have it go back.

I want consistent returns over a long time. That's actually a better business anyway, including a more valuable one. And if I want to ever sell it in the long run, right? That comments to me was really helpful and is probably the way more people ought to be thinking about their businesses. Think more about consistent returns over a very long time, grow a little slower, derisk your business, have more cash, and make the game a little easier.

Your life will probably be less stressful, and you'll end up having a business that you're really proud of. And one day, in 10 years, you'll look up and realize you have a much larger, much more profitable business than you realized. And it didn't happen all overnight. There are occasionally people who are just so good at it, who find PMF in such a strong way or who have such incredible margin profiles or who are such good advertisers or whatever that they can do it a lot faster.

By definition, those are outliers and you should be okay with that because that will actually allow you to build the best business over the longest time. I mean, on a pure financial objective level, you should be okay with it. I'm not saying you have to take my worldview for the subjective experience and make it your worldview. What I'm saying is at an objective financial level, you will derisk the business and build a better returning business over a longer period of time if you can grow a little slower and grow at a higher margin.

In many cases, it will so reduce your death risk that you'll end up in a better total spot. So that is it. [music] All right, I hope you like this episode. You should subscribe wherever you're watching or listening. If you do, you will like much my content in the future as well. If you like this episode, it hits a lot of these themes pretty consistently. I come back to them a lot. Just to repeat the five things that you can and should be doing as you grow your e-commerce business.

I think about what a great high cash flowing, highly profitable, highly valuable business looks like. Number one, refuse to spend bad ad dollars. Number two, engineer your supply chain aggressively to make it as good and as lean and as efficient is the word I was looking for as possible. Number three, pursue a higher AOV because of the particular need of DTOC to have a high value to weight ratio, particularly the cost of shipping.

Number four, commit to a low opex as a percentage of revenue, especially with offshoring AI and better management. Number five, grow slower at higher margin to reduce your death risk, make the game a little bit easier, and build a consistent business over a long period of time. I hope those are helpful to you. Tell me, what did I get right? What did I get wrong? Put it in the comments. I read every one of those comments and I try to respond to as many as I possibly can as well.

I get to most of them. So, definitely go and do that. A big thanks to my sponsors for this episode. Move Supply Chain and Rich Panel. two sponsors who can help you do the things that I'm I'm saying to do in this episode. Move supply chain will help you engineer that supply chain the ways that I said with offshoring, right? So, a really affordable and awesome resource as you are uh aiming at your supply chain. It's who I use to build my e-commerce brand supply chain.

Move supplychain.com. [music] Tell them I sent you. Richpanel.com is the place to go to reduce your [music] software costs on your customer service self on your customer service help desk software and to also have an incredible software product that will grow with your brand. So, go check that out. Richpanel.com. Look out for all of those all the episodes I have coming up. I have a bunch scheduled that are going to be really, really, really good.

I've got Josh Durham coming soon to talk about the current state of influencer marketing, which I actually haven't heard much about for a little while. Really excited to talk to Josh about that. I've got Taylor Holiday coming back again very soon. And a whole bunch more really good things. Uh Conor McDonald from Rich is scheduled to talk about channel diversification. That's going to be great. Don't miss that. So, a bunch of good stuff there.

Podcast at afgrowth.com if you want to email me, ask me any questions. Afgrowth.com has the place for all of the resources that I have, including the unit economics calculator that I mentioned earlier. Don't forget also if you are interested in working with AJF Growth to fill out the form that you see there. Tell me a little bit about your business and even if I can't help you, I might have somebody in mind who can. So tell me a little about your business and let's let's get talking.

Thanks so much for watching or listening. and I'll see you next time.