How To Turn 3 Crucial Concepts Into Actual Operational Processes transcript

[Music] hello and welcome to the Andrew Ferris podcast thanks so much for joining me for another episode of the show where we are going through what it takes on this show week in and week out going through what it takes to run a fast growing highly profitable e-commerce business I am getting in the weeds in the trenches with you sometimes on my own sometimes with guests today on my own and I'm talking today about three key principles that I come back to a lot for what makes a good e-commerce business and how to grow a d2c business effectively but what I want to talk about today is not just the principles but how to get those principles from your head into your bones this is a a hard thing when you go do a lot of podcasts or taking a lot of information it can be really challenging to actually not just hear things that are true but internalize them and act on them and make them part of your business in an ongoing way I want to talk to you today today about what those key principles are not every key principle but a few really big ones that I come back to a lot and then one practice practically that you can Implement that will help you to take that from a principle you've heard about a truth you've learned in your mind and actually get it to be a conviction of your own that becomes part of how you operate your business in an ongoing way let's jump in let's not play anymore okay I gave you the intro you know what the point is let's just get right into it principle number one contribution margin is the goal of advertising generating contribution margin is the goal of advertising now I've come back to this a lot was recently tweeting about this saying you know like I just think this the number one thing DDC operators can do to be effective is to really get clear on the idea that contribution margin is the god metric in e-commerce in DDC really understanding that really understanding how you generate contribution margin let's define contribution margin really fast contribution margin I am defining it here as Revenue minus variable costs every variable cost associated with selling a product so everything you put into the cost of delivery side of your p&l Revenue minus variable costs minus advertising cost minus CAC okay so it's basically all the money left over after you pay to get a product to a customer everything related to getting a product to a customer and after you paid for the customer so you pay for the product you pay for the customer and after all those things all of the costs left over in your business are the costs of running the business all the fixed costs operating expenses we actually come back to that in a minute but everything left is a fixed cost and so basically we're accounting for every variable cost including the variable cost of CAC and saying the money left over is what we mean by contribution margin right so uh really simply we'll just illustrate this we'll say if your revenue on a purchase is $100 it costs you let's call let's say 40 bucks uh in product cost shipping fulfillment 3pl merchant account fees credit card fees what I mean there all of those things right there's all of your variable cost associated with the product cost of delivery and then let's say it cost you 40 bucks in CAC so you've got a two and a half row ass on that customer okay now you've got $100 in Revenue 40 bucks in cost of delivery variable costs $40 in CAC and you've got $20 left over that $20 is your contribution margin that's what I mean by contribution Mark okay did an episode a while back with build alesandro called build alandro is assess with contribution margin my number two most popular episode ever go back and listen to that to hear a deep dive on this why it's so important how Bill's putting that into his business I think it will be helpful to you okay so well that's the the definition the principle here is contribution margin is the goal of your advertising okay and the reason that principle is so important is because if you get that in your head it eliminates a lot of noise in your business if you understand that generating the maximum amount of contribution margin is the goal of your advertising for the vast majority of businesses that are attempting to be profitable on any meaningful timeline right so we can maybe set aside venture-backed e-commerce businesses funded e-commerce businesses that have a really long timeline to profitability and value those businesses are increasingly rare most people realize that DDC Commerce does not create Venture scale at this point so it's it's increasingly the vast majority of people are trying to generate profitable businesses operate their businesses profitably for all of those businesses what I believe is that beginning to orient your whole business all of your thinking at every level around your contribution margin and building that into your operational processes and your reviews all things this is so key to operating well and it saves you from a million other errors so I also did an episode at one point called you don't need an attribution tool right in the attribution tool episode I talked about a bunch of reasons why I don't think you need to be using triple oil or nor beam or anything like that but the best reason to not need any of those tools is because the actual thing that you care most about is contribution margin and no attribution tool will tell you contribution margin this is the argument Taylor holiday makes all the time that aside from the accuracy or not of those tools it's just not the most important outcome of your advertising the most important outcome of your advertising is contribution margin so if that's true that contribution margin is the most important element of your advertising then that's the thing you have to track and if you start doing that you will start to think about all the different ways that you can carve out additional contribution margin in your business including and optimizing your ad spend and that will have manifold positive effects in your business if you start thinking about that and seeing it everywhere you will start thinking seriously about your financing you will start thinking seriously about your Logistics and how you operate at a better level there about the offers that you create the sales you run how they generate contribution or not and certainly managing your ad spend so it's really important but the problem is and this is the promise of this episode how do you take that idea and get it into your bels there is a very simple way to do this and it is in my opinion the one of the most important things an e-commerce operator can do and it's this track contribution margin so simple but it's crucial track contribution margin and I think you should track it in two particular ways the first is in your actually by creating a weekly at least dashboard that tells you your contribution maret from the previous week and I I really prefer if you can forecast contribution margin first and then track your actual contribution margin against that forast but even if you don't do that if you just start tracking alongside any other metrics that you're doing new customer Revenue returning customer Revenue ad spend row ass subscriber count anything else that you're doing okay if you put contribution margin in there and then look at that every single week and watch and compare if my Ras goes up but my volume goes down or if my volume goes up my Ras goes down or if I get get a new 3p a bill for my 3pl and it's more or less than I expect actually the 3pl stuff would be opic so well no it wouldn't be but it would be variable costs but it can be hard to measure that relative to order so forget that for a second right but all of these things basically certainly your actual cogs would be in there that you could see at a weekly level you can estimate and then at a monthly level you can review where is my contribution margin relative to to to what I expected and if you track that consistently you will start making better decision I have a client right now where we are deciding we're playing back and forth with taking more volume at a lower Row versus less volume on our ad spend at a higher row okay and we're playing this game back and forth and the way we are making the decision about about which one is better is by tracking contribution margin weekly and looking at it and we're actually building in a forecasted contribution margin off the customers we acquire today as another important part of that conversation as well but again that's sort of second tier I actually again I'm not as concerned about that though it matters the bigger the fact the bigger LTV is as a factor in your business the more that matters okay the smaller the factor is the less that matters so if you start doing that then it's crucial again I have another client that I'm working with where they we're kind of working on rebuilding their whole ad account structure and I'm thinking about this very much in an ad level right now though this certainly applies also to some other areas in fact I'll I'll explain one in a second but we for this new client they have been using an attribution tool for a long time they have all kinds of concerns about accuracy track totally understandable why they would have those things but I am going to make the argument to them that we should move off of an attribution tool and it's not because of the accac or not of the attribution tool although I have questions about that too instead I am going to push forward the idea of Are We generating positive contribution margin let's look at the new customer Revenue look at the returning customer Revenue know what's happening in the business based on our spend assign our spend to mostly new customer revenue or return customer revenue and figure out is this actually generating positive contribution margin and by looking at that metric each week what will happen we will start managing it I promise you we will manage what we measure just like always that same client actually has some interesting situations where because they own their manufacturing uh there are some potential efficiencies in taking more purchases at a lower Ras because they have a lot of fixed costs to work against and so because they already own the facilities they're going to have the facility there whether or not they generate product or not and so the there is this question for them of should we take again more purchases at a lower row ass or less purchases at a higher row ass which one's going to create the better outcome well distinguishing between fixed and variable costs at even at the manufacturing level and understanding which of these things are actually variable relative to each product we produce versus which one of these are fixed like people and buildings and stuff like that is going to help us make that decision and by looking at that very carefully week in and week out as the volume of War changes we will have an idea of the op of the optimal approach to managing this and it will make a big difference on their bottom line okay so that's what I want you to do first track that weekly and I have a simple contribution marginal tracking sheet I will link it in the show notes or link to an email capture where you can get it I'm not totally sure yet at the time of recording actually um but either way I'll make sure you have access to that for free so you can see the best way to do that okay there's that number two I talk a lot about maintaining a low OPC as a percentage of Revenue let me just illustrate the principle here again okay maintaining a low and by low I mean probably less than 15% of your Revenue in D Toc once you're at a certain scal it's hard to do under a million bucks but once you get over a million bucks keeping a low low offex is a percentage of Revenue is one of the keys to building a profitable D Toc business and it's one of the core things that makes D Toc a unique and good business model your ability to scale spend you've heard me illustrates this way if you've listened for a while before but I always say the same way right it takes the same amount of time to design an email that you send to a thousand people as that you send to a million people and even if you have clayo or something where your costs increase as you send more emails it doesn't increase proportionate with the value so there are built-in efficiencies like this all over the place the same is true with your creative on your ads a lot of the things around the marketing infrastructure in particular in e-commerce businesses scale really effectively which allows you to maintain a low Opex as a percentage of Revenue and make it so that your bottom line profitability is in a really good place by running a pretty lean business you know resisting lifestyle bloat again as Taylor holiday phrase resisting the uh e-commerce lifestyle bloat as you grow is really crucial and I watch this happen with businesses especially as they make that Journey from 1 to 20 to 40 to $50 million there is a temptation to start adding all these things because you be like you got to Rebrand and you feel like you got to do all this other stuff and stop keep your Opex low as a percentage of Revenue okay keep your Opex low as a percentage of Revenue that is one of the crucial ways to maintain a healthy bottom line in e-commerce business even as you are growing that's the principle okay pretty simple but really important so how do you make sure that that goes from an idea in your head that you know is true to something in your bones that you believe and that actually makes its way worms its way into the operations of your business again the answer here I think is pretty simple it's once again tracking and in this case what I think is to forecast it forecast your Opex forecast how much you will pay yourself forecast how much any buildings you have or leases you have will cost as you forecast your revenue forecast along with it and your cogs and all those things forecast along with it how many players you're going to need to add to your team how much your agency fees are going to go up all of those things if you do that you will constantly have a view to the future of whether or not you headed towards a place where OPC stays low as a percent percentage of of Revenue and you will maintain discipline about that part of your business even if you going to bring on a cost that's going to take you above that 15% line you should know over what time period you will get back below it right so let's say you decide oh I'm going to bring somebody on and it's they're going to be expensive or it's an agency that you really believe in or something and you're going to say oh it's going to take me to 20% but uh 20% off ex percentage of Revenue because their fee is pretty high but over time this is what I expect them to produce in value they're going to increase my Revenue this much at X profitability you're going to do all that according to contribution margin and maybe that's even the way you answer the question they're going to give me more contribution margin and therefore it's worth doing they're going to cover that cost if you do that and you actually forecast that then you will have a basis on which to evaluate the performance of anybody that you bring on you will have a sense right away of whether or not you are trending towards profitability even if you were not there yet or towards higher levels of profitability even if you're not there yet let's say you're at 5% profitability for the year or uh let's say last year you did that 5% bottom line you want to get to 10 this year forecast your Opex because it is a significant part of your p&l and what I have what I see happen all the time is Brands take on costs that they don't really need to take on and it's because they're not thinking about this in that bucket they don't have a Target they're not forecasting their Opex very carefully and so it's like oh we'll add the software over here and like don't do that make a point of keeping that number in check forecasting it and then review it monthly every time your p&l gets finished if it's the 15th and your accountant sends you up your updated p&l review it know how you came in your Opex relative to what your forecast was and know how your Revenue came in relative to forecast your ad spend came in relative to forecast that's going to tell you a whole lot about the profitability of your business so track contribution margin weekly and monthly track it carefully look at it analyze it see if it's moving in the right direction track forecast your Opex don't just forecast your spend and revenue forecast your Opex also mistake I used to make this mistake all the time myself and number three another principle that I believe is key is important for running a great e-commerce business right now using cost controls in your ads I am an advocate of bidc caps on meta in particular this is also probably true for Google ads if you're using Target Rass or something like that but let's talk about bidc caps and cost caps in particular again I prefer bidc caps but really if you'll move to either of them I'm pretty happy this is the principle the most effective way to manage and scale your ad account is to run bidc caps that's what I believe to manage profitability and scale both and people don't often believe me that bidc caps produce scale they often think bid caps can strain your spend but I think it's the opposite and here is the crucial way to internalize this thing if you've heard me talk about it because here's what I've seen happen a lot I've seen a lot of people say okay I've heard you talk about this Andrew I want to try it until they'll put a little bit of their spend they'll put a little bit of their spend on bid caps and they'll keep the rest of their spend on their Auto bids met ads and I think that is a mistake I don't think it's the best way to run bid caps first of all so it won't work very well you actually won't get value out of the spend you really have to commit to 100% bid Caps or cost caps as the case may be but beyond that here's what I've happen seen happen a lot I I remember going uh working with a with a media buyer who I was kind of coaching who was really hesitant about this idea they really wanted to maintain more control they really wanted to run auto bids they didn't like the idea of going 100% bid caps but then thanks to some pressure from a couple different spots they committed and they went all in it was actually cost caps at the time they went all in in their spend their ad account they did it they went all in on it like a week before a big sale moment and their spend went from let's call it $1,000 a day I don't remember the actual number but it went from like $1,000 a day to like $10,000 a day for a weekend during the sale like just massively shot up because the sale performed really well or sale ads performed really well and they were scaling really fast I mean it might have even been like three or four grand a day up to 10 or 15 up to like 75 grand one day in spend like drastically increase in spend and maintain profitability all along the way and here's what happened afterwards was that media buyer said to me I am all in on this and it was because he saw it happen you will just never believe me that this works if you don't actually try it and then feel it work you just won't you just won't believe me and and as long as it's a theoretical idea you won't believe me but it does work and I've watched it happen over and over I'm working with the client right now it's moving their whole spend over to bid caps and I think at first there was the usual hesitation is this going to work does the algorithm work right does the machine learning work right am I going to lose control all these kinds of things but we are getting towards contribution margin increasing right away and as we are getting towards that guess what they're starting to believe they're starting to go in on it and the more dramatic that moment can be the more you will feel it so if you can try this right before a sale I know it feels risky I understand but if you can try it right before a sale and you can see that moment as long as you do it right pay attention to your aovs make sure you pay attention to your margin track contribution margin all those things if you can do that you will internalize how good of a strategy this is and it will go from something that you've heard somebody talk about that you believe to something that is actually in your bones and become part of what you're trying to do and if you do that alongside contribution margin you will watch the effect on contribution margin as you track it weekly and you will make a lot more money this is the perfect spot in this episode for me to talk to you about my friends at more Staffing that's because if you want to keep Opex low as a percentage of Revenue one of the great ways you can do that in e-commerce is by hiring incredible talent in the Philippines here's the way I had this conversation with them just recently uh I was talking to some folks at more Staffing and they were saying look Talent is distributed relatively equally across the world but price is not price is actually distributed really widely across the world and at least in something like e-commerce talent I think that's completely true there are incredible e-commerce Professionals in the Philippines who are great additions potentially great additions to your team you just need to be able to find them and get them and that's what more Staffing does and you will pay them good money for the Philippines but significantly less than hiring those folks in the US and so it's a win all the way around and more Staffing will help recruit those people onboard them give them ongoing coaching and training and even guarantee you that they will last in your company for a year and if not they will replace them for free so it's no risk to you really at all and you can get incredible talent in the Philippines in your business more Staffing is just awesome they have an incredible vision for what they're doing I love working with them I working with them personally on adding talent to my business right now I'm bringing people on board you are going to love them too go to more now.co to get started with more Staffing today to add incredible Talent from the Philippines to your [Music] business all right that's it for today and next week on the show you are going to love my episode with Jess Bachman from fire team Jess is a creative strategist at an agency working with a bunch of different clients really on how to generate High performing creative I really like Jess have liked his work for quite a long time because he brings a real creatives creative mind like you know clever creative the kind of person you think of as like art director creative director type Talent really creative guy paired with a real emphasis on performance and metrics and the conversation we have in that episode is all about sort of Jess's exact method for turning Data Insights from his ads into creative ideas and iterations he walked through like full-on his exact notion card that he uses to run with his team a bi-weekly meeting where they go through all of their creative planning for their clients he has seen it work he's a practitioner he knows uh how these processes have developed High performing creative for him and his team and he shared a lot of detail shared a lot of Det with with you my audience so definitely subscribe wherever you are watching or listening to this podcast so that you can make sure to get access to that episode you're going to love that it's really a good conversation I honestly brought him on so I could pick his brain cuz I wanted to learn from him and it allowed me to do that so I learned a ton you're going to learn a ton too make sure to subscribe you can find me of course in all the usual places at Andrew J Ferris on Twitter you can find me on YouTube if you didn't know that I have a podcast the podcast is there with video every week you can subscribe to me there and you can also email me podcast jf.com if you have any questions or thoughts or want me to cover something in an episode I would love to hear from you about doing that so as always thanks so much for listening and for watching make sure to go check out more Staffing ATM now.co to add incredible Talent from the Philippines to your business and rate and review wherever you are share it with a friend all the usual stuff you know what to do I appreciate you so much [Music] thanks [Music]