Ignoring This Is The #1 Way DTC Businesses Fail transcript

I'm going to tell you on this episode about what I believe is truly my greatest accomplishment in e-commerce my growth marketing biggest win I spent 10 years in e-commerce I'm going to tell you about the biggest success that I have ever had and that is with a company that I was running when I was a CEO 4400 one of our Brands and when I was a CEO of 4x400 we had up to six brands in our portfolio at a time we exited a couple of those and this is one of the ones that we exited okay and so as I start telling you this story you're are not going to believe me that this is my greatest accomplishment or you're going to think boy that is a pretty poor greatest accomplishment for 10 years of work okay but that's the point I'm spoiling it in advance I'm telling you it's not going to sound that impressive but I'm going to tell you why actually it's really really impressive okay the company was doing about six million in Revenue at its peak um and we did that at about a 5% bottom line now um you will hear that immediately I know I know especially if you've listened to me or watched me for a while right you are like that is really not that great I don't know why you're bragging about this whatever especially when I tell you more about the brand okay the brand had a good and effective product the product worked well okay customers liked it they got consistently got good reviews really didn't have any negative bad reviews whatever um a in and N Community it was a strong brand um and had deep authenticity there we had um a great influencer in the space who's on our cap table like a really crucial person in that Community um and he he was really a great partner he was really helpful he let us um you know he was he was very helpful in letting us utilize him in a lot of different ways um it was cpg so was a refillable product we uh got up to over $2 million in meta ad spend without a two and a half Rass um you know in a year something like that I don't know if that's exact number but it's somewhere in that range uh two and a half Ras on click over a couple million in spend per year and consistently we're achieving 20 25% annual growth okay on the business so uh when we exited that business um I don't remember what the total exit number was for because there's a few details with it uh unrelated but we exited that business not for some huge number okay um in fact forget even the exit number there was no the point is there was no crazy valuation in the business outside of the numbers that I am telling you right there uh so so why is a $6 million brand at a 5% bottom line my greatest achievement because of the thing that you need to understand for you to understand what is actually happening in your business and the thing that you are building okay um so like I think that if you understand the financials of this business and of your own business and you start to think about what makes a good e-commerce brand then it will make some more sense to you why that actually in my view was sort of an incredible accomplishment okay and it's because almost nothing about this brand actually worked very well economically for d2c and I didn't see that at the time as clearly as I could have I I sort of saw this a little bit and so did Taylor and other people I was working with to some degree but we we were just so stuck in our DDC world we hadn't really fully flushed out our sense of what makes a good d2c brand and if your business is struggling in some way it's possible that has nothing to do with your tactics and everything to do with something more fundamental in your brand we were constantly going back and forth in this brand working through what do we do to make it bigger and better and how what can we do tactically to solve these problems when in fact what we needed to do was address the whole model and what I want to get out in the show and use this this brand as an example um but but also just to think a little bit more broadly what I want to get at here today is to help you think through this question of where the leverage points in your DDC business are because if you can do that effectively then you will be able to um have a much better idea of of uh what you should be doing next in your business whether that's effting a certain area of it spending more money on ads spending less money on ads or heck shutting the business down altogether maybe starting a certain DTC business I don't know um but there's large scale strategic decisions you can make if you understand what makes a good e-commerce business and how it applies to your business okay and that's true at any stage of your business um so let me tell you a little bit more about this brand Okay the reason the reasons why um this I think was such a good accomplishment uh and this I think will help you think through your p&l by the way this gets this ladds back to something that I generally call p&l Design um with a hat tip to Taylor holiday and some of the stuff that he's put out on this same thing uh we use slightly different language for a few different points but are in basic agreement here um and I'll refer to more of his stuff in a little bit but the basic concept here is thinking through your total p&l not as something that was handed down from on high to you but as something that you get choices um or you get to choose how you uh shape uh and and yeah you're not stuck with it okay all right so so to come back to the p&l for this brand okay the first point here is that this brand had less than 50 points of landed gross margin what do I mean by that I mean after uh accounting for cogs after accounting for packaging after accounting for merchant account fees any returns we forecasted um fulfillment costs Pick and Pack and crucially for this brand the cost of shipping the product to the customer okay for all of those things uh we were able to uh we were able to get the business uh as the best we could get the margin to was in the was in like around 50 points of landed margin okay so for every dollar we made 50 cents went out the door in variable costs and so that was where we started with okay that was the first problem that margin is probably not good enough in e-commerce okay secondly um we had about 25% in one in one year LTV despite that it was a refillable consumable product uh maybe we we just made it last too long maybe it just worked too well I don't know but like 25% one-year LTV so customers but again just me be clear about that customers were worth a dollar to US on day one okay if a customer's worth a dollar to US on day one they were worth an additional 25 cents to us over the course of the next year okay no matter how many tactical things we did there and then third we were not very clear on what our Opex was in the business and this is partly related to the aggregator model that we were working within the holding company model it was also like I mean there's just a whole bunch of mistaken assumptions in the early stages of that business but we we just weren't very clear in what the overhead was that the accounting was tricky and for a couple of ways again because the aggregator model shared services model some those things and then also I I think it just wasn't that lean of a business in general even if we were clear on the numbers uh we just weren't we just weren't that lean um which again I'll come back to in a little bit and so now what you have is a business that is low margin for D Toc that is low LTV and that is relatively high or at least unclear Opex and what I just described to you is a quagmire of difficulty in eCommerce business that is so so difficult to get out from under because what it really reflects is that for me as an operator I'm going to take full responsibility for this because it was ultimately something that fell on me I should not have been even thinking about tactical ways to make that brand better that brand is Dead on Arrival in D Toc unless there is something else somewhere out there that makes it incredible like for example if there was a huge volume of organic new customer acquisition that could happen in that business okay then maybe it would work right because then you would be able to have your ad spend be really low as a percentage of Revenue and now you can create a big bottom line and an opportunity for growth but that wasn't the case okay or um or something like and I'm actually walk through a few more of these things like this because I want you to be thinking about the p&l of your business as you watch or listen to this so that you can think through like okay where is their actual opportunity to uh for a real growth mechanism here okay so um so uh so that is uh that is the basic structure of the business and that is why getting it to even $6 million to me in retrospect is actually an incredible accomplishment we had to run at a very high Rass we had very little LTV that meant that growth is really hard um and so immediately growth is difficult even if you're even if you're doing well on on your ads okay uh growth is really really difficult at that point and you're constantly shelling out cash to buy inventory because and now also because it's it's lower margin you just we just never had a bunch of bottom line uh dollars to go plunge back into inventory so cash management was really difficult like all of these elements of it were just really tough and we weren't creating any leverage on the overhead side of the business so so what I'm describing to you is a bad business is a bad DTC business and there's so much that uh happens in e-commerce because people have done a really bad job of opportunity selection they've started to apply Force to their business uh and by force I mean their effort and money okay to their business and yet they have not realized that in fact there is a fundamental problem in the business which is that no matter how much force you apply the thing you're trying to move is really heavy and this is where the concept of Leverage is really helpful what you need to be looking for in your business is where is where is it that I can apply force and the thing is actually move and no matter how heavy the thing is it moves really easily that's the idea of Leverage right that Force gets multiplied as I apply it uniquely and if you understand where that is in your business then you can then you can uh build your business in a way that creates really massive outcomes for yourself okay if it turns out that you look around your business and there is nowhere to create that kind of Leverage then you are going to have all kinds of problems doing anything really effectively so let me break down to you and and the way that the way to think about this is to think about it at the level of of the p&l okay and and this sort of gets into something that I think people talk about sometimes which is is D Toc a business model um or is it a sales Channel sometimes people kind of have this debate and I think it's helpful to think about DDC as a business model as a full model because if you can think about what makes D Toc a potentially good model or you know I guess this sort of conflates it but what makes D Toc a good sales Channel it helps you take a step back into what makes it potentially a good business model okay if you are serious about speaking to your customers where they are at all the way through your funnel with great messaging if landing pages are an important part of your strategy you should be considering format which is way more than landing page software you go to formont commerce.com to use the software that I think is the best best uh software and service and it really is both software and service for generating creative funnels ad creative funnels at scale for a brand that is serious about speaking to a lot of different customers in a lot of different ways here's what I mean if you're running ads where you're trying to talk to five different kinds of customers who have five different kinds of relationships to your product you really have a hard time doing that and sending all of that traffic and all those ads to the same Central pdps you got to get better at messaging customers all the way through the funnel and format is the best tool of which I'm aware to do that so on the technical end of things Vermont's amazing the actual landing page software first of all goes Way Beyond landing pages it is it is landing pages but it's also custom pdps so you can go straight from landing page to PDP you can of course change the offers and build custom offers incredibly easily on through those pages and it's a custom cart so you can do custom upsells for each funnel as well because customers relate to your products differently and like I said on a technical level it's amazing as well it's the fastest load Pages I've ever seen of any kind for landing pages like it is just unbelievable how quick your customer's experience will be getting from the ad to the landing page and then all the way through the rest of the funnel on top of that it's actually a service as well so um Vermont isn't just giving you great tools and then telling you hey go make use of them they actually provide you with an account manager who holds your hand through the process to help you build out funnels uh make full use of the tool get you access to all the tests they've already run across lots of of other brands so that you can know what the best offers and um formats and styles the test are so that you can uh be on the right foot when you start so uh so go check out fromont commerce.com fromont commerce.com to get started today it really is an incredible tool I'm using it with um one of my clients looking into it for another one right now with the one client I've used it with so far we've had a 50% spend increase since the moment we started doing it it really is great go check it out and the way you do that is by thinking about the p&l okay so um Taylor holiday has this concept of four quarter accounting I think that's a really helpful idea um basically the idea is you break your p&l into four pieces okay that would be your gross margin which is all your variable cost it's what I was referencing that 50% number earlier that's every cost associated with um basically from the swipe of the credit card through getting the customer to the product okay okay secondly there's your marketing and advertising cost CAC okay so there's cogs CAC and then the third one is Opex which is all the fixed costs in your business uh overhead right that's that's you think about it so um those things and then the fourth quarter on your p&l is profit so what's left over after you've paid for all three of those things if you think about those things it's really really helpful and um you can sort of think of if you you should by the way be breaking your p&l into those four component parts okay um if you can do that it'll it'll really help you see things clearly then all you know the Sub sub sections within each of those and the line items within each of those so gross margin so cogs uh again think landed cogs here it means including getting the product to the customer variable costs including uh that is all in cogs um CAC marketing advertising costs Opex that's your fixed costs that's people um places right if you've got an office something like that and software typically those the main ones and then profit okay so you should be breaking it down to those four things and what I want to do now is walk through each of those and tell you where there is potential leverage and how to create leverage because that is the crucial uh thing for you to know and understand in your business okay so think first about cogs okay I'm going to start with a Target you should be probably thinking about getting cogs over uh uh or or getting your cogs under 40% of your Revenue okay so that is you have 60 points of landed margin if you have that you're probably decent okay solid okay if you have above 65 points of margin so cogs at 35 points are under you're in a pretty good spot again landed cogs all the way to the customers you're in a pretty good spot if you have over 70 points of margin you're great you have now the the makings of a massive advantage and that is a true leverage point in your business this is one way and I've seen brands do this one way Brands create a whole bunch of margin and this is the place where I think maybe people are most under optimized in the entire of e-commerce I'm just amazed like there's a bunch of stuff that goes into this part of your p&l right I mean you might think first in terms of just like cost of goods sold you know that's your product costs um Merchant fees right that the 3% you pay to the credit card company basically the customer returns your shipping costs your Pick and Pack your 3pl fees and you just kind of break it down to those five areas and it's like okay great that's that's all of the costs in the business okay um except if you actually do that you can break these down way deeper than that and I like for example if you take your cogs and you actually split it out into um product including different products having different cogs right different manufacturers packaging um the box that you're packaging goes in which sometimes two different things right um actually sometimes there's a breakdown for each of those between the sort of manufacturing costs but also the raw materials which can be separate and you can work with your manufacturer on getting those prices down you can redesign your product um so that also um you use different materials right Etc so so that's where materials and Manufacturing are actually different things inbound Freight right because somebody let's say you're Manufacturing in China you got to get the product from China to the US there's like obvious ones there which is Air Freight versus ocean Freight but there's a bunch of other little tricks you can do in the midst of that as well warehousing fees like if your product is bigger um you know it's it's not just like your 3pl fee or whatever but if it's bigger and it's moving slower you're gonna have to pay in warehousing fees a little bit more um and so on right order processing Pick and Pack um there's just there's just a million and this is before you talk about Freight to the customer right there's a lot of different ways to do that what about redesigning your packaging so that it fits into a smaller box like that can be a whole area so there's all of these little places in your business where you can chip away at this margin and it is time worth spending man because if you can actually create more margin and less variable cost with every product that you sell that is the fastest most amazing way not necessarily the fastest but it's one of the most powerful ways to create leverage in your business because now your advertising efforts all those things are exactly the same it's the same number of people working on the problem but every time you sell a product you make more money and that is leverage um and again if you can get above 40 points of margin you got probably somewhere to start it's probably not true uh above uh excuse me above 60 points of margin it's it's probably not true leverage yet but it's at least like a solid start okay you probably look for a leverage in other parts of your business um but it's probably a solid start if you can get above above 70 points of margin you can really fly and I I've seen this happen for a lot of different brands like one brand I was working with a long time ago um they came and said like they were working with an agency and I you know when I was working sort of sort of working with the agency at that point I was starting to head over to 4400 but anyway it doesn't matter they came and they said like hey we need to make our advertising performance better and uh I remember somebody at the agency looked at their business and said actually you don't really need to make your advertising performance better you only think that and this was the mistake I was making on the brand I was telling you about earlier we didn't need to make our advertising performance better our advertising performance was already good okay in this particular brand they needed to redesign their product from the ground up because they were never going to win at any scale because they had like 40 points of margin or something like that gross margin to start and it just they just were always going to be behind the aall you you cannot scale the business out a 3 to one it's not going to work no I mean again there's exceptions to this right there's there's some ways to do this um but the the that is only a strategic decision based on Leverage points let me give you an example simple modern who has talked about this one of things I think is so brilliant about that business is that they actually have a very low margin for D Toc uh again they've been public about this I've talked about it before but I think it's something like 35 points of margin okay before they pay a single Dollar in ads so it's very very low right 65 points of COG so you say how does that business even work well that was a not a d2c business to start they did not power their growth on Facebook ads what they realized at the time uh early on was that price was strategy and so they built their price to win not on DDC but on Amazon where price was really competitive and they could also go to market with a bunch of different colors that other people weren't doing because they built their business for Amazon first for them The Leverage point was organic search volume on Amazon right they knew that they could win by um not that they don't pay any money on Amazon ads but they knew they could win by winning the listing game on Amazon and the thing they could they could uh they could use as leverage in their business was the fact that Amazon controls half of all e-commerce spending in the US or whatever the number is right and there's a lot of people searching for water bottles on Amazon and even though it's a highly competitive category they could out compete their comp their the other competitors in that space by pricing more aggressively than the rest of them and win by being an Amazon first and tailoring their business to maximize that strategy they didn't have to maintain a price point to keep their you know um REI sales in a good spot or Walmart sales or Target sales or whatever they weren't they weren't building for Target and Walmart at least primarily now eventually they did that as well but they started by by winning in that particular category and so that's like the leverage strategic thinking B and and think about your cogs in relation to the the strategy that I'm talking about here and I talked about it in a couple places in this episode but you absolutely should be working with my friends at more Staffing if you're growing an e-commerce business as I said the Philippines is 180 million people in it there are incredibly talented people there who will work on your business uh and who will bring incredible skill sets to your business not just as like virtual assistant $5 an hour don't think that way about hiring in the Philippines think instead about finding incredible virtual professionals who will work across your business at like manager director even executive level roles I have been so helped my business would be nowhere near where it is right now if it wasn't for my partnership with my friends at more Staffing who are the best people to do this they have they have like really helped me staff out my business with high quality killer contributors across the business and they I've seen it I've seen them do it for many more um the the opportunity is simple you get to pay top dollar in a local market for the best possible talent that top dollar is still less than the same amount you would pay for that significantly less same for that talent in the US the the employee wins you win you attract the best talent possible and your business gets better while creating leverage in your p&l go to more staff. moraing the links in the show notes to get started today they will help you um identify recruit train onboard coach that talent and they'll even give you a one-year guarantee so if there's somebody who comes to your business and doesn't work out uh and you have to let them go within a year they will replace that person for you at no additional cost go to Mor staffing.com we think we need better advertising performance they didn't need that they needed to go redesign their product they still were going to stay D Toc but they realized that they were never going to win D Toc and to their credit they did this they were never going to win D Toc if they maintain if they had the kind of margin that they had initially and so they went and redesigned the entire product to go create 30 more points of margin they changed their materials changed their manufacturing whatever and ended up being still a really good product that didn't sacrifice quality they just realize that when they first built the product they hadn't done all that and that's normal right like when you first go to market you don't have every problems solve you have to solve these problems along the way and so there was an opportunity for them to do that and that created a bunch more value in the business and eventually they actually had a really really great outcome in their business because they created margin and then they worked on all the advertising things Etc alongside it so um so along the way it was a really um really valuable uh thing for them to go to get their to get clarity around where the actual problem was in their business I'll just tell you straight up the brand that I referenced at the very top of the show right the very beginning the the number one mistake I made the reason that they the outcome was only what it was was actually that while it uh was actually that it should never have been a d2c business what I what I described there is a business that was not fit for D Toc as I said before and therefore in one sense it's my greatest accomplishment in another sense it is actually um a mark of how bad of a leader I was at the time and of a real mistake I made we should have been because so much of the cost in this business was shipping the product to the customer was a heavy product shipping to the customer was really expensive even if we charged for shipping we took a loss on it because we could only charge so much for shipping before it killed conversion we could only put the price so high before it killed conversion Etc we were just never going to get out from under that and as much as we tried to use Consolidated carriers and all these kinds of things it just didn't work we had instead um what we should have done instead was say you know what actually shipping to a retail partner on a pallet is much cheaper per unit sold than it is shipping D Toc and we should think about our d2c as only one part of something but the real expansion in this category should be for us something that we are doing uh via retail via brick and mortar retail and that should have been the business we were trying to build it was just never set up to be a DDC business because it was never going to get out from this core thing what is DDC it is direct consumer it's shipping a product to a customer so your shipping costs are Central to the model and if I had realized that and thought about it at the time I would have said wait a minute this is never going to be something we're going to get out from under it's just not going to happen and therefore uh and therefore we are going to lose if we keep trying to play the game this way we need to play the game differently okay so there's a lot of different stuff you can do here um now the supply on the supply chain side and it's really hard for me to say generally where the opportunity is for you sometimes people are shipping one PL they really should be shipping three PL I work with the brand recently they got five points of margin back plus by going to a 3pl and then after they got to the 3pl uh and there's like a whole bunch of Cold Storage issues with this particular brand and so getting the right 3pl was really hard um you know there's a lot of customization with each order so that made it tricky as well changing products all the time that made it tricky as well but they found a 3pl partner they worked really hard on it got a bunch of margin back doing that and then opened up a second distribution center with that same 3pl somewhere across the country so they were not shipping to zone six and zone seven and zone eight as much uh and that also was a huge cost savers for them and that added probably another few points of margin and so they did a whole bunch of work put in a whole bunch of effort to go solve those problems okay so again it may be different for you in where your where your business could create additional leverage in this part of the business is but understanding deeply that your number needs to get to a certain point for it to work is really crucial so if you're at 50 points of margin right now you need to ask yourself the question is this something that can get to 60 to 70 points of margin I I mean that would be crazy to go from 50 to 70 but it's not impossible um for you for for some businesses so can you actually do that I'm convinced supply chain is the most under optimized part of your business um uh it's the most under optimized part of a lot of businesses because people just haven't taken the time to go attack it the way they should um and and because it's hard it's not obvious how to do it okay so uh so there's that okay so there's a lot of different areas again I can't speak in generalities to what you should be doing what you should really probably be doing is bringing somebody in um who can be helpful to you thinking through this issue um you know talked to matab Bogle on this show they take minority investments in businesses and then they help them solve some of these problems by just shopping for more manufacturers um my friends at more Staffing and more supply chain their companies there's an ad for them in this episode like they are incredible sply chain experts like I told them at one point that uh for a brand I was working on with them um you know they they started they started an engagement with that brand they talked to 50 manufacturers in the first week of an engagement I it's crazy um so way way more manufacturers way more vendors than most people are actually shopping and that helped them find uh somebody who was a really really good partner for this business so um there's there's some ways to go but you just need to be thinking is this a possible leverage point where am I today h how how can I do better okay um all right number two CAC okay this is why I talk so much CAC marketing advertising for most Brands okay meta ads is your number one uh ad Channel okay for D Toc Brands and um and what you should be thinking about here is uh is there actually an opportunity for me to um to be gaining significantly on the CAC side of the p&l um now this really hard to say what a good CAC is in e-commerce it varies so much depending on your goals your LTV your unit economics Etc but uh but you should be thinking about CAC as a potential place for leverage okay so um so the first thing to point out here is that if if it's true that meta ads is your first or second biggest line item in your business and for many businesses it is it's that big of a cost in your business it is crucial that you build financially based targets that you run cost controls and that you eliminate creative testing campaigns I won't even rehash all of those because I talk about them so much but those elements of good media buying in 2024 and Beyond right um I'm recording in 2024 I imagine they will continue to be important parts of it in the near future here um those elements of running a meta ads account at this point to me are just non-negotiables like it just like there's just so much money that gets wasted on Creative testing on um on uh on poor management of ads on not scaling when you can scale and not suppressing when you should suppress there's um so much money wasted because people aren't really clear on how their unit economics play into their row ass targets and their CA targets Etc and it's time to get serious about those things because it is such a big cost in your business okay so you have to go do those things but there is a second leverage Point here let's mention two of them okay um one of them is perhaps for you organic volume is part of how you create leverage okay I had Isaac mados on this podcast a long time ago they were doing like $10 million in Revenue with Zer ND spend for his store mini Katana um by just creating like absurd amounts of YouTube views and Tik Tok views and things like that and so uh for them their leverage point was was organic demand creation okay uh and that is a leverage point in the business if you can make the meta ads cost on your p&l go to zero then that's a serious leverage point if you have a particular skill around generating organic content that gets views then yes that is a massive skill and a massive leverage point in your business okay another one though that people don't think about with advertising and marketing sometimes is LTV this is another area where um large ltvs significant ltvs is a massive leverage point in the business because what it really represents is revenue that comes in apart from ad spend and over enough time if you have a really good LTV you create um the the CAC as a percentage of your Revenue goes down and down and down and down and down and if you want to know why there are so many skincare Brands and supplement Brands it's because in skincare it's very very good um gross margin and uh well it's really like excellent gross margin and very very good LTV in supplements it's good growth margin sometimes great gross margin and incredible out of this world LTV based on subscription now again we've leaned into a place where D Toc makes tons of sense right because for something like a supplement it is the perfect way for a customer to buy the product um uh the mechanism of buying the product online and having it shipped to my house is the absolute best way to buy that product if I know for sure that I want to take my multivitamin every day then it's really easy to just set up a 30-day recurring order and have it show up in my house and I'm just going to take that for every day for however long it's great I don't have to think about it it just shows up up subscription is awesome right in that respect DC is perfect LTV goes through the roof and you've got the basis of a really basics of a really really good business it's pretty high margin extremely high LTV and you can create a huge amount of um value on your p&l if returning customer Revenue takes up a larger and larger and larger and larger percentage of the total revenue in your business okay if that happens then what that means is CAC is going to take up a smaller and smaller and smaller percentage of your total p&l and that ends up being a way that you just create more and more bottom line margin and really really good outcomes this is why these businesses are so good and so popular to start okay so LTV is a huge thing but you don't have to have best-in-class LTV for it to matter even 50 or 60 points of uh 50 50 or 60% LTV in a year so again that defined as if a customer spends a dollar with me today they spend um they spend uh 50 to 60 cents more over the course of the Year even that gets you somewhere it's pretty helpful as a starting point okay and if uh and and now again that's not true leverage on your p&l but now you're starting to talk about where like okay if you have 60 points of margin so not incredible and 50 to 60 points uh or 50 60% LTV in a year something like that decent not incredible now you've got okay a solid business that can get you somewhere and maybe it's not set up for like massive explosive growth or whatever but it can be something if you have 200 Point 200% LTV in a year and 55 points of gross margin then you can actually be somewhere there because your LTV is so strong so you don't have to have leverage everywhere but having leverage in a couple places can be really good and if you just do this math if you just build a cohort forecast for yourself at some point right if you know how to do it um and uh and think and just look at what happens over time right then you um then you can end up with CAC becoming a lower and lower percentage of your business one way I visualized this recently is by um by thinking about how uh like if you started a business from scratch and it had like basically like let's call it 60% LTV in one year um and you increase spend slowly over time okay you can really easily go from like let's say in month one uh you know your CAC is 50% of your p&l right because you like have literally no returning customers okay so whatever you whatever Revenue you get is all new customers by definition like even if you hold your spend relatively constant or even start growing your spend right within a year spending the same amount of money per month Nets out to being like like 30 to 35% um CAC as a percentage of your total p&l and it gets smaller just because returning customers come and that means that you end up creating more Revenue while CAC shrinks as the total percentage of the pie okay so um so that's a dynamic to keep in mind as you forecast your business is how CAC plays out hopefully you're spending more money over time as you're continuing to grow Etc um that's definitely what you want but um but with returning customer Revenue it's potentially a huge leverage point in the business okay so that's number two do you have an opportunity like that somewhere there um some other people by the way have massive Tam so they just have a ton of people they can reach so the CAC isn't particularly low but it scales really really fast and really really well because they just have such a huge audience other people um sometimes just have massive skill in marketing and advertising and that is a leverage point I would just say apply that leverage point to the best opportunity possible right if you have incredible marketing advertising skill um and you can also find a business that has good margin good LTV I mean that's really a real opportunity for you to take the skill you have and again create leverage against it as you apply the force of that skill to the business it it creates um a better outcome okay all right lastly Opex okay fixed costs in the business um this is another thing that I think is really crucial and people need to understand this um one of the things that makes DDC work as a model is that you can run it really really lean um here's a way of thinking about this how much does it cost for you to design one email and the answer to the question is the same amount as it cost you to design that email whether you send it to a thousand people or a million people and that basic Dynamic okay that the cost of Designing the email shrinks as a percentage of the revenue that it creates okay that basic Dynamic is in place for lots and lots of e-commerce you can run incredibly lean e-commerce businesses I remember hearing an interview with the um CEO of butcherbox who was saying they were like two or three million do in Revenue ahead in their company I think yeah I think it was like three because it was like it was like 160 employees for $500 million business or something like that so somewhere in that range right so roughly $3 million ahead um that is the opposite of software business right the software business scales because the unit economics scales so well but you need developers okay and I I don't know I mean I guess software software businesses also um have some scale against their Opex but it's just uh it's certainly the opposite of a service business it just you're you're always going to have to some degree a huge cost of Opex in your service business as a percentage of your uh that is your unit economics it's a percentage of your Revenue it's going to be the case but in e-commerce this is the thing that can shrink the most as your business grows and you should be relentlessly focused on staying lean as you grow and that is actually the key here okay um is that by staying focused on the next best opportunity next in your business you can do a great job of making sure that even as your business grows you don't get fat and if you can avoid that you could do really well this is also the case for hiring overseas Talent if you're already distributed Workforce for your business why not go look all over the world for the best talent you can at the best possible price and see what opportunities are there the Philippines who I talk about a lot uh where I'm working with in my business right has 180 million people there's really talented people in the Philippines where you can pay Top Mark top dollars in the market um for somebody so you attract the best talent in the Market at the same time it's less than paying that same person in the US everybody wins in that case okay so um so there's all of these opportunities both you and the employee both win there there's all these opportunities to think that way about your business there's also little things to do here like audit your software costs resist solving proc process problems with people that's another thing right like um having discipline about your hiring um there's a lot of stuff that I could say about about how to do this but the key is to recognize that Opex should be low as a percentage of of your Revenue the the simple heris here is you want to get below 15% if you can get 10% or less that's like Best in Class okay um if you can if you can have those numbers you can be in really good shape again creates a really big leverage point in your p&l and it's something that it's core to DDC in general and ought to be core to your business okay so I hope what I've done in this episode has helped you think through every element of your p&l and start to think less about it's something given to me and more about something that I've designed that I have the opportunity to pursue some of you may hear about this and go like wait a minute I don't have very good margin um I can't create that much revenue which makes it really hard for me to scale revenue and keep Opex low as a percentage of Revenue uh my LTV isn't particularly good um Etc wait why am I doing this business and that if that's the outcome for you then fine that's like the reality uh you you need to think about that outcome and decide what do you do next do you try and find a leverage point or do you decide to pursue a different opportunity like who knows okay um there's a lot of different things you could do with this or maybe you think I need to go hammer away at different parts of my business to create the leverage point or maybe you need to just more aggressively invest in the opportunity that you're pursuing because you already have the leverage point you just didn't realize it all right um but whatever it is I want you to think about your p&l something you designed not something that's given to you and then go attack the areas with the most Force possible um where you can create the biggest opportunities for yourself thanks so much for watching or listening I hope you will subscribe wherever you are doing that I've got a few more solo episodes coming up soon then I have a run of interviews that are going to be great including a couple interviews talking about people who have had success on Tik Tok shops um as well as some early thoughts on YouTube shops I think that's going to be really interesting that's a really hot topic right now that I haven't dove into as much but I've got Jordan West coming um uh who's built his changed his whole agency from being meta ads Focus to Tik Tok shops and other shops Focus which I think is fascinating and I've got Paul I actually don't know how to say his last name uh but Paul from BK Beauty uh big Tik Tok shops brand they're both coming soon which I think is going to be great I also have Aaron oror coming soon and um yeah a whole bunch of good episodes so definitely make sure you subscribe wherever you're watching or listening today um if you like to email me I would love to hear from you you can do that at podcast ajg.com you can also reach out to me on Twitter at andrewj Ferris I would love any conversation to be public so other people can weigh in as well make sure to tag me with any thoughts thanks so much for watching listening I'll see you next time time [Music]