Podcast: How Elite DTC Brands Measure Marketing Performance

Episode Summary

In this episode of the Free to Grow CFO Podcast, host Jon Blair, founder of Free to Grow CFO, engages in a comprehensive discussion with Ryan Rouse, advisor for growing consumer brands and co-founder of Factor and former CEO of Highkey. They dive into strategies for scaling direct-to-consumer (DTC) brands with a focus on balancing marketing efficiency, growth, profitability, and cash flow. Ryan shares insights from his entrepreneurial journey, highlighting the importance of understanding unit economics, contribution margins, and the realities of scaling a business sustainably. With an emphasis on profitability and cash flow, they explore the nuances of business finance, marketing measurement, and the challenges and opportunities of going omnichannel. This episode provides a deep dive into creating value in DTC brands through economic viability, offering a blend of high-level strategy and practical, actionable advice.

Meet Ryan Rouse

Ryan Rouse is a growth advisor to consumer businesses with a focus on every line of the P&L. He was previously, Co-Founder at Factor Meals (acquired) and CEO at Highkey.

Episode Transcript

00:00 Welcome and Introducing Ryan Rouse

02:43 The Entrepreneurial Journey: Challenges and Learnings

05:44 The Transition from Operator to Consultant

13:37 The Importance of Understanding Your Business Model

14:13 Deep Dive into Marketing Performance and Profitability

25:21 The Nuances of Customer Acquisition and LTV

28:43 Decoding LTV and CAC: A Deep Dive

30:51 The Importance of Contribution Margin in Business

33:34 Navigating the Buzzword: Understanding Contribution Margin

34:15 The Significance of Defining Financial Terms in Your Business

42:19 The Transition to Omni-Channel: Strategies and Considerations

49:21 Final Thoughts

[00:00:00] Jon Blair: All right. What's happening, everyone. Welcome back to the Free to Grow CFO podcast, where we talk all things, scaling a DTC brand with a profit focus mindset. I'm your host, Jon Blair, founder of Free to Grow CFO. For those of you that don't know, Free to Grow is an e comm focus, outsourced accounting and finance firm.

We help scaling profit focus DTC brands scale alongside healthy profit cashflow. And confident decision making. And I gotta be honest, the conversation we're going to have today, I've been super excited preparing for we're chatting with Ryan Rouse. Some of you guys might know him as co founder of factor, former CEO of High Key, he's now a consultant for growing consumer brands.

I'm super excited for this conversation. Ryan, welcome. And thanks for joining man. 

[00:00:48] Rya Rouse: Thanks, man. Excited to be here, Jon. This will be fun. 

[00:00:50] Jon Blair: So for today's topic, I mean, here's the thing. I feel like you and I can chat about any number of things when it comes to scaling a consumer brand in the DTC context.

I've kind of got earmarked like for us to chat about this balancing act of marketing efficiency, growth, profitability, but then also cashflow. And the reason why I think you're, um, the reason I consider you an authority on this topic is because. You've got this multi dimensional background of being in the trenches as a co founder of a consumer brand, right?

Um, an operator in that brand, not just a founder, an operator of High Key, and actually you've also held several executive positions. in consumer brands as well, and also had a nice little stint in the investment world, CEO sitting on, um, as an operating partner in a PE firm in the space. And interestingly, a, in my opinion, a super talented marketer, but you can talk shop on the realities of like one, the messiness of scaling a business and two, the, the, the connection back to ultimately what matters the most.

Profitability, cashflow, building a business that actually generates value through generating economic value in the form of cashflow and profitability. And so because of all those reasons, I'm really excited to dive into this topic before we get into the weeds of chatting about some of these things. I just, I really want the audience to understand your background and your entrepreneurial journey and what's brought you to this point.

Uh, cause I think that will really help them understand the diverse perspective that you have on scaling a consumer brand. 

[00:02:43] Rya Rouse: Yeah, for sure. So, um, you know, I spent 13 years in finance. I'm four. I just turned 45 actually two days ago. So when I graduated college, entrepreneurship was not fun and sexy and new, right?

Everyone did consulting and finance and all these things. So, um, so I, I, I grew up in finance and, um, 2012, a friend of mine came to me with an idea for a business, healthy, prepared meals delivered to your door. Fairly ubiquitous. Now, it was not at the time and we certainly didn't know anything about it. So I dove into Entrepreneurship startup operating Through that lens and through that experience, you know him and I he had had the idea for this business he had done a lot of legwork in terms of Figuring out what the business was going to be and doing some branding work on the business But we hadn't launched the business yet.

So he called me bring brought me in and It was trial by fire. You know, we, we did raise a little bit of friends and family money, you know, admittedly, like institutions weren't interested in the space at the time. We could go into why I think I'm grateful for that. It made it much more challenging.

Certainly. Right. We used a lot of our own money and we used Uh, friends and family money, but we had sort of this proverbial two year convertible note open that was, you know, we were just sort of piece mailing money into it and then we were covering the rest ourselves. Um, so, so I spent five years in an operating role in a, in an early stage startup where we were underfunded the entire time and that's relevant because we couldn't really hire experienced people.

Right. So I think again, same point I'll make about. You know, the lack of ability to raise outside institutional capital is we were forced to use our own a lot of our own money. We're always short on money, and so I'm grateful for the experience. I can't tell you confidently that had we. Raised 10 million, 5 million out of the gates that I would have had the same mindset about profitability bootstrappers mentality, I guess, is the best way to put it.

I can't confidently say I would love to sit here and say, yeah, you know, had we raised a bunch of money, I still would have been very diligent and used rigor as a, as it relates to spending money. But I can't say that. I don't know that. And so. It made it more challenging for us. Uh, we were certainly, we're low on money the whole time, but on the flip side, I learned every element of the marketing tech stack myself.

I, at one point was running our ads, Facebook and Google learned SEO, learned email, learned content. Um, and that wasn't fun looking back. It sounds like it was, and I'm grateful for it, but, but you're grinding, you know, you're doing all those things yourself and you're doing it without a lot of money, right?

Um, so, uh, I left that business the day to day that business in 2017, it did go on to be acquired at the end of 2020 for almost 300 million. So an amazing outcome, but it was, it was a grind for the entirety of the five years that I was there. Um, And then since leaving the day to day I have, to your point, I've taken, I've done a lot of consulting with a lot of omnichannel consumer businesses across all different categories.

I have taken three leadership roles. One is the head of growth at a healthy baby food company called Serenity Kids. I was the CMO at a company called High Key, which is a low sugar cookie company, Omni China business, mass retail, as well as e comm, uh, spent a year as an operating partner at a private equity company that was investing in digitally native consumer businesses, helping them scale into retail.

And then most recently was the CEO of the aforementioned High Key. Uh, so I spent seven months as the CEO of High Key. So to your point, like I I'm, it's a, it's an interesting background. Right. If, if you were to go talk to a recruiter and say, Hey, what's, what is Ryan the perfect fit for? I think they might be a bit confused about what I'm the perfect fit for, but I'm grateful.

I do think, you know, at this point, as you're thinking about your career, it's sort of, in my opinion, you're trying to get a. Fully rounded perspective. And I don't think you ever get there, right? It's a dynamic game. The game of business isn't, it's not conducive to saying I know all things from all sides that that's a farce, but I feel like I've got a really good perspective and had looked at it from multiple angles, both from the operating side, the bootstrapper side, the entrepreneur side, the investing side, you know, and then different roles inside businesses.

So I've, I've, I'm. Grateful for the different lenses I've been forced to view businesses by because I just think it helps, you know, in the totality of how you view things. 

[00:07:21] Jon Blair: I love it, man. Um, we, we, you and I certainly don't have the, obviously the exact same background, but coming from the early state, like working in house at early stage, um, startups and being on the founding team and guardian bikes, a lot of very similar stories.

Almost all those companies being very underfunded the whole time and looking back the range of skills that I learned because I was originally trained as an accountant. Um, most people don't know me as an accountant today. I'm much, most people know me as an entrepreneur today, but why? Cause when you're, when you're part of founding teams, You have to have range.

Like, yeah. What did I own the finances of these companies? Absolutely. But did I get involved everywhere? Yeah, we had to, cause we didn't have enough money to hire everybody else. Right. Um, and I actually would agree with you that was it all fun? No, it was not all fun. Am I grateful for it? A million percent, right?

Like I would not have the perspective as a finance professional that I have today. If I didn't have that entrepreneurial experience, the way I like to explain it to people is that like. I was getting a PhD in what it actually takes to scale a business, right? And that's all kinds of things outside of my primary, like what I was primarily trained to do, which originally was accounting.

And so, um, it's really cool, man, because You know, when I think about the consulting world, which you and I are now both in, in this season of our lives, right? The consulting world, you and I know this from being on the operator side, I've been screwed and overcharged by every consultant you can imagine.

Marketing consultant, strategy consultant, supply chain consultant, spent tens of thousands of dollars or more and felt like I got no value. And one thing that I always tell brands that I'm talking to on sales calls is like, Hey, We're a small boutique firm. There's only about seven of us. Everyone has worked on the brand side before.

So we are not out of touch career consultants. We have been in your shoes and we actually know that there's nothing worse than a consultant giving you this plan that like, it sounds so amazing on paper, but on the other side is the operator. You're like, That's not possible. That's not practical. I can't implement that.

Like you don't, you're so out of touch with like the reality of like my actual problems. Like, can you speak into that a little bit from your perspective? Like literally your background is being an operator. How does that position you to be that much more of a valuable person? Consultant given that you know what it's like to be in the shoes of your clients.

[00:09:59] Rya Rouse: Yeah, I think it's really important. I'll take a step back and say, you know, one of the problems, one of the issues we had when we would hire the wrong person, whether that's a consultant contractor agency, full time employee is not being crystal clear on what we were looking for, what we needed in the business at the time, right?

It's very easy. I think in this world of. Of creators and LinkedIn and Twitter to follow people with large audiences and to place a large amount of credibility on them strictly for the size of their audience rather than their body of work. And so you, you go into a conversation, you're sort of so happy to just be on the phone for as, as funny as that sounds.

It's true. I'm on the phone with this person who I looked up to. They have this large audience and I just want your help. So and so. As opposed to being very, very clear on like our needs at this business, in this business at this time are right, this very clear about what we're looking for and then asking, you know, and then seeking out the solution to that.

So I think that's, it's an important takeaway is to just, I, I always, every time I'm on a call with someone is to just. Is to push back on them to make sure they know what they're looking for. Now, to your point, yeah, I think it's really, really important. It's certainly an early stage, right? What a, you know, what a fortune 100 company right now want more of like the Deloitte consultant that's looking at a full blown implementation of an ERP system or me, probably the former, but if you're talking about a sub 150 million.

Company that really wants scrappy tactics and high level strategy combined at the same time. They want that from someone that's been in the weeds in those businesses, because the challenges that have 150 million and below business faces is going to be wildly different than the Nike's of the world.

Right. So, so yeah, I think, I think it's all about the type of business and what their needs are, but certainly, um, certainly putting the reps in, in this situation. Of the company that you're going to help specific to the needs that they're trying to solve is going to be a much better solution than someone that's just never done it before.

[00:12:20] Jon Blair: Totally. I am 100 percent agree. And you know, for me, the space that we sit in, um, at Free to Grow CFO, you know, we help scaling DTC brands between about five. And about 65 million in revenue. And like that, that stage, that lower to middle market, you really need to be in touch with the actual challenges that that brand is experiencing across the business, because it is this, I mean, every stage of business is hard.

There's not a stage of business that isn't super freaking hard. Right. But like that stage of business is especially hard because you're literally The way that I like to think about it is, you know, the concept that the scientific concept of like, you know, uh, cell multiplication, right? And like that multiplying going from like one cell and splitting apart into two and then splitting apart into four.

And then it's painful. It's so painful, right? And all the while, Your business is not running the business. The operation serving your customers. That's not getting any easier. It's not getting any slower, right? And all the while you're literally building the plane while you're flying it. So anyways, I think that's super awesome.

A lot that we relate to on that level. And I think super valuable for brands in that lower to middle market that we serve. I want to turn our attention now to talking a little bit more about marketing performance. Um, as it relates to profitability, it's, um, a spot, it's, it's a con, it's a topic that I've had several interesting conversations with you on.

Um, and it's also, it's obviously front and center in the world of digitally native brands because of the challenges, the increasing challenges of scaling a digitally native brand through digital advertising and other channels. In a manner that's profitable. What are the big mistakes you're, you're seeing out there that brands are making when they're thinking about attribution and or just marketing performance measurement in general, that's maybe leading them in the wrong direction to make wrong decisions as it relates to profitable marketing.

[00:14:33] Rya Rouse: Yeah. I think the first one. You know, and, and, and this is largely changing, but you know, we're, we're on the back end of a, of a consumer bubble where, you know, for a very long time, institutional dollars, certainly venture capital wasn't coming into consumer brands. Right. And then when venture started coming in, and this is not placing blame on anyone.

This is the, the facts are 

[00:14:57] Jon Blair: venture 

[00:14:57] Rya Rouse: capital is not interested in consumer. And so consumer businesses had an, a playbook that was very old school. And I mean, old school in the best way, right? Profit first managing margin profile and understanding that self sustaining business is your path to success.

Towards optionality and optionality is your North stars of business. In my opinion, right options. The only way you have options is if you can say no to something that's presented to you and still thrive and still grow and still make it and still succeed. So for a long time, venture capital wasn't interested than they were.

And when they were, they were very, very interested, right? And so you have a lot of money flood flooding into consumer businesses. And again, I mean, it's very easy to place blame on venture capital or investors, or even on, on the bubble itself or on direct to consumer for that matter. None of those are at fault for anything that happened.

Everything is at fault for everything that happened recently, which is we lost our focus on profitability. Easy to say that obviously, but I think there's, there's a difference between, let's use one specific example. So it's not so vague, one big, big problem that arose because of that was this idea of payback period, right?

You would hear, I remember one of the first people I ever. Started learning marketing from was Ryan Dice from digital marketer when I started when we started factor And I didn't know anything about digital marketing. I found digital marketer comm which is a brilliant URL And he's a brilliant teacher and that company did a very good job of just training people who knew nothing about digital about how to think About digital you have to keep in mind that They were largely not looking at e commerce businesses, consumer businesses, direct to consumer businesses.

They were, they were thinking about services type of businesses, right? And so one thing that I remember him saying was he or she who is able and willing to pay the most to acquire a customer will win. And this is, this is, this is a truism, but it's nuanced like everything else, right? So if you take that as fact blindly without peeling back the layers of the onion, you say, Oh, I should be willing to pay as much as possible for a customer because that's how I grab market share.

The nuances there are that cashflow matters and that profitability matters. And so one huge mistake I certainly saw throughout the bubble was. People and brands and companies and operators taking that as without the nuances that matter, meaning, Oh, I should just pay a lot to acquire a customer, right?

Well, first of all, you have to know what your customer's worth in contribution, margin dollars, and when that money comes, right? So a standard LTV curve, your LTV is 800, but it takes two years to get it. Well, you first of all have to strip out all the variable costs from that. And then you have to understand that that 800 is really only 300 over two years.

Okay. You can't pay even 150 to acquire that customer if you don't get paid back for 12 months. Not in a consumer business, right? Because cash flow, as you very well know, and many who are listening to this will know, the challenge, one of the biggest challenges with consumer businesses is the cash flow element.

You have to buy inventory. You have to buy it ahead of time. You get paid. Paid late from certain customers. Right. And so your cash conversion cycles really, really critical. So, so I say all that to say like you have one of the big mistakes that I, that, that I constantly seeing being made is taking these.

Statements about things that are actually true. Like that's a true statement. He or she who's willing to pay the most to acquire a customer will win. That's how you grab market share, but not applying the nuances to their business. And in a consumer business, that's cashflow, that's inventory, that's understanding your customer unit economics.

So overall point being, you have to understand how much your customer's worth when that money's coming in and whether or not you can handle. From a cashflow perspective, paying X, Y, Z, right? X amount to acquire a customer on paper. If my customer in contribution margin dollars is worth 300, I should be able to be, or be willing to pay 150 in a silo.

But if I don't get paid back for 15 months, it's a dramatically different business model. That's not tenable rather than if I get paid back in three months, that is potentially tenable, right? So all, all of it has to be specific to your business is just take this high level sort of guardrail advice that you get, understand that even if it's true, it may not be true for your business or said differently.

You have to apply it to your business and then you really have to get into the nuances because, you know, a tweet that sounds really good and a bunch of people are, are, are commenting on it about how true that is, is only true if it's true for you. 

[00:20:08] Jon Blair: Totally. And you know what? So one side note, I don't want to get us on a tangent here cause I want to come back to several things you said there that are really important, but one of the issues with short form content is that there are only so many characters, right?

That someone of influence. can make a statement with. And I've even, you know, you know, you and I both have our own LinkedIn content. Um, and one thing I've actually started to say is make one of these general statements because it's true, but I'll say later on in my post, there's nuances here. And like my goal in this post is not to draw out all the nuances.

It's to make a statement about something true that I want to get people talking about. So, But I will be humble enough to let you know there are nuances to this. And if you want to discuss the nuances, let's take it off LinkedIn, right? Because there's just too much nuance to talk about. But I've started to do that because I don't want to mislead people because I have seen influencers out there.

I don't know if they're doing it on purpose or not. I think some of them are. Some of them are not. But I've seen influencers mislead people by making these generally true statements. And not make the a a the sub statement that like, there's nuance here, so be careful about how you use this. But that's not the goal of this short form post.

Right? That's 

[00:21:31] Rya Rouse: right. 

[00:21:31] Jon Blair: That's right. But that aside, I wanna dive into contribution margin a little bit more. Um, 'cause you brought up, you brought up a couple things that are, that I see as a fractional CFO for scaling D two C brands. I see time and time again. One is brands not operating with a financial model, right?

And so, uh, when I say financial model, I mean a projected PNL and balance sheet and cashflow statement, what we in the finance world call a three statement financial model, right? And what's important reason I'm bringing that up is because you brought up several times. Hey, yeah, profit profit, but cash flow, right?

Those things don't ever equal profit never equals cash flow It never does especially in a consumer brand that's capital intensive requires inventory investment, right? Um, but additionally You can't optimize only for unit economic or, well, I won't say unit economic. I'll say marketing tactic decisions.

You can't optimize for a single piece of that just for order level profitability. You have to run it through your model and go, can we float this cashflow wise? Like given our capital structure, how much equity cushion do we have? What debt do we have available to us? And how many days of inventory do we have to hold at any point in time?

And so something new. that I almost most of the brands that we end up encountering in our sales pipeline at Free to Grow CFO, like all 99 percent of them don't have a three statement financial model. And that tool is so foundational in being able to see, I think, I think a lot of brands, at least, If they say they have a forecast, it's usually just the P& L, the ones that we encounter.

And that added dimension of cash flow and balance sheet are like, there, you have to see all three of those dimensions. If you don't, you could optimize for something on the P& L that totally screws you up somewhere on the balance sheet or in your cash flow. And then the other thing that you mentioned, which goes along with this, is like, the timing of, Your LTV coming to reality, right?

That like, what is that period? And the reality is the way that I try to explain it to brands in simple terms is like, look, if the LTV gets paid back over a longer period of time, you need to have the cash reserves to basically operate unprofitably on that customer base for that period of time. Right?

And so if I take some of our more profitable brands. That can that, you know, maybe have 20 to 25% EBITDA margins and they're doing 50 million a year in revenue. Well, at that profitability, they have cash reserves that they can afford to not get paid back fully by a, a customer's LTV for maybe 90 to 120 days.

But if I've got a brand doing 5 million and their EBITDA is 5%, they've got very little cash reserves to operate unprofitably for even 30 days. On on a new customer, right? They literally need to generate their minimum contribution margin dollar target on order number one. Um, you know, what, what, what other, uh, what other nuances do you think about if you're sitting down with a brand?

You've kind of run through your diagnostic, right? Um, what are some of the just other areas that you talk with them about or levers that you talk to them about that they need to consider when they're thinking about how profitable they need to be on a first order versus, you know, getting paid back, um, by LTV over time?

[00:25:20] Rya Rouse: Yeah. Yeah. Let's back up to your LTV. Cause I think there's so much important stuff inside of that. And again, we'll, we'll circle back to this. Sort of very short statement that has truth to it, but is missing nuance LTV to cap, right? This, this thing that largely SaaS businesses sort of made popular and then venture came in and said, Hey, this is, we will judge your business model based on your LTV to cat fair.

Right. And what we're looking for, I literally looked this stuff up when we first started factor, right? You're in this, you're in this like information gathering mode. You're like, I literally don't know. Anything. So where am I going to find this information? Like, Oh, cool. Right. And what am I aiming for?

Three to one. Okay, perfect. Three to one. All right. Well, SAS different than this different than consumer, right? SAS going to have a large upfront fixed cost and then low variable cost over time. So an LTV to cat in general for a SAS business relative to a consumer business is going to be, should be. Is wildly different, but let's just say three to one works and you say, okay, I'm, I'm optimizing for three to one and you've seen a ton of decks in your day.

So have I, and they say our LTV to CAC is three to one. Okay. That doesn't mean anything, right? A non time bound lifetime value. Let's just dig into the mistakes of lifetime value. Cause cause to answer your question, a lot of it is around how they're viewing their business model. Right. Are they viewing it in the appropriate way?

And not that there's one way to view it, but there's certainly wrong ways to do it. So if you say our business model is sound, our LTV to CAC is three to one and period. Like that's not enough. How long does your LTV take to materialize? First of all, how are you defining LTV? LTV in a revenue basis. I view LTV from a revenue perspective as a measure of retention, not as a measure of business model sustainability, right?

If you are seeing your LTV on a per customer basis grow over time, you have good retention. There's certainly other retention metrics, but if you just had one metric and you said, hey, how are you going Judge whether or not this company has retention LTV cohorts are the way to do it to me. If you could only pick one, because you're looking at how much was the average customer in a cohort worth on their first order.

And then what were they worth at three months, six months, nine months, 12 months. And is that growing, right? Because in consumer ALV is not going to move wildly. Yes, you can do a lot of things in order to increase your ALV, but generally speaking, certainly on a consumable. But most consumer businesses, ALV is going to stay within a relatively tight band.

Therefore, you can't have a low percentage of customers making your LTV grow over time, right? There's going to have to be a good subset of customers that are adding orders regularly in order for your LTV to grow. So to me, the LTV on revenue and how much it's growing over time is a retention. Litmus test, not a business model litmus test.

So that's one. So we're talking about how do we judge, like, how are we defining LTV? LTV is a, is a gross margin number at, at worst or at best, however you want it to find that it's not revenue, right? If you're looking at the business model, you're saying our LTV at the fully loaded gross margin. So that's product cogs, fulfillment, delivery for a e com business.

How much is, how much is there are customers bring to us after all the costs associated with getting it to them before marketing. Now you put that number relative to CAC. And then that LTV number has got to be time boxed. So you say our 12 month LTV LTV is defined as lifetime value of a customer on average, from a fully loaded gross margin, gross profit perspective.

This is how much they're worth in 12 months. Over how much we pay to get them. That's a much better, right? So I would say six month LTV to CAC from LTV being gross margin fully loaded. And then our CAC, that is a more of a business model question and answer than just a, a, you know, a non time bound LTV.

That's a revenue based number over your CAC, because that doesn't give you any indication of like your margin profile of the business. You know what I mean?

[00:30:06] Jon Blair: First off. Brand founders and operators listening to this, Ryan just gave you like a mini masterclass on how to think at, in my opinion, a very sophisticated level, um, about thinking about marketing, um, measurement. Now, to be clear, I think you would agree with me, Ryan, these concepts aren't super technical.

They're not super hard to understand. It's just that what, what Ryan's breaking down here. I would say the, the upper echelon of, of marketers are thinking in this way and a lot of other people, I would say that the masses are thinking in the way that Ryan's telling you not to, in terms of like thinking about LTV at just a gross revenue basis.

Additionally, one thing that I've recently started saying, Ryan, and this is actually because it's becoming a closely held belief of mine. is that contribution margin is the real top line, right? And for us, we use slightly different terms in Free to Grow. Um, we have gross margin is just landed product cost.

What we call contribution margin before marketing, which you're calling fully loaded gross margin is basically backing out all. Yeah. Non product cost basically the, the, the variable costs to get the order fulfilled, right? And then we back out marketing and that's our contribution margin after marketing but like Contribution mark, uh contribution margin dollars.

That's your real top line because Generally speaking, top line revenue somewhat means nothing from, from a bottom line profitability standpoint. If you're not charging against it, the per order or per unit costs that get deducted from every dollar of revenue that you generate. So really, contribution margin dollars that are left over to cover your fixed overhead and then contribute to bottom line.

That's really your top line. And I think that interestingly enough, I come, like I told you at the beginning of the show, I come from an accounting background and I was the rebel. I went, I didn't go big for accounting. I went straight into being an entrepreneur and working with startups. And I eventually did get a certification.

In the CMA certification certified management accounting and what most people know the CMA certification for is cost accounting. Um, it's actually turns out to be a lot deeper than that, but that's what it's known for. And this concept of contribution margin used to be when I took the CMA exams 15 years ago.

Um, that was a, that was a concept that was left for the cost accountants in the world at that time. Like you didn't have CEOs and founders of brands and lower to middle market talking about contribution margin. It's become a buzzword since. Yeah. And so, so for us, we're not talking about anything new in the finance world.

Contribution margin has always been a staple, right? Um, in the way that we model and we think about, uh, we think about a brand's margin profile and ability to break even or generate certain profitability, but it has absolutely become a huge buzzword, I think, partially because of the Investment dollars in the space drying up and brands needing it by necessity.

It's a necessity to become profitable and internalizing the concept of contribution margin is a necessity to understanding your profit equation as a consumer brand. But what I want to chat about really fast is like this buzzword, right? It is super, super. important to understand contribution margin, but I'm seeing a lot of people take advantage of this buzzword.

And actually I don't believe they understand what it means. And it goes back to your comment about like making a generally true statement, but worse than the fact that there's nuances. The person saying it doesn't even actually get it. Um, they're just claiming to get it. Are you seeing that? And if so, like where, where, like, where, where are you seeing that?

[00:34:08] Rya Rouse: For sure. I mean, absolutely. You hit on a couple of things that are important to hit on, uh, or, or to discuss. One is There's a lot of different terms for the same numbers. That's, that's an accounting and finance generally thing, but like, certainly as you get into just public discourse about business, uh, there are multiple definitions for the same term.

So it's important to just understand how you internally at your business define certain things. To your point, like. You know, gross margin, one gross margin, two contribution margin. I've seen our head of finance at companies I've been at. That's how they described it. Or, you know, uh, gross margin fully loaded, right.

Or gross margin, direct gross margin, indirect. So, so, so removing all that, just understanding that there's, there's multiple ways to do that. If I'm thinking about a business, the earliest business books I ever read, We're generally not talking about consumer businesses and definitely not talking about e commerce channel consumer businesses because it wasn't available.

And so I think one of the most important things I ever read was, let's just use, let's just define quickly for what we'll talk about here, gross margin, right? So. You have your gross revenue, net out your returns, and your, um, discounts. Then remove your cost of goods sold, the product, right? Then for e commerce, you do have to remove shipping and fulfillment.

That's not gap gross margin, but that's just, if you sell an order, right? What will you take home before marketing before overhead, before anything, what is coming to you and what's coming to you is the revenue. You got less, any returns and discounts, less the product costs, less the shipping and less the fulfillment.

So that's what's coming to you. Let's call that, just for this conversation to make it easy, gross margin. It's not according to GAAP and it's not according to the way a lot of people define their P& L. That's fine. Let's just call it that for now. The best business book, books I read originally, I remember saying all this idea of like, Hey, one million dollars per employee, right?

Is as a framework for how many people should I have on my team? It was like, Oh, a million dollars per employee. That was sort of like a widely used metric. I remember reading a business book very early on that said, we're talking 1 million in gross margin dollars per employee. The money that comes to you, that's a very, very, I'm not saying that should be your metric, but I am saying like, that's an, that what's coming to you is very, very different than what you're being paid for it.

So you have to be conscious to net out all of the things that are not going to get into your bank account before you spent money to acquire these customers. You have to understand what that is. So you have to understand how you and your finance team are defining your P and L and not get. Confused by anything that you're reading online or, or anywhere else about how they're defining certain numbers, you know, how you define certain numbers and then don't get caught up trying to redefine your numbers internally.

Just know what you define them and isn't what they mean, but yes, group contributions. So then if that's gross margin for this conversation, then the only thing you net out of that in my world to get to contribution margin is. Advertising dollars and processing fees. Those are the only two other variable costs that will move up and down according to how many orders you get, especially in an online world and e commerce universe.

So if that's contribution margin dollars, I, to answer your question, yes, it's everywhere now. I'm glad that it is, but with the good comes the bad, which is that some people don't know how they are describing it or what they're defining or describing when they give advice. So the best advice for you as an operator is, Get with your team align as a leadership team and a fine in your head of finance.

What are you calling each line of the P and L? Let your finance team worry about the accounting portion of it and what needs to be submitted. That's gap compliant. You should understand that too, but like we're operating the business under these. This is how we define each line of the P and L and know what's included in each one.

And then know what the percentages of each of those are and what the trend of each of those are, right? What are your returns? And what's the trend? What is your discounting off of gross revenue and what's the trend? What's your product cost and what's the trend? What are your shipping costs and what's the trend?

What are your freight costs and what's the trend? And then what are your, your fulfillment I think is the last one. And then certainly marketing underneath that, but you get the point. It's like you define it, how you do internally at your company. And then you need to understand why they're defined the way they are, what constitutes each definition.

And then what's the trend of each of those? What is the percentage of those costs? And what's the trend of the percentage of those costs over time? And are they getting better or worse? 

[00:39:21] Jon Blair: I love that, man. Um, and honestly, you, you hit the nail on the head in so many ways. And what you were just talking through right now, one of the big things that we do as fractional CFOs for scaling DTC brands is we just go ahead and give the brands our roadmap for the chart of accounts and what should be included in each of those margins.

And then when, when, when the books are done every month, we hand them dashboards that we've built that trend out All of those costs that you're talking about, and so that way they understand if their contribution margin there's getting better or worse every single month, but they can see why which area of their variable cost structure is getting better or worse.

Right? Um, look, one thing I just want to say, man, I love, it's very clear the empathy that you have for founders and operators of scaling brands. Um, there's a lot of people who will latch on, like, there's a lot of people who will talk on these concepts and say, like, this is the way to do it. You are always in, in your content and conversations I have with you outside of this podcast, in this podcast episode, you're always going like, Hey, listen.

There's freedom to define things in a way that work for your business. Understand the underlying absolute concepts so that you know how to apply them in a nuanced manner to your business. You do have to understand that first. But there's nothing, in my opinion, there's nothing absolute in business.

There's all these rules that you have to understand and all these theories and concepts. They're tools in your tool belt. Right. But it actually is very similar to like, I'm a musician and one thing they talk about with jazz musicians, which are considered like in many, many, um, you know, many people consider jazz musicians to be like the creme de la creme of musicians.

What they'll all tell you is learn all the rules, learn all the scales, learn all the keys, learn all the modes and then throw them out the door. Right. And I look at the way that you approach business and that I approach business is very similar, which is, Learn all the rules cause you need the tools, right?

But then when you get in the trenches, throw them out the door and just grab them and nuance them the way that it works for your business. And I think that's, this is, I just want to call that out cause it's an important message for the DTC brand founders and operators listening to this episode. Like, you don't have to feel so constrained and so confined, right?

Like, yes, there's best practices. Know them. Because you want to know when to pull those out, right? Um, but don't feel like you have to do it like everybody else. And don't feel pressured by the prevailing messages in the marketplace that like, we've got to be doing things this way. Seek to understand these things.

Internalize them so you can break them down. Break the rules and build them back up in a way that works for you and your business and your business model. And I just want to call that out. Cause I, I love that about, about chatting with you and about the way that you approach giving advice to people. Um, so look, we only have so much time, so we're not gonna be able to get into everything, but I do want to chat about one more thing that I just think, I know you have a wealth of knowledge on, and it's something that's very top of mind for all the digitally native brands that we're working with a Free to Grow CFO.

Going omni channel, right? Breaking out into retail. There's a number of reasons why brands are considering it right now. There's a lot of brands that I'm seeing consider it, um, much earlier than I've seen in like, you know, previous years of, of the e com space challenge with scaling, uh, digital advertising profitably.

And so there's this allure of getting into retail to basically, you know, lift your blended marketing efficiency. Right. And, and, um, um, you know, find new channels to acquire new customers, but frankly, find new channels to convert customers who find out about you top of funnel on like meta or, you know, Instagram, Facebook, whatever, what, um, what is, when a brand comes to you and it's like, Hey, Ryan, we're thinking about going Omni channel, right?

We really want to break out into retail. We think it's the right thing. I know there's a ton of advice you could get in there with your background. But give me the high level of like how you would begin to advise a brand of the things they need to think about before they decide to venture into expanding into retail.

[00:43:39] Rya Rouse: Yeah. The, the irony is like, um, consumer was only in retail for the entirety of consumer until whatever, 2010, 11, 12. Right. And so, um, What we talked about when Venture came into D2C, D2C turned into a business model and not just a sales channel, right? I come, I learned this game on a D2C only business.

Prepared Meals does not have Omni Channel. It's not an option. So I was one of those people when I left factor, I sort of had this DTC lens. I was very emotional about it, loved it. This is how you grow businesses. But the reality is, if you look at the data, this is growing, but 20 percent of shopping is done online.

And of that. Half is going to Amazon. So you have to consider that if you are going to choose to stay direct to consumer only or direct to consumer plus Amazon, then you are wildly limiting your potential investor or customer base. That's okay. If you realize it, so I would say, okay, if you're going to stay without going into retail, that's fine.

You just have to understand what your top line revenue probably is going to be like where you're going to top out. I see a lot of beautiful 40 million online only businesses, right? I don't see a lot of hundred million dollar online only businesses. None actually, uh, AG one, sure. Like, but don't be the exception.

Don't you don't, you don't strive to become the exception, right? You don't scale businesses by being, we're going to be the exception. Like, that's just not how you do it. So, so that's what I would say. Like, like understanding sometimes your cap table, the way you've raised capital, isn't going to allow you to be a 50 million business because you have a 75 million valuation or 80 million valuation.

So removing that, which is a deep conversation and topic. If you're going to stay online, only understand there's a top that there's a, there's a ceiling to where you're going to grow your revenue and there's an efficiency that's going to start to decline when you get there. If you want to open yourself up to the other 80 percent of people who would prefer to shop in a store for most things.

Cool. Now you have to understand the differences in cost. And supply chain complexity and your finance function that are going to be required in order for you to get into retail, right? For every new customer you get. So you're going to use retailers, right? These, you can go direct, direct to Walmart. They cut a PO, they buy your stuff.

You send it to a distribution center at Walmart, pretty clean, but then you've also got distributors. Right? Some just work through distributors. So you got a UNFI, they're going to collect orders for multiple retailers, they're going to send them to their distribution centers, and then they're going to send it to the customer.

Now you have a relationship with the distributor. And you have a relationship, in our example, with Walmart Direct. Right? You may need to get a broker to get into some retailers, and the retailer that you got a relationship with through the broker only goes through a distributor. Right. And so I'm not going to get into like, try to confuse everyone, but the overall point is this, I would say internally to simplify all that down one, it can get complex and it can get expensive.

You're going to play slotting fees, just to pay to play, to get into some of these retailers. You're going to pay some of those distributors margin. You're going to pay some of those brokers margin. So you cannot probably. Go from having no retail exposure to every retailer. Let's just presume the buyer want from every retailer wants you in their store.

You're not gonna be able to do it probably because the cost is going to be up front and it's going to be hard. And then those retailers will pay you on terms on the back end. But even internally, if your supply chain team and your finance team are not familiar with the retail channel and all those different things that I just described, they need to get.

Trained up on that. And it's very different than how you're going to distribute into, um, e com, right? And your own 3PL. So, so there's a lot there, but I would say, A, if you're going to go online, only understand that you've got a ceiling. And if your cap table, Sets up such that that's okay for you and your margin profile sets up that like, Hey, a 50 million business for us kicks off 5 million at EBITDA and we can handle being a 50 million top line business because of our cap table and our goals and our desires.

That's awesome. That's okay. You don't have to be a hundred, 200 million business. If you want to get to a hundred or 200. You're probably going to need retail. And if you want retail, you're going to have to have a supply chain team, a finance team, and the cash in order to get into retail. 

[00:48:37] Jon Blair: Totally, man. Um, I I've, I've dealt with it before.

I had a, I had a stint before getting into DTC. I actually came from more of the wholesale, um, and manufacturing world. And like, everything is different. The cash conversion cycle is different. Cause you've got receivables. Um, you know, the, your financial model changes. Um, how you, how your operations team has to prepare shipments so that they actually get accepted and not rejected.

Um, there's just, it, it, it's a lot of complexity. I'm not saying don't do it. There's a place for it. And like Ryan said, make sure it ladders up to your overall strategy, right, and your overall goals. Um, so in, I'm going to help us land the plane here. Before we close out with a final personal question, which I always like to ask everyone, tell me a little bit about your consultancy.

What are you doing today, and how are you helping growing consumer brands? 

[00:49:35] Rya Rouse: Yeah, it's, you know, a lot of the stuff that we've talked about today, you know, my, it's funny, I've taken leadership roles on the marketing side of the house in, in a number of cases along the way, I've just never considered myself a marketer.

I've always, I got thrown into an operator role. And to your original point, when we first kicked off, I was forced to learn finance. I mean, I had a background in finance, but like business finance is different than finance, finance, finance, supply chain operations, marketing. And so I don't know, you know, like I, I happen to be very good at marketing.

I happen to have a business. And so I'm working with, you know, like I like to think of myself as like. What I would have loved to have had in when I was operating factor before I sort of know what I know now, which is someone that can speak intelligently on your leadership team across functions. I think the best people you add to your leadership team, everyone on your senior leadership team should have the ability to speak intelligently about every function of the business.

They're not an expert in it. They're not running the function, but if they can't weigh in and a at a minimum understand how their function. Is going to affect all the other functions, but more importantly, and more ideally be able to speak intelligently about those other functions where that leader has an issue and you can collaborate with them on a solution to it.

So that's how I think about it, right? You, you have a lot of complexity that the, the thing that I, my. Clients would probably say I do best is just find the simplicity, find the simple answer, try to reduce the complexity. What's the 80 20. I think it's incredibly hard to find the 80 20 of your own business because you can't read the label from inside the jar and you are totally squarely inside the jar at all times.

And so just an outside perspective from someone who's operated multiple businesses in this space, bootstrapped way. Had to look at profitability from day one and therefore have a lens that says, Hey, I can, you know, I can be helpful across a number of functions. Um, not just marketing because for marketing to work, you need all the other functions to work too.

[00:51:41] Jon Blair: I love that spot on their spot on. Um, Okay, so I always like to end with a personal question. You know that I'm a dad of three little kids. Um, in terms of being a dad, I think I did the math and I'm about four and a half years behind you in terms of the age of my youngest. And I've talked to you several times about like, just, I mean, I mean, I'm completely honest with everyone here.

Like, it's just all out insanity. It's the most amazing thing I've ever done. Raising a small family and scaling a business at the same time. But sometimes I question my own sanity. Like why am I doing these two things at the same time? They're both so exhausting. And so I'm asking for a friend here. How did you pull off raising a young family of three while being an entrepreneur?

[00:52:30] Rya Rouse: Yeah. That, you know, the, the really short answer, which is like not helpful is you just figure it 

[00:52:38] Jon Blair: out. 

[00:52:39] Rya Rouse: You know, it's, it's not unlike anything. I mean, think of all these challenges you take on within your life when, when you can look back and you say, we had no idea what we were doing, but we figured it out.

So there's an element and their strategy to this, right? Of understanding again, what's the 80 20 of like me being a father to me, I determined to ask that question and answer it right to me. I want to be present. I want to be available. I want to be around. Right. Yeah. Okay, cool. So, if, if My kids feel loved by me and I'm around and they see me every day not every day But most days I feel like I'm doing a good job there cool So then I don't have to get so stressed out about stressed out about all the other things as a husband If I'm of it once you have kids very different to be a husband without kids and it is with kids like Totally am I doing 50 percent of the work?

No, I think my wife does more than 50 percent of the work I think most wives do more than 50 percent of the work But, um, am I there when she needs me? Do, am I clear on what she's asking from me on any given week or day? Like, so just asking like, what do you need for me this week or this month or this day?

And if I'm there, most of the, if I can say yes, most of the time I feel like I'm winning, right. As well as spending alone time with her. And then same thing with the business. It's like at some point you 80 twenties overused, but it's overused for a reason. At some point you just have to understand what's important and the rest is just you worrying.

Right. About, about, you know, like, was I not there enough or was I will ask her, right? Like, was I not there for my kids? Ask them once they're old enough, you know, but I think it's just asking yourself and asking the people you care about what they need from you and asking yourself what you need and then trying to show up there as often as you can and let the rest just be what it is.

[00:54:30] Jon Blair: Dude, such sound advice, man. When you posted two days ago about your birthday, I actually read that whole post and it was like, I want to be Ryan Rouse when I'm 45. He's a few years ahead of me. Um, but man, I just, I really look up to your wisdom, man, on the business side. I'm, I truly, truly am someone who, um, holds you in high regard on the balance between, uh, you know, personal and business.

And so, I just, I can't thank you enough for coming on the podcast and sharing some of your wisdom. I might have to have you on again at some point because there's just so much that we didn't get into. Before we break here, um, where can the audience find more about you and your consultancy? 

[00:55:13] Rya Rouse: Yeah, LinkedIn and Twitter, easy enough.

You know, after, after we just spent so much time ragging on those platforms, I'm a believer that there's a lot of good on those platforms. So, so hit me up on one of those if you're interested. 

[00:55:26] Jon Blair: Definitely follow Ryan's content. Um, you know, I, I, um, shamelessly follow it all the time and I'm always like, man, where does he come up with all this wisdom?

Um, but thanks everyone for joining. Um, again, masterclass in so many important concepts, uh, today. So you might need to listen to this one twice. Um, and you know, if you're looking for help on the accounting and finance front, as you're scaling your e com brand, don't forget Free to Grow CFO. We're here to help you scale your brand alongside healthy profits, cashflow and confident decision making find us on a, you can find me on LinkedIn, Jon Blair, or our website, Free to Grow CFO. com until next time scale on.