You're Thinking About Your DTC Business Wrong (With Kelcey Lehrich). transcript

Kelsey larck says e-commerce is not a business model I say he is wrong it is a business model and we are going to argue about it and most importantly we're going to talk about why it matters listen to this episode if you want to think through how the way cash moves through your business how the way your p&l is organized your balance sheet is organized how those things impact the actual outcomes you're trying to drive from a guy who rescues e-commerce businesses out of debt and turns them into thriving profit machines let's talk to Kelsey L from 365 Holdings I'm quoting now Kelsey from a tweet from you only moments ago about to hop on a podcast with at Andrew J Ferris and argue with him will be super embarrassing when he posts the recording of him taking a major L but he hey he asked for it that's a lot of confidence that you're about to argue with me and destroy me in some kind of an argument even though I already know your argument is and I'm certain I'm right I've thought through this a fair bit and I have an equal amount of bravado and uh I'm going to enjoy the conversation the thing that's going to be annoying to people upfront is that I bet you I don't disagree with you very much on it um but I I there's like basically one thing that I care about in this conversation and so we'll get to it okay here's what the conversation is you and I been arguing about whether or not e-commerce is a business model you say no definitely not I say yes e-commerce is a business model um we've argued about this and it becomes semantic so I mean there's one way of looking at this which is like it doesn't matter um like who cares but there's I think it matters and I think it matters for a really specific reason but you I'll give you the mic first you you tell me tell me why e-commerce is not a business model and more importantly tell me why I should care e-commerce is not a business model it is a sales Channel or a go-to market strategy for your business the reason why you should care is because uh the people that listen to this podcast and the circles that you and I run in uh it's very easy to find a guru an influencer some might say a guy like yourself Andrew that buys media and tells the world how to do it better uh that you look up to for advice and insights and wisdom on how to grow your business and when you start believing the lie that your business is an e-commerce business uh it's easy to begin to generalize and rationalize a lot of broad commentary that just may not really apply to you and your company so I think the danger for a lot of people when they're seeking advice seeking wisdom researching they're listening to podcasts reading tweets going to conferences trying to soak up ideas to succeed and win in their business and like oh I'm in e-commerce and then one guy is running Google ads Drop Shipping aftermarket auto parts on a woocommerce store the next guy is a supplement business that only runs Facebook ads and a little bit of email the third person is doing Tik Tock shops the fourth is an Amazon Seller uh the next one is a make to order custom products business these are wildly different businesses they use different advertising channels they had different cash conversion Cycles they had different demand Cycles like they're completely different yeah we rationalize they're all just e-commerce businesses and they should all you know take advice from each other um I think it can be dangerous in some instances so yes uh if you run a Shopify store and you run Facebook ads there's a lot of broad similarities one business to another uh but I think that defining your business by your sales channel is a mistake because if other industries did that we wouldn't be flying on airlines we'd be flying on e-commerce companies because who's ever bought an airline ticket any place other than a website um and if you were um a sales business you could be selling cars you could be selling Insurance you could be selling nuts and bolts yet we know that an insurance agency a car dealership a nuts and bolts Factory are very obviously different Industries but they all use sales as their sales channel so are they all sales businesses of course not um so that's that's the danger is you get very different business models cash conversion cycle demand supply chain the way the p&l looks the balance sheet needed to look total addressable Market all these different Dynamics and here roll them up into this convenient word of e-commerce uh and I think that some people it can do a disservice to well we've done two things here right away the first is I think there's a lot of light here alongside any potential heat in the sense that I have uh I have I had an I did an episode with Olivia Corey a couple weeks ago and and one of the things she was talking about she was disagreeing with a piece of advice that I've given at times which is like trust the experts um that's that's a pie advice I really like um trust the experts and her her her argument say as an expert right well I mean I I suppose that's that's me jabbing at you that's me jabbing I love you you are you are worthy of taking advice from I've taken a lot of advice from you well not well but I mean the thing that she she brings up that is that is right is like which ones right so because like I disagree with plenty of people who are talking about the same matter to me all the time so this is like the problem and and you brought it up in terms of right away when you framed your response to that question you you framed it as there's a lot of people talking about how to do it and you got to figure out who to take advice from and if you think of all of it as one business model then all of the advice is in play but if you start actually chunking it out into more specific kinds of businesses a supplement company for example versus you know whatever uh whatever other kind of business like that that ostensively is an e-commerce business like you you end up having this thing where like what powers business a is very different than what power business be and therefore who knows which one you should actually be taking advice from you know um and and I think this is something I was struggling with in my response to Olivia which was like on the one hand I really reject the test everything mentality I don't like that I I I think it's a bad idea you you'll end up losing a lot of money trying to test everything what you should actually do is use well-worn principles and try to do them but but the problem in my response to her even at the time and and something I've still thought about like well okay but how do you actually help somebody sort through which advice to trust which experts to trust and you've just said something interesting which is essentially maybe one thing to do is to drill closer into what is unique about your business who else is doing things that are like your business um and then can you listen to them because if you think of everybody as being in the same industry then there's going to be people who are doing things that really don't apply to you in the same way and there's there's a similar principle here that I've also been thinking about recently which is about the size of businesses because a $1 million e-commerce business is very different even it's the exact same industry as a $100 million e-commerce business and um you know this is sort of one of my Reflections on Tex clad Super Bowl ad is like it it's like amazing huge fan amazing that those guys are sharing information for free all the time amazing like I I period stop right there's like four people that can relate to it exactly if you're not like it's sort of the ultimate picture if you have a hexclad if you have a Super Bowl ad with Pete Davidson your your approach to marketing is simply not relatable for my 10 million doll clients forget my $1 million clients you know um it's just a different deal so yeah um so there's there's you have to start chunking you have to start narrowing down into who his businesses are actually more like yours but here's my counterargument to you in all that having said all of that first of all I think I would probably be more likely to say d Toc um is a business model more than e-commerce because e-commerce even includes Amazon which is really a whole different beast and some of that so um so so I'll narrow it to D Toc as a business model so maybe you have me maybe there's a point Kelsey by calling Ecommerce business model that's wrong D Toc is business model okay but here's the thing what I would say is there are things about D Toc businesses that are that are real close to being universally applicable um for DC businesses to work including the fact that right there in the name is that you ship a product to a customer's door and that process of going from your Warehouse to a customer's door directly and not having another thing the thing that defines D Toc as D Toc um that itself suggests something thing about um about about the business now maybe it's better to call it a sales Channel um and that that sales channel has unique value let give you really that is why I care about it here's a really easy really hard hard time to give you so what does a DTC business mean like what if my products on the Shelf at Target bu I do 80% of my revenue on my Doom am I still a DDC business yeah what if I also have owned retail and it's 20% of my Revenue I still not anymore so so what do you mean by DC business is it 100% well then but then but but I'd say is the moment you add Target your business model changes right you are now a different business model than before that's the that's part of the point is that like so now the business changes so fundamentally in the way that you operate all the things you said earlier your cash uh your your the way cash moves through your business when you add Mass retail is drastically different than when it than when it was DDC the way you measure your marketing is drastically different than when it was DDC and so so the business has the ability to change models or to make their model more complex or whatever but yes it's a different it is now a different model of business it is so different like and this is the problem just calling it a sales channels like it almost sounds like there's something core to the business that like and and there are things of course that are core to the business that then are replicable across other channels that's of course true to some degree it's the same products but but it is so completely different precisely on the terms that you laid out earlier which is that like which is that like the model now changes drastically because of those channels it's that that's how big of a deal that channel is so I don't this is why like it's sort of semantics but also like clarifying why the semantics matter I think is important um I I find it really interesting it's the first example I could think of where a group of people decide to classify their work by the way they go to market um I I don't know that you could describe that as having happened elsewhere maybe we like think live um sure I'll give you that one um yeah but again like what happens when the MLM then goes to retail or or whatever else but yeah that's see MLM is definitely a business model like you know it's not sales had a friend from five years ago called them up to for Tupperware party knows what what that is yeah I get it right right but but see MLM is another good example of this the point is there's things about that that approach to going to Market that are so definitive about the business and and what makes the business work financially that you that it is worth really getting them right if you are going to do that you have to like you have to think about the whole business through that lens and for D Toc businesses that's what I would say is the same thing there's these principles in play now those principles do vary by category a lot so that's where maybe like you again you point Kelsey right like subscription supplement business is really different than the furniture businesses I used to work with you know something like that and but but the d2c thing is still a huge deal in the way they think about some core there is actually some crossover what most people think of when they think of a quote unquote d2c business is 80% gross margin $100 aov mostly Facebook ads they may or may not have turned on Google they send emails and text messages uh and they have a Shopify store that's what most people think of and it does apply like a wide swath of e-commerce businesses or D Toc businesses um I don't think it's even a majority though I think there's way more businesses that actually don't meet that criteria I just defined and then it makes the generalization challenging yeah I wonder if like what you have to narrow it to is like bootstraps do you see or something like that like you know it's or like almost like profit focused D Toc just because again like that they're just going to function so differently than like a than a funded D Toc you know like uh yeah e even if you get to a business that's more predicated on even I had this debate before of like a demand capture business was running on Google and maybe Amazon uh as opposed to running Facebook ads like very very different Dynamics in margin profiles in businesses that create demand than those that just capture it yeah okay but let's talk about a couple things that are true in DC bus so here's why I care about it because what I think is that many there there are a couple things that I think are unique to D Toc as a channel model whatever you want to call it that I think are the most important reasons that I care about this number one um the ability to scale at a very low cost of uh a very low overhead in the business um so what I mean is D Toc one of the things that makes it work and this is the example I always give is that it takes it costs basically the same amount of money to send an email to a 100 people as it does to a thousand people to a million people right your clavio costs go up some for sure but the graphic designer who builds the who write who signs the email the copywriter who writes it costs the same amount of money um so D Toc scales great relative to humans and this is a thing when you when you hear D Toc people get interviewed on non D Toc channels like people are like astounded like I remember hearing an interview with the the head of butcherbox uh the CEO of butcher boox where it was like you know they're at 500 some odd million dollars and and they were they're still at like 180 employees so it Ned out to like three $3 million in Revenue per head you know and it's like you know the guy interviewing him was like what like he just couldn't believe it right because if you think about tech or something like that it's like a different Universe um so um so there's there's you know or service business right of course again completely different so um so that's one thing I care about and I think it is really important that DDC people keep that extremely clear in their minds that like this is one of the ways your business works is that you have a p&l advantage on your fixed costs especially if you start to add in things like remote offshoring and a I None of the three of which defin 365 I mean maybe AI does anyways I don't know yet but the other two you guys are in office and in Cleveland but um but like I don't know um labor is I think pretty free in Cleveland if I understand it correctly so it's fine um the um the but the the but like some of those things allow you to keep your fixed cost very low um in a way that is really important to create margin in your business so that's number one number two and then I'll let you respond number two is um is like I said earlier like shipping the product from a warehouse to a customer's house is such a core piece of the of the unit Eon economic profile of a d Toc business um like even just like the problem of Last Mile shipping basically or last mile delivery right like that like that that thing that makes shipping to somebody's house expensive is a really important part of the business and therefore like thinking about how you what kind of products do well and don't do well and where the advantages and the disadvantages at the level of unit economics specifically for that model are really important even as you think about decisions like should I go into Mass retail um you know that really depends a lot I think among other things on um on all the Dynamics that I just mentioned essentially like how your unit economic profile works out for D Toc there's a reason why subscription supplement brands are often like ah a lot slower to go to mass retail because the thing works so freaking perfectly for the act of shipping something to somebody's house you know um it's it's such you know ultimate use case for that so those are the two things that I think of as like crucial to the to the thing that and it's the reason I care about is I want people people to I want people to view their DDC businesses with Clarity on those two lenses um and understand that deeply in that what powers their business and understand the moment they go away from DDC as their core channel that those things change uh to some degree I like um operating leverage as a important thing to understand about the DDC model I scale there makes a ton of sense um I'm not sure I've thought through the shipping products piece yet I think a lot of folks do 3pls obviously if you're an Amazon Seller if you don't touch your product uh by and large and those are you know e-commerce businesses e-commerce Works in part because you can build operating leverage with low fixed cost as a percentage of your revenue and the way you can supercharge that strategy is by adding incredibly talented people to your team from the Philippines with my friends at more Staffing I a huge fan of more Staffing I've worked with them for a long time they have staffed my business internally they've staffed friends M businesses and they are going to staff my future e-commerce business that I building on the side as well and it's because they are incredibly talented people who connect you to great talent and the value proposition is really really simple uh you uh can hire people with deep rich e-commerce resumés across every part of the business and manager levels and up not just $5 an hour virtual assistance but like manager level and up like I said across operations marketing supply chain like you name it any part of your business uh there is incredible talent in the Philippines that you can add to it more Staffing connects you to those folks and here's the way I am doing it and the way I suggest you do it as well don't just look for cheap look to hire at the top of the market in the Philippines so you attract the best talent which will still be meaningfully less than that same Talent would cost you in the US that means you get great people working in your business at much lower cost um and that allows you to grow faster and apply again more leverage to your business whether that means hiring more staff or that or keeping additional margin in your business there's a bunch of ways to do it but more Staffing can help you find all of it they also have a one-ear guarantee on every um person they add to your team that's like way longer than most staffing agencies which are like a three-month guarantee uh so what that means is that if more Staffing helps you find talent in Philippines that doesn't work out for a full year they will replace that person for free for you so that's just an incredible deal go to Mor staffing.com staffing.com to get a conversation started these are some of my most trusted Partners in all of e-commerce they've been a sponsor of this podcast for a long time because I believe in them so much and because I've seen over and over the way that they have friends of mine businesses my business and Beyond I just can't recommend them highly enough more staffing.net the road on on those two things when you're talking to people like why are those uh important to you in your mind yeah well for one of them the the the hidden margin killer in a lot of businesses is shipping costs even if you charge people will say oh the shipping is fre because I charge for shipping but they're doing their math wrong if because the customer let's say the customer gives you $25 and $5 goes to shipping uh right so it's like $20 for the product and you say oh I charge for shipping so no big deal there what has actually happened is you've now taken a $25 order and added 20% cogs in or 20% variable costs associated with every order so it's not free it's actually destroyed your margin profile on top of everything else that you're doing um plus you have to pay credit card fees on that extra $5 dollar you charge you have to whatever so um so this is a thing that I think people don't think very well about is is that and then there's all kinds of things about um how to think about order value um you know value to weight ratio is something I've thought a lot about uh and use like the idea of like if you know my I got my cut my teeth at Kao this is like a perfect e-commerce business silicone wedding rings uh we were charging $20 for this it was extremely cheap to make but also crucially extremely cheap cheap to ship to somebody's door so you could make the business work please tell me you guys just slip those into the USPS mailstream with a postage stamp because that's how I would ship those uh yeah I mean they were in like a little like a mesh back but yeah they were basically like that right it was extremely extremely cheap to ship and so um so it was it was like it was a huge advantage in that business and it was part of the reason why you could live on a much lower aov than what people think is possible it's also why aov can be an overrated metric or an underrated metric depending on what you look at um because value valued weight ratio is I think a better metric than aov in that respect um so and then I think about what products are primed to do well in this space and and this is a big part of it um so how you optimize shipping costs you know it's really hard to go like negotiate with USPS or whoever it's like there's there's all kinds of you know they're just too big and too unwieldy but like thinking about how you sort of engineer offers and products for the reality that you're going to do that is really crucial um another one I've seen is like um like I've seen a food and Bev company that like really worked hard like it was a it was uh it was like um yeah anyway it was not like a canned thing like it would expire really fast right so it needed to get to people's doors quickly so solving that problem really really is like crucial to to even whether or not it works as a d Toc business basically that sounds less like a d Toc business Andrew more like a logistics business well it wasn't I mean eventually what they did is they did all the things that everybody else does they they did uh they did by Coastal fulfillment so they could get from uh a 3pl to a customer store faster they were shipping to further zones less often which is a really helpful thing the heavier your product is the more that matters um is another thing that people don't go after enough they they were um thinking about how they pack they they redesigned their packaging to make it better and better now what that looked like for that business which was like a heavy box of of food versus um you know again a supplement business or something like that is really different but it's the same principle which is thinking about how your packaging like works out into shipping something to somebody's house and think about how much like aov became a crucial crucial thing for them because there was so much um margin to be added back especially on like overnight shipping and things like that so yeah there's like there's like a bunch of these things where it's like it's actually the same principle across a lot of different businesses it matters more and less depending on which category you're in but that I think is is like a is a really important thing is that's such a core thing to the customer experience that getting that right really matters I did not expect the bulk of what we would talk about to be Logistics and shipping I think it's actually really interesting um that you keyed into so much of that as like the advertising guy and we just spent five minutes with you talking about by Coastal fulfillment um one thing I think is an interesting follow on to this is is uh entrepreneurs tend to get like an identity in their business if you're an e-commerce business um is it okay to sell on Amazon you know when should I really explore Mass retail and is that a shift in my brand strategy you have an opinion as you talk about D Toc businesses e-commerce businesses uh and you have um people taking advice from you on how to think about the identity of a business and its sales channels yes um I think you should think about sales in relation to so I think Amazon is a fairly obvious extension for most brands for for most brands I think Amazon is basically additive not really cannibalistic to your DDC probably a little bit but not really out and it's just it's just taking e-commerce or DDC whatever and extending the reach of it to the most used e-commerce platform in the in the country right so it's like 50% of e-commerce happens on Amazon if you're already an e-commerce business like basically all the things that work in your d2c business work even better for Amazon because their Logistics are so perfect um and so uh and so so in general I think that's a good idea the key is to measure um differently because uh and this is something Taylor's been really hot on recently I've seen it for a couple clients of mine you have to then measure the value of your ad spend um really differently you can't just measure on DDC basis only because the moment you start getting a meaningful Amazon presence you're going to have some of your meta ads clicks jump over to Amazon so I guess that works against what I said about being cannibalistic but the net effect of it is that it's additive total um so um so there's also some Downstream effects of like growing your search ranking by adding some sales velocity there that creates some organic Revenue as well on Amazon so um so yeah so I think I think in general at some point Brands ought to do that they shouldn't do it too soon though um because it just adds complexity so um so I would think about that as like when you're ready and if your business makes sense for this um you know then then yeah if if your business requires customers to add like three or five things to your order then Amazon doesn't make that much sense right because because uh but if it's just like one widget and they're going to buy that one widget from you or from Amazon or you can package it as a set of three of those one widgets on Amazon and do a little cheaper whatever then it makes tons of sense especially in the category where there's some categorical search um for Mass retail I think it's um there's some question about margin I think there's some Brands where the mass retail margin makes a big difference again this comes down to shipping um shipping some things um I I'll use this brand because we've talked about publicly uh Kiri who has at various times been a client of mine um you know kir is a great example of a brand where like retail makes all the sense in the world K's a a women's focused clean deodorant brand um so you know what you know it's it's a stick or two of deodorant at a time uh it's not particularly small so it's not particularly cheap to ship the margins are good not incredible in a in that business um and so the D Toc thing isn't there's LTV that's good not incredible um you know so there's all of these things uh that make it so that it's like not a perfect D Toc product on top of that like where do women buy clean deodorant they buy it at Target and so they should add Target and you should go there you know um and so to me it's like a perfect case where a brand is like you absolutely should be pursuing Mass retail as the way to put this into most people's hands simple modern is another good example of this where they actually built you might say it's no longer an e-commerce business and now it's a cpg company that's right that's that's that's exactly what I would say their business model fundamentally changed they are no longer a d Toc business model and that was I not allowed to listen to anymore well they fired me because of this I don't mind saying this at all this is exactly why they fired me most recently um and and I and why I didn't argue with them about it or like fight for it I I to they they came to me and said we're doing something so different than what we did when we brought you on right Sarah has been public on this so I don't think she'll REM me saying this at all and like more power to him I I have no problem with this right like Sarah came onto my show and talked about we got to eight figures or whatever it was in a year doing D Toc then they added Walmart and now they've added Target and they also added Amazon and suddenly measurement changed a lot that screwed a whole bunch of things up internally for them and then on top of that um as they like you know actually at some point she fired me and then brought me back and then we worked together again good relationship as you can tell like we're all friends here it's no problem um and we fired you but we haven't brought you back yet we need to go full circle you to come back on the team I don't know I don't know if I I don't know you it's bad blood between you and you's arguing but but but when they brought me back again they brought in a CMO who had much more mass retail experience and I told her on the first day I talked to her if you have to fire me it is okay I understand because I know you're doing a different thing doing before so I think it reflects exactly the thing that that I'm saying here which is like it's so fundamentally different to the way you make money and I just don't have the experience scaling a mass retail business on Facebook ads you should think about that differently and so anyway so like I said it was like good luck to you guys so yeah I think I think it perfectly illustrates the the the thing that I'm saying here which is that it's such a significant shift we just agreed I'm right and it's not any comerce business this is good we've made a lot of progress made a lot of progress yeah yeah the thing shifted so much that the model of the business changed it's a different business model the model of the business changed it was never an e-commerce company it was a cpg company that chose a sales Channel and then shows new sales channels as its vision for its business which is a women's consumer package good yeah needed new and different things from it's go to market strategies and it changed how it went to reach [Music] consumer if you are thinking about your business the way that Kelsey is thinking about his the way that I'm trying to think about mine which is financial first profit driven running a good profitable cash flowing business you should be thinking about your marketing and e-commerce optimization with help from intellig intellig is not just split testing software yes they can handle your basic split testing all of the sort of stuff that Google optimize used to do for you but if that's all you're thinking about with intellig gems it goes way beyond that intellig can be a lot more because you can use intellig to split test much more important things for your profitability than that for example your pricing your the price of your products is one of those things that has a massive impact on not only customers behavior and relationship to your website their conversion rate all those things but on your margins if you're thinking margin first you should be testing your pricing you should be testing offers like sitewide offers individual Pages um you know stack discounts the kind of things that people do like I had one client recently who moved from a stack discount where if you added more stuff to the cart it was 5 10 15% off they tested that against 10 20 30% off 30% off one 10 20 30% off one and they could measure that down to the level of profit they've tested their free shipping threshold with this these are the things that are needle movers for profitability in your business and intellig GMS is the best tool in the market for testing exactly these kinds of things in part because not only is it very easy to set up and to deploy so that you can run these tests in real time which is uh really awesome but also you can measure all of it at the level of profit per visit not just uh you know conversion rate Etc so you can actually plug into your Shopify metrics so when you're running something like an offer test or um or a price test you can actually see how it's affecting the profit of every visitor not just Revenue not just conversion rate whatever it's an incredible tool go to intellig gems. today intel. you can get 20% off your first three months if you use the code feris 20 it's fis2 check the link in the show notes in the description if you want to link to that go check it out intellig J.O incredible tool build profit in your business at every step of the customer Journey with a jumps yeah their entire model changed I totally agree cash moved through the business differently and so therefore it is a business model D Toc is a business model because it changed so much they had to change everything they did so yeah I'm guessing I'm guessing when they file their tax returns they pick the new industry code too because it's a new business I mean who cares who cares what the tax returns say tax returns probably doesn't even yeah who knows what year that was made in um the uh the uh the tax returns probably barely know the internet exists um so uh yeah okay so um so what kind of businesses does 365 have and who do you take advice from and like how do you you have you you have a holding company with six different brands are they all different business models like what's the point of even having a holding company at that point you know like you're not do you have any sh do you have any shared knowledge between those six businesses that makes it useful to have them all together less and less shared than we used to uh much more decentralized now than ever before and now grouped by the things that we have learned to make them unique and different and to try to not uh Force features from business a into business B just because they both sell stuff from a website and put it in boxes just because they do that there's not enough common to think that go to market strategies or supply chain things are the same um and so yeah the business now has really been chunked into um kind of three platforms one's our old school direct response business two of them are more of our demand capture businesses that have um just a different demand cycle From perspective of how we go to market and generate sales and traffic in the websites um and then the third platform is really the demand generation business much heavier on Facebook and content creation um it's just that businesses need different teams different financing uh different infrastructure um that's kind of been our our biggest lesson learned really is getting the organizational structure of owning those business businesses um really aligned with how they go to market and then also what we think the real business model is so our preference is to um have them be businesses not Brands so a brand is this like abstract thing that sits between a manufacturer and a consumer and it's this idea of like a a pretty middleman and and maybe D Toc is guilty of that from time to time um hey slap a label on it and you have a product now um I think the best businesses are as close close to the customer as possible and as close to the raw materials as possible so whether you choose to um go to Target or go to Amazon or do Facebook ads or whatever your sales Channel might be you're controlling from raw materials and supply chain all the way through to final customer delivery uh I think the best businesses the most durable ones the best to own um are as close on both ends of the spectrum as possible to the product and to the customer interesting is um I mean it is interesting like I again this probably score point for Kelsey here and that like maybe one of the reasons that like you guys are like the last aggregator standing the last holding company standing right is because like there what we all realized certainly one of the things that we realized before for 100 when I was running one of these was like there's the shared services just don't work the businesses are too different um and and they have different needs you know um and so like you you have to actually split them out and while each brand may end up having operating leverage at the level of individual Brands the operating leverage doesn't mostly come at the level of the actual holding company um maybe a little bit but not much we thought yeah um there's certainly still a handful of portfolios um of different shapes and sizes running I think that um we got 365 got lumped into maybe the The Venture back to aggregator bucket I don't know that that was ever really what we intended to do maybe we shifted towards that conglomerate style vertically integrated uh approach over time kind of accidentally feeling like everybody else was doing it I don't think it was really what we set out for and it's certainly not what we're doing today um the fact that I'm in e-commerce is just happen stance I don't think I'm God's gift to marketing or product development or Facebook ads or anything I'm probably like the least capable in a lot of those areas uh I just think that people want to buy things on the internet and they're going to find Brands they know and love and they're going to choose to buy from them and hopefully more than once uh and if those Brands make their product and take care of their customers and they're in categories that aren't fads and don't go away they're just good little businesses it's no different than owning a garage door repair company or or Landscaping firm or the local Staffing like just they're just businesses um so grouping them the fact they're all in e-commerce quote unquote uh to use use your language uh or their own consumer products um it's not any different than if I bought a landscaping company and an HVAC business in a plumbing company and said oh we're going to people's houses they're all the same uh obviously those are wildly different services that that help consumers in their home yeah but you would have so much overlap in the way you thought about those businesses you would still approach them as like cost of Labor as being a crucial thing and you have to think about your unit economics in relation to labor cost because it's a service business like so OB you know you you think about a lot of the way how much money you can spend on marketing to make the business work in general would be you know what the margin profile is expected to be how cash moves through the business those things are all so different where like a service business has details about those kinds of things in a way like I mean think about the issue of AP and AR right like they they basically don't exist for a d2c brand you know um I guess AP does but like if you're on Amazon you know I don't know it's just it's and it's like there's there is actually quite a bit of similarities between those because there's something fundamental at the level of the way the business makes money and the way that again the way that cash moves through the business that actually does have overlap I know for a fact that you have media buyers that service all of your businesses that you have um that you have approaches to Logistics and warehousing that work through all your businesses that you know all these things that are actually very similar from business to business to business let get in the way of a good story okay I'm here to win the argument not we got got to stay on track go ahead go ahead respond to that yeah um I I lost the the script um well there's a reason you don't also have an ad agency in there somewhere even though it could be a good business it's because the muscles you've built on DDC or e-commerce brands are different muscles it's actually part of the reason I'm not scaling a service business because I've spent the last you're thinking about GC businesses I think as Founders just aniz appetite to pursue a business so that the capital behind a acquisition or operation of a company uh is that we've learned a lot in the last eight years of selling stuff on the internet quotequote e-commerce um and it would be an uphill learning curve to go do business in a new industry I fantasize about it all the time I even threaten to do it I haven't haven't managed to to make it happen yet everybody else's business always sounds easier than yours so yeah The Grass Is Always Greener I call it business model Envy um gets everybody y yeah okay so come back to the ear point where do you where do you learn from I mean have you looked so like your demand gen businesses versus your demand capture businesses just take those two right um which I know exactly what you mean right your demand capture businesses are going to be more Google oriented how do you win on search where's the right place for us to be where people are searching for this kind of thing your demand cap your demand gen businesses are going to be like how do we Wi on Facebook ads that kind of thing the stuff you brought me in to work with your team on okay um so um so because I do I want to come back to your earlier point that I really like which is which is like there's you have to be able to learn from the right people so how do how do you think about this at the level of individual businesses 365 to like to learn from the right people to like separate out the businesses to see their differences yeah that's a good point um we've certainly Gone In Search of people that can help us yourself included in places that were easy to identify I think the biggest list of mistakes that we've had over the years years is from trying to force ideas into businesses that just didn't fit and I I think the answer to your question is I don't know that I I have it solved we tried forcing demand gen into demand capture businesses and wasted so much money over the years convinced that we needed a funnel we needed a customer Avatar and an advertising and this and that and like nobody went look nobody was going to go get interrupted by a Facebook ad and buy this product so there there was some um entrepreneurial overzealousness that if I could go back in time and shake myself I'd say hey buddy it's cool that you want it to work that way this is how consumers approach this product category and you can't make them want it they want it when they do and they're going to go look for it and it's going to cost you a bajillion dollars on Facebook to convince them otherwise just stop trying I think I can think of one of the brands you're thinking of here and one of the funny things about that is that one of the problems is a value to weight ratio problem actually um in in that business it's a it's like you don't have enough margin either for it to work at the aovs that they have if it's just inbound search it totally works um you know so and I think in that respect it kind of comes back to this same thing which is this idea of shipping the thing to the to the customer is a big part of the deal um okay let's let's talk about I I mean and I think you know when you brought me in you you know was to help you guys develop a muscle that you had a decent muscle app but wanted a better one and uh and it was specifically because you had added demand gen businesses where you're like Hey we're really good at the demand capture side we probably need a little bit of thinking about how we scale up the demand gen side with Facebook ads can you help us do that and so we just we work through that and I I would say that's a good that's that's a good illustration of your point which is that those businesses functioned so different you actually needed to develop new let me put a fin point on it we thought we had a demand gen business and it turns out we had a demand capture business that was experiencing multiple years of of covid and postco one-time demand Spike and we're still now realizing how one time it truly was uh and now it's solidly in the demand capture camp in in my brain uh but even when we first started working together we still kind of thought that that business was demandable and it really really really isn't uh that we're we're fully out of that that cycle of like one time consumer demand you are the last aggregator standing the last holding company standing not quite exactly um but I you're part of the reason I think this thing can work I there there's others out there Zach stucks doing it somewhere um like you know I can't tell exactly what his split on Brands is but he talks about see seem like a couple of them that work um you know pattern is still out there doing stuff like you know there's there's they definitely exist y yep um so okay so you guys tell me about what you guys are great at uh I I know like part of your guys's model has been to think about specifically brands that are distressed and helping solve like solve problems for those like get a brand where the fundamentals work but maybe something went wrong and you can save it from being distressed is that is that right yeah I think what we're uh finding a nich in is rationalizing uh a business model to be sustainable so whether the business was venture-backed and no longer has funding support whether it had an unsustainable overhead structure um I think we've learned enough in the last eight years of doing this to have a really strong opinion on what a business model should look like without the um kind of blinders or rose-colored glasses that a Founder might have I'm guilty of it you're guilty of it every Rene loves their business so I don't want to call Somebody's Baby ugly but it's really easy to go cast judgment on something you're walking on on day one and there's no emotional attachments we have that that privilege of having seen and done a fair number of things and walking with freshh of eyes and many Lessons Learned to kind of cut through the noise and quickly get down to a working business model um we have been seeing a ton of distressed transactions whether it's over balance sheet oh yeah lots of them over LED balance sheets broken contribution mark models too much overhead in the ability to get working capital financing um just lots and lots of challenging situations for entrepreneurs out there and um you need a fundamentally good contribution margin model on your tnl and need a right sized balance sheet and a right sized overhead it's much easier to say than it is to do when you built a team and a culture and you're passionate about things and when that model no longer works it's a painful painful transition um but I think to answer your question is uh we can find those opportunities be a good partner to that brand um give the best possible outcome to some stakeholders and see that brand on to its future I'm extremely tempted to be labor some previous points of this conversation in relation to what you just said I will resist let go uh because I no no I want to talk about this because you have really interesting things to say about this so so when you guys see those are you guys still acquiring brands that are um that are in those in trouble like that where you guys can help okay yep okay so you guys are still adding so you have six maybe still adding um can we talk a little bit about the mechanics of that what do you guys do let's say a brand is drowning in debt um and so I mean so first of all we should just say if you are in that situation and you need to think through potentially way to happy to talk yeah yeah the email um Kelsey's email um is uhis really hard to guess Kelsey 365 DH holdings.com but it's in it's in the show notes here so if you if you didn't catch that and you don't know how to spell KC that's fine um you can uh you can you can go check out his email there or um follow on X which which we'll do in DM him but the um uh but but yeah let's can we talk a little bit about sort of how you guys go about actually doing that um where's the best place to start best place to start is understanding your balance sheet and that's a comprehensive view of what you have cash inventory and receivables what you owe payables debt working capital financing and contingent liability that's unshipped customer orders that's gift card liabilities uh I've seen like a variety of like brand obligations that um don't show up on a standard maybe balance sheet when your QuickBooks gets produced but is a future liability of the company to do something or promis to a customer or otherwise uh that's really an operational concern of if this brand is going to exist we need to make good on this future promise and it's need to be financially Quantified in liabilities to the business so first is like getting all that information out uh and in order and second is kind of rationalized understanding in today's 2025 q1 environment what are lenders doing what are buyers doing we have all this uncertainty with tariffs uh we have a bunch of lenders that exited the scene over the last 12 months uh valuations are not super great right now um getting kind of sober about the realities of what the business is worth today often times is not necessarily maybe what's owed and as a Founder uh your obligation is to figure out the best path forward that could be your fiduciary duty to your board your fiduciary duty to yourself fiduciary duty to your lenders uh and if your employees and your morals and what is the right thing to do for your customers and this business that you built and if you're in a tough situation you might need to make some unpleasant decisions about what's your Staffing look like is it time to transact the business uh do we need to get out of product lines do we need to massively change the organizational structure in terms of overhead uh do we need to refund and cancel some customer and products we can't fulfill uh we need to change our expectations about evaluation on the business there a lot of things that are going to happen in those conversations um what do you think people like like why do you like I uh You' mentioned like maybe needing to let some people go change some things like do you think do you think people get into that situation because they aren't clear on the financials that make their business work in the first place usually like like you mentioned like needed a right siiz contribution margin for example like create essentially a contribution margin profile in the business that is workable like that's that's the idea right so so net of variable costs net of AD spend there is some way in which this business Works before you talk about fixed costs in the business and operating leverage and all that stuff okay so that makes sense to me right the idea that you would need to have some kind of model for that when people don't have that though or when they have too many employees or um or when they have a product that isn't working do you generally think it's because people simply aren't clear enough on on what they should be doing in the first place or do you think it's because they took a swing and they missed do you know what I'm saying like yeah um some of both uh I do think that the level of financial sophistication needed in 20125 to run an e-commerce balance sheet is pretty high um vendor deposits unshipped customer you have this giant working capital Gap that could spend we have a business that working capital might stretch 120 days in either direction between deposit on one side and customer shipped orders on the other uh most e-commerce brands are recognizing revenue on order date not on ship date per cruel accounting it should be ship date so if we really go to that extreme uh you get have months between outlaying cash and recognizing revenue on an cruel basis um it's just really easy to let bills get piled up and to move money around and you get a cash advance offer and this and that uh I think the answer is both I I I really do I think there's a lot of sophistication needed that maybe people aren't equipped for uh their adviser may or may not be giving them the best financials needed to make those decisions and even if you have them I don't know that kelia four years ago would have known what to do like we've just we've had some bumps ourselves we've helped a lot of other people we've done transactions like I've learned this on the job there's no textbook there's no college class or podcast where I pick this up it's just almost a decade now of experience um it's hard it's not a simple straightforward business model um and things will change a tariff Bill hits your desk and you realize you've ordered all the product and your dynamics of your pricing needs to change yesterday and you're running ads and like it's it's challenging for sure you literally just called it a business model point point for Andrew point for Andrew okay uh but let me Del on that when I I've said a lot of times and and been public about just how bad of a c CEO I was at 4x400 I when I try to answer this question for myself it is exactly what you just said which is like both it is pretty hard and also I was not clear enough I even I was trying to be pretty clear I was not clear enough on what makes I did not have enough of a model in my mind of what would make these businesses work and what makes a really good e-commerce business and I like I just didn't I didn't have a way to think I wasn't thinking through that with any anywhere near the clarity so we got know a lot of um problems and some of that was also because of the holding company model and and just like the reality of different businesses have different advantages and disadvantages and and a lot of a lot of aggregators find themselves in the place where one opportunity just is much higher than the other ones and so they focus there and that's kind of normal but um but also like a lot of the mistakes that a lot of the trouble we got in was just because I was not clear enough on those kinds of things and so we we I just ended up driving the the boat like into some Rough Waters because of some bad decisions that I just wasn't clear enough about and I think it's where like listening to you talk about is really helpful so maybe that's another go ahead go ahead I I think you want to get clear on uh the aggregator portfolio model that you do have a portfolio and outcomes will vary and so you need to take some level of founder passion off the table and start to follow the numbers because like it's you want them all to win but they're not all going to it's just it's definitionally going to happen um much like we've tried to group by business model is it a demand capture business or demand creation business uh what is it go to market strategy uh we've tried to also in our heads as Founders and people running the day-to-day of the business uh really really get comfortable with the differences in the cash conversion cycles and the differences in the EB and flow of how these businesses just run operationally could be seasonal uh could be the cash conversion cycle um could be just the the demand on the team as far as overhead is it more of a steady state business or is it more of what we're always building always kind of creating new things uh and getting clear on that and really having a bird's eye view of it from a strategic view is incredibly helpful inside of one business I think that happens at like the product portfolio level like if you have 10 SKS or 10 different categories of skes inside of them you basically have the same exercise of like what are my cash cows what are the ones that great LTV what are the ones I'm acquiring customers on you're kind of playing 3D chess all the time trying to look at your business from different angles to figure out the next best step forward in your plan okay I think you can help people I think if people are struggling um and are thinking about what they need to do next and they there is a gap between Kelsey of four years ago or Andrew 4400 and Kelsey today and hopefully myself today there no there's no super hard like sales pitch we talk to lots of people we can help lots of people we can't help uh I had a transaction I thought we were going to pursue a couple weeks ago they got a super good cash off I'm like hey you should go take that that's much better than what we can do for you I'm happy just to have kind of entrepreneur to entrepreneur conversation if it leads to a deal or something great if I can just be helpful uh I think that there's a lot of um challenges out there uh I'd be particularly weary of what you have guaranteed personally and what is a corporate debt if you're a Founder just be aware of like what you're on the hook for and what you're not uh some things that catch people by surprise is all the trust taxes so sales tax collection payroll taxes uh statutory things like wages payable vcation time uh 401k plan contributions there's a lot of things that you can be on the hook for and have personal liability so if you are not sure where you stand financially I'd get really really clear on what your obligations are so that you know what your own risk is in a transaction or in a business trouble spot yeah I think that's a perfect lead into the idea just reach out to Kelsey about that I think like I think that's a a good call and I'm not a lawyer but like yeah this is the exact point right which is like you know the idea that you've sort of picked up a bunch of knowledge along the way and now you can speak to a lot of those things with Clarity because you've got that sort of hard one wisdom as you've probably made mistakes on all those things that you just talked about as I have literally at list yes yeah right exactly yeah um okay awesome um someday Kelsey we will have to do a podcast about uh something you told me about a long time ago that I've never really heard the full story about maybe it'll never become public about some trouble spot you guys got into that uh that was a challenge so I don't know if that'll ever become public or not but someday at the very least you and I will have to talk about it at ECF live this year so give me a rain check it will be discussed to DCF live and give me a rain check we we'll record it okay great um all right so reach out to Kelsey uh all the information for that is in the show notes Kelsey thanks for your time man I I I think this was this was everything I hoped this conversation would be which I actually think is a really um useful we decided then it's not a business model or we we aligned there it's a no I won when you called it a business model two minutes ago you gave me like three points in the whole conversation I gave you one I think I I think that that merits uh all right if you call if yeah we'll call it a draw and next time we'll settle this like men that sounds good all right thanks Kelsey appreciate you man if you like that episode as much as I enjoyed recording it I love that conversation with Kelsey you should subscribe wherever you're watching or listening I've got all kinds of great stuff like this all the time a mix of sort of higher level p&l uh Financial thinking like this mixed with really highly tactical stuff it's actionable today right now in your business try to do a real mix of both go subscribe wherever you're watching or listening to this and also subscribe sub to my newsletter which you can do at hf.com just drop your email address in the popup or the footer there you will get that it's once a week one highly tactical insight and then a couple links out to anything else I'm doing here and there but I'm not going to spam you it's one email a week that's that you can follow up with everything else I'm doing at AJF growth.com and email me at podcast ajg.com or follow me on X andrewj Ferris thanks so much for watching or listening I will talk to you next time [Music]