Podcast: Scaling DTC Profits by Optimizing Contribution Margin
Episode Summary
In this enlightening episode of the Free to Grow CFO podcast, join host Jon Blair, as he dives deep into the world of scaling Direct to Consumer (DTC) brands with profitability at the forefront. Our special guest, Thomas Gleeson, co-founder of StoreHero, shares invaluable insights on achieving marketing efficiency, profitability, and positive cash flow. Discover Thomas' personal journey that led to his co-founding StoreHero, a revolutionary product helping brands pinpoint their successes and pitfalls in ad spending. From discussing the landscape of e-commerce and targeted marketing strategies to exploring the significance of contribution margin, this episode is packed with essential knowledge for anyone looking to scale their DTC brand sustainably. Tune in to gain a comprehensive understanding of how StoreHero is making a significant impact in the e-commerce world and how you can apply these insights to your own brand.
Meet Thomas Gleeson
Thomas Gleeson is a co-founder at StoreHero! StoreHero is a cutting-edge tool for ecommerce brands and agencies to combine their ecommerce, marketing and finance data to cut out the noise and focus on what really matters - PROFIT!
Episode Transcript
00:00 Welcome and Introduction to Thomas Gleeson
02:51 The Journey to StoreHero: Thomas's Background
05:34 The Evolution of E-commerce and Marketing Efficiency
15:11 Understanding Contribution Margin in E-commerce
22:17 The Importance of Aligning Marketing and Finance
27:11 Exploring Dynamic Marketing Strategies
27:35 Case Study: Impact of Pricing and Ad Spend on Profitability
33:38 Maximizing Profit: A Deep Dive into MER and ROAS
44:52 Leveraging StoreHero for E-commerce Profitability
52:15 Final Thoughts and Recommendations
[00:00:00] Jon Blair: All right. Hey everyone. Welcome back to the Free to Grow CFO podcast, where we talk about all things scaling a DTC brand with a profit focused mindset. I'm your host, Jon Blair, founder of Free to Grow CFO. And for those of you who don't know, Free to Grow is an accounting and finance firm that works exclusively with growing profit focused DTC brands.
And what we do is we provide bookkeeping and fractional CFO services that help growing brands scale alongside healthy profit and cashflow. Today, I'm super excited to be chatting with Thomas Gleeson, co founder of StoreHero. Thomas, thanks for joining me, man.
[00:00:38] Thomas Gleeson: Hi, Jon. Uh, thanks very much for having me on.
Uh, really, really looking forward to getting into it.
[00:00:43] Jon Blair: Yeah, it's, uh, it's, uh, I think the last time we were chatting on a video call was me on your podcast, and we were actually in the same building, but, uh, in different rooms. I was in Ireland, um, what was that, about two months ago? And, um, yeah, that was a really good time.
I, I do want to, I've been talking to my wife a lot about coming back, um, on a vacation without the kids, um, so that we can actually see the rest of Ireland and not just Dublin. I was told by you and many others there's a lot that we didn't get a chance to see on that trip.
[00:01:16] Thomas Gleeson: There's way more Guinness in the rest of the country as well, Jon.
[00:01:21] Jon Blair: Love it. Love it. But, uh, so yeah, look, today we're going to continue the conversation we've been having for the last few weeks where we're talking about this balance of marketing efficiency, profitability, and cash flow as you scale. Um, as I mentioned before, our fractional CFO firm, all we work with is scaling DTC brands that are profit focused.
We're not working with venture backed startups that are pre product market fit. We're talking about brands that are scaling a capital intensive business, right? Because it's inventory based and needing to do so in a self sufficient manner, which means what? Profitability and what's one of the biggest components of profitability for a scaling DTC brand.
It's marketing efficiency and then on, on the heels of that profitability equation, we need to be looking at cash flow as well. Um, I've got Thomas on today because he's the founder, uh, co founder of a very interesting, um, product, SaaS tool called Store Hero that really helps brands focus in on where they're winning and losing the battle.
for listening. on the, uh, profitable, uh, ad spend front and really just like profitable scaling front. And so, um, because of that, Tom, Thomas has a really interesting personal background that led up to his time at Store Hero, but Store Hero itself is doing some really, really powerful things to help brands scale alongside healthy profits.
So I'm really excited to dive into this topic. Um, with, uh, with Thomas's perspective. So Thomas, before we get into talking about store hero and some of the things that you and I are both seeing out in the marketplace, um, as it relates to brands trying to scale profitably, tell me a little bit about your background and your journey that led you to starting store hero.
Because I think there's just a lot of very relevant information or there's a lot of, there's a lot of relevant history. In your journey that positioned you well to come up with this idea for store hero and, and, and ultimately co found this SaaS product.
[00:03:23] Thomas Gleeson: Brilliant. No, absolutely. And I mean, I think to your point there, it's.
Personally, for me, it's been a very lived problem. Um, I grew up with it in a house with e commerce at home. Um, my mother's had an e commerce business since 2004. So, I mean, you're going back to 2004 e commerce. We all think of e commerce today and it's very, you know, it's part of our nature. You, you, you jump on your phone, you buy an app and you buy it, you buy a product.
It lands in your door a couple of days later. You don't really think about it too much. If you go back to 2004, e commerce is very much in its infancy. You have to kind of convince people it wasn't a scam. Um, so you had all of this, all of these challenges that we don't really think about today, you know?
Um, so our, our family business would have been personalized gifts, so baby gifts, wedding gifts, Christmas gifts. Um, we probably saw that business grow over a long time. So we're nearly 20 years old now at this stage, which is kind of hard to even think about. Um, so. Um, we would have seen, first of all, our business was kind of built on SEO.
So we didn't run any paid ads until probably 2016, 17. Um, I then got the job of trying to figure out how to run Facebook and Google ads around that time. And my parents, I suppose, had seen that, you know, they got the business to a certain scale without ever spending on ads. So there was definitely a big reluctance to spend on ads because this is something that we kind of had perceived that we got for free for a long time.
Um, now, obviously, that's a terrible way to look at it. You should look at your, your, your marketing as an investment rather than a cost to the business. But that was kind of very much ingrained. And anytime I was spending money, then I need to be a clear ROI on the spend that was coming back to us. And to be honest, Jon, I was probably figuring out and mapping out contribution margin on a spreadsheet before I actually even knew the name for it.
Um, so that was the business that that's my family business at home. Um, I would have had a couple of e commerce businesses myself, I think two or three. Um, over the years, and then I suppose I went to work at Shopify in July, I think of 2019, um, which was an incredible experience. I think, I think I was six to eight months in the door before, uh, before COVID hit.
So, um, I mean, yeah, it was crazy. It was a crazy, crazy time, but such a massive learning curve for myself.
[00:05:33] Jon Blair: That's really interesting. So you come from a family that had an e commerce store, definitely in the early days, the heyday of. of e commerce and and funny enough me having come out of the Brand side of the e commerce world on the founding team of guardian bikes.
We Launched I believe in 2016 on our shopify store 2016 to me compared to today feels like the old school days of E commerce. In fact, there was a lot more working with Uh, lower funnel activities like SEO and Google. There was actually white space with Google pay per click advertising. You could still get into a product category and be like, no one else is spending on Google.
That's pretty hard to find today. I don't want to say it's impossible, but it's pretty hard to find today, right? Um, but so you come from a family. That is, uh, has an e commerce business. You guys transitioned from this kind of lower funnel, like just capturing existing demand or existing search for, you know, uh, search intent for products that you guys offer to actually paid advertising, and then you go work at Shopify and arguably.
The one of the most incredible times you could possibly be at Shopify when there's an e commerce boom because of COVID, right? So from those two experiences, walk me through how you met your co founder Karl and ultimately why you guys landed on, Hey, we've got to start store hero.
[00:07:08] Thomas Gleeson: Sure, I mean, so I started running ads around 2016 17, um, we were actually on a platform called Volusion, pre Shopify.
Um, and it was really actually hard because we had the Facebook pixel in there, but none of our conversion value from the product prices and stuff like that was pulling into Facebook ads. So I could see the cost of a purchase, but I actually had no even idea of ROAS figures at that time because, you know.
That data wasn't being put into the Facebook ads manager. And so you couldn't actually see the conversion value. So we moved over to Shopify. I think in, uh, around the same time, I actually started working there. So my mother never had a cue for support because I was the support. Um, but what I quickly started seeing was that, uh, You know, obviously your, your experience from growing up in your own business, uh, family business, then having run your own, it's very insular.
You, you, you know what, you know, and all of a sudden I started off in Shopify in customer support and all of a sudden you're talking to hundreds, if not thousands of different businesses on a, on a, on a couple of monthly basis. And I quickly started seeing, I mean, it was such an amazing learning curve.
There was so many different businesses doing so many different things. Um, and I realized that I had so much to learn. Um, So what I kind of started doing for my parents was on a Monday evening, basically trying to create a spreadsheet to map out all of the core Shopify metrics. So, you know, sales, new customer, traffic, conversion rates, so on and so forth.
Then I decided I need to bring in Google ads, metrics, Facebook ads, Klaviyo metrics, GA4 metrics, well, UA at the time. Um, and then my, my, my father is an accountant and, you know, accountants, not like you, Jon, but most accountants by their nature can be, uh, apprehensive of marketing spend and it's true effectiveness.
So he would make me bring in all of the core costs, um, not just product costs, obviously, but, you know, staff costs, uh, software fees, uh, along with the rest of it to make sure that when I was kind of bringing this spreadsheet together on a weekly basis, that it was actually a true reflection of the actual profit that we were making.
Um, so yeah, I mean, why do I need to bring in the cost, the profit piece. I think, and I think a lot of, you probably see this yourself, but I think a lot of brands, you can get hung up on purely looking at ROAS, and I mean, ROAS and Google is great, ROAS and Facebook is great, but, you know, ROAS is a, it's, it's fine, but it's, it's really a derivative of the, uh, the attribution tool or the attribution software model or the window, whatever you want to call it, that's being used in those, those platforms.
And it's, yes, it's a great indicator in terms of is Facebook working, is Google working, but really. I mean, if you're trying to link the finance and marketing function of the business, what you really need to understand is the impact of your marketing spend on the profitability. And what I was doing for years without again, really, really knowing the name for it was trying to get your contribution margin, which in my opinion, you know, as we kind of move towards a more cookie less world and as attribution probably gets murkier and murkier.
You know, that's the North Star metric. Every business needs to follow on and work on. So in terms of, I suppose, where did Karla come into the picture and how do we join forces to make store hero during my time at Shopify? I was doing my business degree in the evenings. And then final year, I had to do a business plan project and I was like, okay, well, this spreadsheet that I've been working on for a number of years, let's try and see if I can just work on my, my project and something I'm actually interested in.
Um, so I spent probably 9, 10 months working on that. And this is just really random because Karl and I were connected on LinkedIn, but we didn't really know each other that well. Um, I was just about to submit my project and Karl messaged me out of the blue and asked me to check out this project that he had started working on.
And my face dropped because he presented about 85, 90 percent of what I had just done my whole project and actually spent a couple of years working on. And I was initially sitting there like, has, has my lecturers tipped this guy off or how has this landed on my lap? Um, because, you know, you hear about founders and the journey they go on to try and find a co founder, and it can be quite lengthy and really, really difficult.
And the idea of starting a software business was always something I was very, very interested in. And all of a sudden, you know, it kind of had landed on my plate, to be honest, to a certain extent. We spent the next couple of months chatting and we realized it was a great fit. And then we kind of joined forces officially probably around October of 2022.
And I left Shopify a month later. Um, and the rest is history, I suppose.
[00:11:18] Jon Blair: It's so funny. We were talking about this over dinner in Ireland. We were like swapping co founder stories, like how, how we found our co founders and my co founder, Jeff Lowenstein, we have a, we have a similar story. Um, as you guys, in terms of like, I, I, you know, I had been scaling Free to Grow CFO, um, as the only CFO on the team.
Um, but having built out some back office support and accounting function, I really wanted to partner with someone, but for us, the guiding principles that, um, really, um, You know, set the direction for our business are neaR & Dear to my heart. And there's only so many people out there who are going to align with our core values and our purpose and reason for existing and meeting Jeff really kind of fell into my lap just through a introduction of a friend of a friend.
And he was looking to start his own e com fractional CFO shop. And, um, really was just kind of picking my brain on what has, what worked and what didn't work. And I realized here's a guy who had a complimentary skill set to me, not exactly the same, right? Cause like I always say in business to people who are exactly the same.
Means one of them is useless, right? He like, he very much complimented my weaknesses and vice versa. And, um, and very much aligned with our core values and guiding principles, which I, I believe there's a, is very, very hard to find. Um, and I was like, wow. Here's a, I convinced him, I pitched him on joining forces and let's, let's co found the next generation or, um, you know, next phase of Free to Grow CFO instead of you going and starting your own firm.
And that was the birth of our co founder story. And like, I would say that's, we're probably the exception. Not the rule. I think there's a lot more for, for as many co founder stories as there are like ours. There's probably four of just like real horrendous co founder stories that don't end well. And so we're lucky in that regard.
But I think another thing that's interesting for the audience to understand about you and your co founder Karl. Karl comes out of the agency world, right? And so him having, um, let, was he, did he own an agency? Was that part of the journey
[00:13:34] Thomas Gleeson: and I just kind of what you said there is really in line with us as well.
We, we definitely have very, very different skill sets. Um, but we both had like. Both are like very relevant, but very different experiences and background. Like mine was at Shopify and on the brand side, whereas just as you've alluded to there, Karl's background is on, he had an agency for a big number of years.
So kind of full service agency. Um, and he had actually started building out, you know, A mix of super metrics and funnel into a Google data studio reports for a lot of his clients. Um, and, you know, they were really, really good, but often they're not very nice looking and the connectors can break and you spend a lot of your time actually fixing the data and fixing the connectors that are broken instead of actually logging into a platform and actually trying to Get a sense of, you know, making decisions on the data instead of actually fixing the dashboard to make sure the data is actually there.
So, Karl's experience was largely from the agency side. It works with loads and loads of really big Irish clients here and some other ones in Europe as well. And we'll probably run into a lot of the same challenges I ran into from the other angle where a lot of clients were asking for, you know, this is fine.
The ROAS reporting is fantastic, but really, can you tell me how much profit I've generated after this marketing spend and. You know, when we joined forces and we kind of started chatting around this, it was a bit of a, one of these moments, you're like, how does this not exist? Like, you know, contribution margin is a term.
Was definitely in its infancy, by the way. I still think it's very much in its infancy for the e commerce industry, but even going back 18 months ago, it wasn't as much of a talked about term as it is today. So we kind of joined forces and said, this was something that the market really needed. Um, and thankfully we, I think we backed the right horse.
[00:15:14] Jon Blair: It's funny because I originally am an accountant before becoming a brand operator and a CFO, right? And so contribution margin is, is, it's an accounting term, really. Um, I have a certification in the States called the CMA, which is Certified Management Accountant. It's, it's kind of, This is a poor description, but this is what it's known as.
It's kind of the cost accounting equivalent of a CPA in the states, right? And um, contribution margin is a management accounting term that's been around for a really long time. And you normally only heard about it in a managerial accounting Um, classroom setting or a managerial accounting, um, textbook.
And so what's funny is that I was talking about contribution margin much earlier in my career in different settings. And most founders looked at me like I was crazy. Like what, what I, I, I don't care about this, right? It's, it's gross margin. It's EBITDA. Um, even just the gap way of looking at a P&L, which is like breaking out operating costs into SG and a selling costs R & D.
And, um, it's interesting because at guardian bikes, what, seven, eight years ago, I We were talking about contribution margin, but their CEO and a business school, um, friend of mine, Brian Riley, he originally had a finance background. So like, even though he was the CEO and he was kind of the marketing and product visionary, he had a finance background.
So contribution margin was a term. That made a lot of sense to him that he knew deeply so we were talking about it eight years ago But I think you're right that it this old term that's always been there in the accounting world is now becoming mainstream because the reality is Understanding reorienting the profit equation, right?
I actually just wrote a post about this today on linkedin Profit is not revenue minus expenses Profit is contribution margin dollars minus fixed costs That sounds possibly like just semantics. But it's not just semantics. The underlying concepts within contribution margin dollars minus fixed overhead is a much different way to look at your business and your profitability equation and understanding what those things mean is key.
And so, um, One thing that I want to chat about here a little bit is like, what conversations are you and Karl out there having? Cause you guys have generate, you guys have created store hero, which is a piece of software that amongst other things helps brands, uh, uh, calculate and analyze their order level and skew level, um, contribution margin.
Right. Um, so you guys are on the forefront of helping brands. Calculate contribution margin. You're helping them bring in the data sources into your platform. That, that, uh, that ultimately drive those calculations and drive that reporting. In doing that day to day, what conversations are you out there having with founders over and over again?
What are you seeing about, about founders ability to like internalize? The contribution margin concept.
[00:18:38] Thomas Gleeson: Yeah, I mean, really, really good point. It's, it's a lot of education still on what it actually means. Um, people can understand it, but you can see the moment the light bulb goes off and they actually realize, you know, what this actually means.
And again, we're not talking anything revolutionary here, and it definitely is a term that's becoming more and more mainstream in e commerce. Um, But there still is a huge gap in understanding industry wide around what contribution margin actually is, what it stands for, and how you can really utilize it to.
Almost reorientate how exactly you look at your marketing for your e commerce business and how you, again, look at contribution margin minus OPEX equals EBITDA because there's still such a massive gap in education between just in the industry as a whole. And in terms of, I suppose, conversations that we're typically having with brands, they're moving a lot of agencies.
The good agencies are moving the reporting way more towards contribution margin. ,
[00:19:33] Jon Blair: Some agencies, the way they're structured, the way their strategies are structured, they are not inherently maximizing contribution margin dollars.
And, and to be clear, not a lot of them aren't doing it on purpose. They're not seeking to minimize contribution margin dollars, right? It's just that their, their playbook doesn't have alignment between the activities they're doing and driving contribution margin dollars. And so if that gets exposed, it really exposes.
The underlying issues with their whole playbook. And I'm, I'm actually seeing that more and more like agencies are embracing it or they're like, please stay away. I don't want your help showing this to my client. Are you seeing the same thing? It sounds like,
[00:20:23] Thomas Gleeson: Oh, so much, so much. Um, to be honest, it's more validation for us that we're on the right track.
That that's the kind of attitude good and bad agencies have towards us. The good agencies that really want it because it really shows off the work that they are doing. Um, again, what we're talking about here is nothing revolutionary. Again, we've said that a couple of times and it's, I think it's worth going back to understanding how is e commerce function for so long.
Without this term, which sounds so blatantly obvious to me and you, how does this never come to the forefront for a lot of brands or how has e commerce matured to a point where there's millions of Shopify stores out there? And this hasn't been the fulcrum in which businesses spin on to a certain extent.
And I think it goes back to, you know, years of cheap CAC and ROAS on Facebook and Google. You know, if your margins were so good from your, your advertising spends on those platforms, you really didn't need to understand the boring parts of your business. Like, you know, margins and costs and that whole thing, you know, that all took care of itself.
As long as you were spending on Meta and Google and the return on the advertising spend was so good. And let's face it, it was for so long. You know, the rest of the business just took care of itself. You could have had a really, really profitable business out there without really understanding the intricacies of it all, but I think, you know, in the last probably two years, as you know, the, the, the post COVID boom has kind of subsided and iOS 14 has come in and the rest of it, those ad costs have gone incredibly much more expensive.
There's way more competition out there. And now more than ever, I think people. You know, for years you could have operated an e commerce business with marketing, knocking it out of the park, finance, doing a really good job, but those two functions in a business, not really understanding how each other works.
Um, but I think to grow a successful e commerce business today, that intersection between those two functions is where the rest of the business needs to build from. Because if your marketing team don't understand. Deeply, the unit economics, or your agency don't understand the unit economics of your business and your finance team are building out, you know, forecasts or reports for the year.
And they don't understand the marketing lingo to a certain extent. You have two functions who need to lean on each other, really not understanding each other. And if that's the way your business is going to try and operate, you know, that's a really, really difficult to, it's a really difficult environment to operate in when those ad costs.
If you look at an e commerce business, the gas that you have to accelerate is your, your ad spend. It's your marketing budget, but if you're not fully clued in or the business isn't fully clued in on the impact of that marketing spend on the profitability that you're trying to generate, it's like operating your business blindfolded and that that's never a good idea.
[00:23:00] Jon Blair: Yeah. So there's something I want to bring into this conversation for us to chat about that you and you and I actually haven't talked about this before specifically. But it's something I'm starting. It's a pattern I'm starting to see, which is that, um, and it's, it's built around this concept of monthly budgets and targets to give to an ad buyer, give to your agency as fractional CFOs that work exclusively with scaling DTC brands.
That's one of the questions we get the most often. I'd say the two questions we get the most often, like one, can I buy this much inventory and two. Um, what's the budget, what's the ad spend budget and the, uh, uh, marketing efficiency target for our agency this month. And here's the thing I'm starting to form this opinion and it's something that I'm working with my team on.
Um, and we're kind of testing on a few clients, but we used to just give guidance on an ad spend budget and, uh, marketing efficiency and MER marketing, marketing efficiency ratio, um, target for. The month and I'm starting to realize that that by itself is very unhelpful. And here's why I actually do believe that you should give guidance, right?
We should have a target because if we don't have a target for how much we want to spend, your ad buyer can't reverse engineer. How much they're going to spend on a daily basis and what the stair steps of of ad spend increases are going to look like if you don't give them a target they're just going to be running blind there but if you give them a static target on ad spend and M.
E. R. here's the problem what's rule number one of planning of like forecasting M. E. R. and ad spend and M. E. R. Same thing as rule number one for every other forecast. You will not hit exactly those numbers. So when you give that to an ad buyer who this day and age ad buyers are freaked out, I talk to them all the time.
They're so freaked out that they're going to get to the end of the month and they're going to get chewed out by the brand because they totally screwed something up and they ended up driving. Not as much profitability as everyone was hoping. And so, you give them an ad, let's just say you give an ad buyer 100, 000 ad spend target for the month, and then you give them a 3 MER target.
Well, if they start scaling spend, and they're on track to spend 100k, but their MER is coming in at 2. 5 instead of 3, they're actually not sure what to do. Like, they can go ahead and retreat and pull ad spend back until they see the MER rising back up to three, but they don't actually know the impact that that's having on the bottom line.
They're just blindly, pretty much blindly, following an MER target of three, right? And so what I've started to realize is that what we need to do is As e com focused fractional CFOs is we need to give our brands actually kind of like a scenario chart where it's like, Hey, look, our goal is to hit a three MER at a hundred K ad spend.
But if you spend 125K in ad spend, here's the new MER that produces the same contribution margin dollars as our target. Or if you only spend 80, 000 in ad spend, here's the new MER target that generates the same contribution margin dollars as a 100K and a 3K. And what that does is it empowers an ad buyer to go to that chart and go, you know what, I'm pacing towards this one.
And actually, um, I actually can, I can beat this MER. Um, and so I'm spending more, my MER is lower than three, but I can see on this chart, I'm going to produce more contribution margin dollars so that ad buyer can keep, keep executing with a lot of confidence. And so we're trying to think through how we kind of build out these look up kind of scenarios, right?
So that an ad buyer can have a direction set at the beginning of the month, but have something intuitive to use. What, what is your opinion on that kind of a strategy versus just a static MER and ad spend target?
[00:27:10] Thomas Gleeson: I think, I think it makes a lot of sense. I think it makes an awful lot of sense. Even one example I would give, I spoke to, um, an eight figure brand at the end of January, um, and they made some pricing changes.
Um, they increased, I think, product prices by about 20, 25 percent in, 20, 25 percent in just the very, very start of the year. And they didn't really move the MER target, um, so I think they spent 170k on spend in January, which was up 78%. And I think the contribution margin was up 110 percent on a 78 percent increase in spend.
So I was kind of looking at this going like, you know, your, your contribution margin dollars. Are actually rising on a percentage basis faster than your ad spend to which I was looking at this. I'm like, I rarely see that kind of scenarios. Like, this is a huge opportunity you're missing. If you need to make sure this when you're talking about all the kind of contribution margin conversations that you need to be very, very careful.
Diligent to make sure that the business actually has the cash on hand to make that happen, because we've ran into that a couple of times as well, or they mightn't have, but, you know, they made that bigger swing because they were fixed on this 3 MBR target. I think in February, they increased spend from, I think it was 169 to, I think it was 270.
So pretty, pretty substantial increase based on the conversation that we had at the end of January. And month over month from February, uh, from January to February contribution, margin rose by, I think, Oh, I think it was 70%. Um, so, you know, did the NER actually dropped by about 15%, 15 to 20%. So substantially more at a reduced MER.
And I think to your point there, if they had had a chart like that, where, you know, you can drop MER to a certain extent, um, in, in line with increased levels of spend, that's probably what they were missing and that didn't give them. You know, they actually, based on the year targets that they had hit for January, they had had a three MER and everything was going well.
They were actually planning to spend the exact same amount in February because they had hit their target. Now, what we saw was we did a substantial increase in spend, reduced MER below what they had initially anticipated, but actually the profitability of the business was much better off in February than in January, even though they were below target.
So I think the matrix that you've kind of outlined there in terms of. Understanding that and giving that to media buyers is incredibly valuable. What I would probably ask you is like, do you think most brands have the wherewithal or the The tools in front of them to actually create what that, that, that plan or that outlook actually looks like.
Obviously a lot of the brands you're working with as a fraction of CFO, we'll have that level of guidance, but I actually, I don't think most brands are at that level, unfortunately.
[00:29:59] Jon Blair: No, they, they definitely, they, they aren't. And that's why I'm realizing that as CFOs for. Scaling Econ Brands, we need to provide that intelligence and I want to go back to, I want to connect this back to what you were saying before about like the need for finance and marketing to be communicating and working together.
Is that like, um, your finance team needs to understand marketing at a high level. They need to build to understand the jargon and the acronyms and understand mathematically what they mean. And how they tie back to the financials and likewise for the marketing team, right? They need to understand, um, things like MER and contribution margin and how they tie to the financials, but at a basic level, they need to be really good at marketing.
Right? And so, what I've found is like, hey, yeah, in a perfect world, you'd get your marketing team, like, super schooled up on finance and they would be super badass because, uh, they actually really get all this stuff and can internalize it and they can create their own spreadsheets, but the reality is, in practice, what are we asking these marketers to do?
We're asking them to work outside of their job description. And so, really, in practice, where I'm starting to see, Uh, finance's ability to, uh, partner with marketing in the, in the scaling and e com brand context is Let's provide them with these tools like that lookup chart, right? Where they don't have to necessarily understand how we did the math to come up with those numbers But they need to understand they should understand that contribution margin dollar maximization is bottom line profit maximization, right?
And that it's okay for them to spend more at a lower efficiency. If per that chart, they're going to drive more contribution margin dollars. And if they do that, if they follow that chart and those contribution margin dollars don't come to fruition. In reality, when the books get closed, that's on the finance team.
Right to figure out where they went wrong in the math. And so I think I think Let's put it this way. What I'm realizing is it's really easy to talk about this ideal scenario this utopia Where marketing and finance work together and they all totally understand what the other one is doing That doesn't, that doesn't make any sense in practice, I'm realizing.
They need to have conceptual understanding crossover so that they can communicate, but they should be providing tools to one another, right, to make it easier for them to draw off of each other's expertise. But, like, to, to your point again, most Brands don't, um, already have the kind of conceptual understanding to build these things out themselves.
And in large part, like we do know some, but they're, they're not really a fit for our services because they, they've kind of got their finance function on lockdown already. They're already doing really well there. So like when it comes to the market of, of brands that we kind of, uh, that we serve, that's definitely, um, that's definitely a shortcoming.
Um, I want to talk re oh, go ahead. Go ahead.
[00:33:15] Thomas Gleeson: I was going to say from, from what I see at like founders and media buyers that I've seen in the last 12 months, they're overly fixated on revenue maximization and more traditional older school finance people. Are too focused on marketing being a cost and neither of those functions are focused on profit maximization and both of them think revenue maximization equals profit maximization and marketing spend reduction equals profit maximization.
But unfortunately the truth is somewhere in the middle and it's marrying the two functions together and it's about, yeah, maximizing spend where it's efficient. And obviously that would help drive profit maximization, but that's just kind of some, some stuff I just typically keep seeing in the last 12 months.
[00:33:57] Jon Blair: Well, and it's interesting because there is some truth. There is a truism behind, um, minimizing costs, right? But there's a difference between a fixed cost and a variable cost. And, and the profit maximization formula is not always true. The minimization of variable costs, right? Um, I, I, I wrote a post that's actually going to go live on LinkedIn in about two hours.
And it talks about rethinking your profit equation. Like I mentioned earlier, instead of revenue minus expenses equal profit, revenue, net revenue, times contribution margin ratio as a percentage of revenue, equals contribution margin dollars. And then contribution margin dollars minus fixed overhead equals profit.
And there's a really important distinction there, which is that your contribution margin ratio, the percentage of revenue, that's where ROAS maximization is. Comes into play. Is that generally speaking, if you're maximizing your MER, right, your contribution margin percentage as a percentage of revenue is going to be maximized.
But if you do the opposite, it's going to go down, but you multiply it by a net revenue volume. Right? And that's what gives you contribution margin dollars. So I used an easy example where, if you've got net revenue of 100K, and a 25 percent contribution margin ratio, that's 25, 000 of contribution margin.
But let's say you could increase ad spend, and hit 150K in net revenue, at a 20%. Contribution margin ratio. That's a lower contribution margin ratio, but guess what the contribution margin dollars are 30 K instead of 25 K. So if you operate at the same fixed costs in both those scenarios, you made 5, 000 more by increasing revenue to 150 K and letting your contribution margin ratio come down by 5 percent of revenue because you're letting your MER fall.
Now, word to the wise warning, I'm not saying that this math means if you do that for your brand. Your profit is going to go up. What I'm saying is understand these dynamics so that when you're sitting down and you're working with your ad buying team and they're talking about different MERs, they can hit at different spend levels.
Don't just discount a lower MER at a higher spend and assume it's not going to maximize profit. It could, but you need to understand conceptually this math to forecast out if it's going to be better or worse for your bottom line. Um, So really quick in talking about all of this, there's this kind of thing that we've mentioned a couple of times.
We're kind of circling around its attribution. And I guess more specifically what I hear all the time is like ROAS versus MER ROAS versus MER, which one do you prefer? Right? Um, the reality is They're related, but they're not the same thing, right? They're, they're, they're, by definition, they're not the same thing.
What, what are some of the kind of thoughts or, or opinions you have around ROAS versus MER? And, and how you consider contextually using those metrics in different contexts?
[00:37:09] Thomas Gleeson: Yeah, um, I'm going to give the most marketer answer ever here and say, it depends, but, um, I, I'm firmly in the merge train, to be honest with you, uh, me or all day is my best metric in terms of the efficiency of your marketing spent.
Robust is great. Um, I think it's fantastic. It's great as a guiding indicator, but I just think attribution, no matter what kind of tools you're using out there has become so murky in the last couple of years, and it misses a lot of the picture from a margin perspective as well that I think merges cuts out the noise.
Um. Really just gets to the, gets to the point a lot quicker in my opinion. I think roas on a channel level absolutely is really, really important. And on a campaign level, obviously it has to be because your mirror is more of a business principle rather than a campaign level, ROAS driven principle. But ROAS is obviously still really important on a, on a campaign level, but if you're looking to gauge the effectiveness of marketing on a business.
Mer, in my opinion, is the only way to really do that accurately.
[00:38:09] Jon Blair: Yeah, I have a, I have pretty much the same opinion, and said in, in terms, in the way that, that I think about it, ROAS should be used to look at a more granular level, like you said, channels, ads, and if it's going up or down as you're making changes, right, within a given ad channel, or within given ads, Um, generally speaking, you, you should, you should really consider those changes in ROAS to make more tactical, granular changes to your advertising strategy.
But, you should correlate those changes in ROAS back to MER to make sure they're heading in the right direction. Especially if you're talking about the ad channel level, if you're looking at Facebook ROAS, when you see it go up and down, you should go back and look at MER during that same period and see if it's going up or down in concert with it, right?
A lot of times I do see them going in the same direction. So directionally, that tells me that ROAS tends to be correct. It may not be the correct dollars of return on ad spend, right? But directionally is correct. And so there's this correlation that you should be following between ROAS and MER to make sure that what the ad channels are telling you is correct.
Um, is correlating to M. E. R. If they start going in the opposite direction, you have a problem somewhere in your funnel that you need to dig into because it just it would indicate that your row as is going up and your M. E. R. is going down and that there's, there's, you know, some, there's something weird going on there.
Um, so here's another one that, you know, um, I think is really interesting to think about. And to be honest with you, there's no right way to think about this, but I'd love to just get your perspective on what you guys see, um, with your store hero clients as it relates to this channel or this as it relates to this challenge.
And it's, it's cross, it's omni channel, having more than one e com sales channel, right? And so specifically an Amazon store, And a Shopify store, right? And so, to set this up, I've got several brands who are spending heavily on top of funnel on Facebook or maybe YouTube, but usually on Meta. They have an Amazon Seller Essentials store and they have a Shopify store, right?
And, and generally speaking, you tend on the accounting side to allocate all your Facebook spend to the Shopify store because it is really hard to, It's really hard to determine how much of that is bleeding over to Amazon, but we know it's bleeding over to Amazon because we've messed with top of funnel spend and seen Amazon go up and down in correlation with it, right?
What are you seeing brands struggle with here in that kind of like cross channel attribution? And is there any advice that you're giving brands of how to think about that when they have both a Shopify and an Amazon store?
[00:40:58] Thomas Gleeson: Yeah, big time. And the third one I'd probably add in there is probably POS locations as well.
Um, I think there was a stat a couple of years ago that typically when brands open a new physical location, even online sales for that region will have a spike of up to 30 percent in the first month. So, um, you know, you can't discount the, the impact of a physical location on your Amazon and your Shopify store as well.
I probably have a channel like Ecom, like an omni channel MER broken out by Shopify, Amazon, and probably POS to a certain extent as well. Maybe not so much POS, but I probably have it broken out by channel, but also on a business level again, I think it's important just to have that kind of, that breakdown, that clarity to understand what's actually working still on a business level, but obviously still broken down on a channel level as well.
But as you said, that the piece between. Facebook and Google ads and how that bleeds into Amazon is incredibly difficult to try and solve. And as you said, I would be of the same opinion as you that, you know, the Facebook ads should transpire to higher Shopify sales, but we've seen the same thing with a number of stores where, you know, Facebook spend goes down.
Because maybe Shopify sales aren't fantastic. And then Amazon sales also go down directionally the exact same week as the Facebook spend, Facebook spend dips. So it's, it's a bit of a mishmash to be completely honest with you. I, if I was given advice to have a business mirror, but also a channel mirror as well, where possible, because again, you want to just see the directional cues that you're getting positively or negatively.
[00:42:27] Jon Blair: Yeah, I mean, that's the way that we've, um, had to look at it with the brands that, that we work with. I've got a brand who's spending 2 million a month on meta, so there is absolutely a halo effect on their Amazon store, right? And, um, what we've, Done is we have a channel level, um, Mer and we do allocate all Facebook spend to the Shopify store and on Amazon, only whatever they're spending on the Amazon platform gets, um, allocated to Amazon.
So what does it look like? Their Shopify Mer appears super low relative to their Amazon Mer, but we're also. Um, we're also looking at an omni channel blended MER for the whole business, right? And that's helpful because when we make changes, like you said, cut spend on meta or crank spend on meta, we do want to see what it appears the Shopify channel MER is doing, but if the overall business MER still stays solid because Amazon's rises or stays steady, and the overall business MER is healthy, Generally speaking, we'll keep cranking on the spend, even though Shopify looks like it's not doing well from an efficiency standpoint, so that's, that's another kind of example of like looking at more granular channel metrics, but then going, hey, if the business level MER is holding, We might want to not mess with anything cause this is all connected and we're, we're, we're producing the Mer that we want at the business level.
So let's, let's keep on going. I know that that's not always the answer that brands want to hear. They want, like, it's not uncommon that they want their CFO to like tell them basically solve the attribution problems of the world. And, and that unfortunately we can't do that. Um, there are SAS companies spending millions of dollars trying to solve that problem.
Right. And they're still struggling. Right. But we do have some holistic ways by using Murr to at least assess if like the bottom line impact of the, of the marketing decisions you're making are, are heading you to are pushing you towards or further away from your goals. Um, when, so coming back to store hero, this is a tool that helps you.
Um, you know, again, amongst other things, uh, measure your order level profitability with a contribution margin lens, your SKU level profitability with a contribution margin lens also allows you to look at your company's profitability because you guys are pulling in fixed operating costs as well, or the system has the ability to do that.
Where are you seeing the biggest challenges of getting the data that you guys need for a particular brand to have. Rock solid, um, store here reporting. I'm sure there's some that have it together, right? And store here is just working from the very beginning. And then others were, there's a learning curve of like fake walking them through what data they need to pull and having the right definitions, like landed product costs versus just supplier costs.
Walk me through where some of the biggest challenges are that you're helping brands with as it relates to the data.
[00:45:27] Thomas Gleeson: Sure. And just to kind of set the scene, I suppose, yeah. So Tor Hero is, it's a SaaS platform for e commerce brands and agencies to centralize e commerce marketing and finance operations to get a, a true review of the margins, unit economics and profitability, as Jon kind of said there on an order product and also on a business level there as well, um, the e commerce and the marketing data is.
Not going to say easy, but it's it's plug and play and the, the, the, the secret sauce, I suppose, that we're trying to help brands with is understand the profitability lens. And, you know, to understand the profitability lens and to have accurate data. You know, cost inputs need to go in there. You need to make sure that your, your shipping costs, all of your, your variable, variable or marginal level costs are correct.
And then also your, your operational expenses. So to be completely honest with you, brands are probably using this in two different ways. Some brands are happy to just get to CM3 contribution margin and leave it there. Not input their operating expenses. Um, and then other brands do want to input all of the opex and get down to EBIT r to net profit.
So in terms of the marginal costs or the variable expenses, um, we hook directly in with your shipping carrier. So your ship stations, your ship Bobs, and the likes. Um, then we pull in all of your three PL costs, your return costs, um, any of your transaction fees. They all pull directly in from Shopify. Um, and any and any of the, of the, of the other kind of marginal costs that you might face, that onboarding is probably only 10 to.
10 to 10 to 30 minutes, depending on how ready you are for the call. Really? And the 2nd part, which can be more a little bit more cumbersome, but also not not too bad is the operating expenses and how they get inputted into the platform. So we can do is up your integration or is a pure integration to map indirect as quickbooks or to 0.
But a lot of businesses are, they're using StoreHero to get to like 90 percent or 95 percent confidence. They don't want to input every single cost into StoreHero. They might have the Zapier integration set up with Xero or QuickBooks. So they're kind of putting in 90 percent of what that recurring OpEx looks like.
And say, that's, that's a good enough directional cue for us. We know our bookkeeper or accountant is going to have our accounts over to us at the end of the month. But we're pretty confident that we have. Profitability with 90 95 percent confidence interval here. So you can input your staff costs, your rent costs, software fees, agency fees, very, very quickly.
Typically, even if you want to go ahead and actually input all of the operational expenses of the business, total onboarding time rarely goes over 45 minutes.
[00:47:53] Jon Blair: Yeah, I love that. Um, another thing that you touched on and I won't get us on a tangent because we got unfortunately got to land the plane pretty soon here coming up on time.
But there's one other thing that I've been noticing recently that you just touched on, which is agency costs. There is often times, there's almost always a variable component to agency costs, because they're usually charging at least part of their fee on a percentage of ad spend or a percentage of revenue.
And so that is a variable cost that often times, um, brands, Tend to leave out of their contribution margin equation. And so I just want to point that out, that that's something, um, you know, if you're not doing that, that's something that you want to consider, um, heavily because those agency fees really do scale, um, if there's a variable component to them and then that catches a lot of founders off guard.
[00:48:41] Thomas Gleeson: Just to double click on that, Jon, because I'd love your feedback on it. Because I, I speak to hundreds of, hundreds of businesses a month, there's such a divided opinion on whether agency fees go into marketing budget or as an OPEX or operational expenses. I'm of the opinion they should see it as a marketing cost and feed into your contribution marriage and figures.
Um, but I get pushback from that sometimes, um, curious. It sounds like you're in the same kind of camp as I am in that sense.
[00:49:08] Jon Blair: Well, if it's an agency, right, and there's a variable component to it, it's got to be, at least the variable component should be in, in your variable marketing costs at the very least, but at Free to Grow, um, all marketing contractors.
So like, that's whether it's an agency or a freelancer. Get, um, tend to get coded as a marketing cost. And so when we are showing brands, their MER, we call it MER per, uh, QuickBooks or MER per their accounting system, MER per their, um, general ledger. It's net revenue divided by everything coded to marketing.
It's not the same MER that's being measured. On just an ad spend basis, right? And that's so that they understand the disparity between their advertising MER and what they're fully loaded MER, right? And it's, it's important because making an in source versus outsource decision, right, for something like an agency.
Is a true incremental cost decision. We're bringing it at one, at some point I was explaining this to a brand the other day, like, Hey, we don't need to, your agency is crushing it. I don't want to rock the boat, but I want you guys, you guys are killing it. They're scaling ad spend. And I just want you guys to see that like in my model, as you guys scale to these revenue numbers and ad spend numbers, 40, 000 a month.
And so my question to you is how many people could you hire internal, right? That just focus on your brand all day, every day for 40, 000 a month and potentially get better results. It's, it's a, it's a hard decision to make. It's not like black and white, like we're spending this much money. So we need to bring it in house because an agency who's doing a great job as an agency is doing a great job and they're keeping that off your plate and you need to, you can need to take into other considerations, you hire people in house.
You need to be able to manage them, right? There, there's other employment costs. And so, you can't look at it in just, uh, isolation. But, it, it absolutely is a variable cost. And if you, if you take a variable cost, again, because it's, there's usually a percentage based on ad spend. So as you scale ad spend, that cost goes up, making it variable.
Um, It, when you take that variable cost and you convert it to a fixed cost by hiring someone in house, then you should scoop that variable cost out of your contribution margin and now it becomes a fixed operating expense, right? And so it is important to make those distinctions, I believe, from a finance standpoint.
[00:51:34] Thomas Gleeson: Yeah, I couldn't agree any more with you in that, in that, on that sense. Um, yeah, and depending on the size of your, your brand, um, You know, that could be a complete misnomer to your contribution margin and how your business actually functions. So, uh, I think we're on the same page in that one, which is, which is fantastic to hear.
[00:51:51] Jon Blair: Absolutely. Absolutely. So we're running up on time. So I got to help us land the plane here. Um, before we close out, I always like to ask, um, a personal question. And one thing that I'm interested in is what is something you're reading or listening to, or some kind of resource out there that you'd That you've been kind of, uh, consuming and digesting that you've just found, like, really empowering or interesting that you think could be helpful to the audience.
[00:52:19] Thomas Gleeson: Um, at the moment, I have been I'm going to have to edit this and think about it. Um, what am I even reading? See, I want to say, I want to say, uh, take a holiday here, but I probably shouldn't. Um,
um.
Um, so right now I've been reading a lot, um, but probably to be honest where I'm getting most of my educational stamp, educational information from e commerce, just the trends and what's going on in the industry right now. The limited supply podcast from Moiz Ali. And Nick Sharma has been phenomenal. Um, probably the, the unofficial Shopify podcast from Kurt Elster.
I've become a little bit more of a podcast guy in the last couple of months, because I don't have as much time to read. I wish I had more, but I don't. For sure. Probably lent into Ecom podcasts a little bit more. So, um, probably the unofficial Shopify podcast and the limited supply from, uh, Nick Sharma and Moiz Ali.
[00:53:28] Jon Blair: Those are both really solid ones. I listened to limited supply as well. If you're a brand operator listening to this and you're not listening to either one of those podcasts, I definitely. I definitely endorse them and highly recommend you check them out. They're chocked full of knowledge and really also just help you like not just from a strategy and tactics standpoint, but they can really help you just kind of stay up to date on the trends.
It's more of the macro trends within the e com space that can be really, really helpful. So, um, well, Hey Thomas, this has been an awesome conversation. Um, brand operators listening to this. Um, there is so much. There's so much advice that you can follow in this episode. Um, but you know, if you're interested in finding out more about Thomas or about Store Hero Thomas, where can people find out more about you guys?
[00:54:16] Thomas Gleeson: Sure, so you can head over to storehero. ai Uh, you can get me on LinkedIn at Thomas Gleeson and more than happy to chat with anyone, set you up with a free trial and do an initial free consult to help you get the most out of Store Hero and the most out of your business.
[00:54:31] Jon Blair: Awesome, awesome. Well listen everyone, I'd highly recommend you check out StoreHero.
Super powerful tool. If you're a profit focused DTC brand, um, you need to understand your contribution margin and making it easy to report on and understand is, is, is what shop, or is what StoreHero is really, really great at. Um, so yeah, I appreciate everyone tuning in. Look, if you want more helpful tips on scaling a D2C brand, consider following me, Jon Blair, on LinkedIn.
And if you're interested in learning more about how Free2Grow can help you scale your brand alongside healthy profit and cash flow, consider checking us out at freetogrowcfo. com. Thanks again for listening and until next time, scale on!
