Podcast: The Top 3 Mistakes DTC Brands Make While Scaling From $1M to $10M
Episode Summary
In this episode of the Free to Grow CFO podcast, Jon Blair and Jeff Lowenstein discuss the common mistakes DTC brands make while scaling from one to ten million in revenue. They emphasize the importance of inventory management, the impact of marketing agency fees, and the necessity of regular financial reviews. This conversation provides valuable insights for founders looking to navigate the complexities of scaling their businesses effectively.
Episode Links
Jon Blair - https://www.linkedin.com/in/jonathon-albert-blair/
Jeff Lowenstein- https://www.linkedin.com/in/freetogrow-jeff/
Free to Grow CFO - https://freetogrowcfo.com/
Key Takeaways:
It's better to risk stocking out than to overstock.
Monthly financial reviews are essential for tracking progress.
Understanding contribution margin is key to evaluating agency performance.
Meet Jeff Lowenstein
Jeff was previously leading M&A efforts at ecommerce aggregator Boosted Commerce where he was the 5th employee. He built processes across M&A, finance and operations to support rapid growth from 0 to 30 brands under management in 2.5 years.
He previously co-founded and exited an app for Shopify merchants and spent time in the Strategic Finance departments of Etsy and Caesars Entertainment. Jeff holds a BA from the University of Pennsylvania and an MBA from Harvard Business School.
He’s worked with hundreds of brands over his career and founded Free To Grow because of his passion for supporting entrepreneurs and helping them succeed. The analytical and financial tools he has developed over the years are specifically crafted for the modern consumer brand.
Transcript
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00:00 Introduction to Scaling DTC Brands
01:21 The Badlands of Scaling: Key Mistakes
02:50 Inventory Management: The Fear of Stockouts
22:07 Marketing Agency Fees: Finding the Right Fit
32:14 The Importance of Monthly Financial Reviews
Jon Blair (00:00)
Hey, what's happening everyone? Welcome back to another episode of the Free to Grow CFO podcast, where we dive deep into conversations about scaling a DTC brand with a profit-focused mindset. I'm your host, Jon Blair, founder of Free to Grow CFO, the go -to outsourced finance and accounting firm for eight and nine -figure DTC brands. And today I'm here with my favorite guest, I don't know.
No disrespect to any of the other amazing guests that we've had on the show. They're all great. But I got my co -founder, Jeff Lowenstein, on. So yeah, I gotta say that I do have a little bit of favoritism there. Jeff, thanks for joining me, man. What's happening?
Jeff Lowenstein (00:39)
Yeah, happy to be back on the pod, Jon, and no disrespect to anyone else. I mean, you could say we're all tied for first for your favorite, favorite guests.
Jon Blair (00:50)
100%. We've got a little bit to live up to on this one. You were on Taylor Holiday's Bridges webinar last week, we've got to really crush this one. But I'm excited about what we're gonna be talking about. Last time I had you on, we chatted about LinkedIn post that I had posted maybe a couple months ago, and that got a lot of people talking. And today we're gonna chat about another one.
which is centered around the top three mistakes that I see DTC brands make as they scale from one to 10 million in annual revenue. Keep in mind, everyone, before we dive into this, these are not the only mistakes we see, right? and there's nuance to all of this, but there are three things that I see over and over and over again that plague brands that are scaling from one to 10 million, and I gotta be 100 % honest, the reason we're talking about this,
Scaling from one to five million is what I call the badlands. Where you have got product market fit, right, and you need to scale and punch through five million dollars and you've got to take enough resources to get to the other side of the badlands. You can't get stuck in the middle, because if you get stuck in the middle you've got to either retreat or push through and it's a really tough place to be. And I'd say depending on your product category and your business,
the badlands could extend all the way up to seven, eight, nine, 10 million. It's a tough, tough phase of the business. And so we just wanna share our thoughts on three of the biggest mistakes that we see brands make in this period of scaling in hopes that it will help you as you are pushing from one to 10 million and that you might be to glean a little bit of wisdom from what we're chatting about here today. So dude, let's dive right in to the first one.
Jeff Lowenstein (02:21)
you
Jon Blair (02:45)
Purchasing way too much inventory for fear of lost sales. Now, over the years, I've learned it's better to risk stocking out and live to fight another day unless you have excess capital, which most brands don't have at any point in time, but definitely not in 2024. Jeff, what are your thoughts about purchasing way too much inventory for fear of lost sales? You see this, what are your thoughts on it?
Jeff Lowenstein (03:12)
I mean, the only thing worse than not having enough inventory to sell is having too much inventory that you can't sell, right? So just think about like, which way would you rather be wrong is what I recommended. No one is ever getting this perfect. It's literally impossible.
you're placing a risk -adjusted bet on where you think things are gonna sell, how much of each SKU and variation is gonna sell. Let's just be honest, it's impossible to get it perfect. You're gonna miss, and you're gonna miss in places you...
didn't expect to, right? You might be super confident on one channel or one product category and then, you know, that's actually what you end up getting wrong rather than where you thought you might have issues. So it's just really freaking hard, right? You have the combination of marketing efficiency that varies day to day, month to month.
season to season, right? Especially we're about to enter the holidays and it's, you know, it's crazy times for everyone, especially the Black Friday Cyber Monday coming up. So...
I like to think about it like where would you rather be wrong? I like to show a little bit of restraint. Like I'd rather have some of my clients stock out a bit rather than being super over -inventoryed and having their cash tied up. Cause that cash crunch can kill you in a lot of ways. So that's typically where I try to push people if you have to choose one or the other. you know, it's a skill that you do have to hone over time, the inventory planning piece.
Jon Blair (04:39)
Totally.
Jeff Lowenstein (04:51)
you
Jon Blair (04:51)
Well, so there's a couple things that I want to point out there that Jeff just mentioned. One, inventory planning is really freaking hard and you will never get it perfect. No one gets it perfect. I've worked with companies doing $500,000 who are not getting perfect and I've worked with companies doing, you know, nine figures in revenue not getting it perfect. And so, take that burden off your shoulders, right, of like trying to engage in inventory planning perfection because it doesn't exist.
The other thing is, you know where this came from, this like topic in this post, is that on the founding team of Guardian Bikes, we made this mistake several years in a row. We lived to fight another day, right? But where did this show up the most? It showed up the most right before Q4, like Jeff was mentioning, right? That prime time is right around the corner.
Jeff Lowenstein (05:21)
Yep.
Jon Blair (05:49)
And then it showed up for us at the time, Guardian has since brought its supply chain back to the US, but at the time we were purchasing bikes in China. And so with Chinese New Year falling right after the holidays and shutting down the country for basically a month, we had to commit to springtime inventory, which for bikes was the other seasonal spike. And so the trick was, we're growing, you're growing, so last year's numbers for Q4.
and mind you for Q2 for the spring, your sales numbers should be bigger this year theoretically, right, than they were last year, but you don't know how big they're gonna be. And if you have really long lead times, you're committing to orders really early and even harder, you're committing to orders that need to be produced before Chinese New Year before you've even seen how you did during Black Friday, right? And so we had to play some massive bets.
Jeff Lowenstein (06:42)
Yeah.
Jon Blair (06:47)
And the trick is where the emotional or like kind of psychological bias comes into play is the fear of lost sales. Right? With the fear of lost sales, you're like, shoot, I may be leaving money on the table. Right? And so what Jeff mentioned about a risk -adjusted bet is like one way that we think about this from the CFO standpoint, and I'd love to get your
elaboration on this Jeff, but it's like what's the most that we can afford to buy with our capital structure, right? That can allow us to sell or to hit the highest revenue goal possible. But that if we totally whiff and we hit some minimum sales forecast that we feel really confident in, that we're gonna at least hit that, that we would still survive, right? We'd live to fight another day. Instead of betting the house and you either survive and thrive,
Jeff Lowenstein (07:29)
Thanks
Jon Blair (07:44)
or you die. You got any other thoughts on that, Jeff?
Jeff Lowenstein (07:49)
I always have lots of thoughts, And I know you live this with Guardian Bikes as well. okay, I have a couple things that I wanted to mention in response. So actually, I also have some experience from when I was at Boosted Commerce an aggregator. We actually were trying to buy a brand and what they were doing at that time.
They were growing very, very nicely year over year, consistent every month, consistent from January through, it must have been around this time of year, September, that we were looking to buy them. And the year over year growth rate was really high, like they were crushing it. And we were looking at, know, hey, we're about to enter Q4. But by the way, we have so much we want to order for the holiday season.
that we don't even think they can produce all this and also what we need for Q1 because they're gonna be out on Chinese New Year break during Q1, right? Which happens right after the holidays, which people often overlook that they have this...
Jon Blair (08:46)
Mm.
Jeff Lowenstein (08:59)
they were thinking, okay, we're gonna make this massive, massive order because that's what's needed to fund, you know, to fulfill all this demand that we're creating. Well, all right, let's look at the numbers a little more closely and they were crushing it all throughout the year up to that point. But if you actually look back at last Q4, they also had a massive, massive growth rate.
over the prior year. And so if you just look at it in terms of dollars, was, it was actually a crazy bet to say that we're going to actually grow, you know, another plus 75 % over last year's massive Q4. And so, you know, in making an acquisition, right? Like, you know, we were able to have some influence on that inventory purchase because, you know, we weren't going to buy it if we were uncomfortable with that. And so we worked with them to understand, let's, let's be a little more.
I don't want to say conservative, but it is conservative, right? Is the way we wanted to go with that. And basically what we're able to do is with the supplier, and again, this is a whole different conversation, you can have, basically giving more information to your vendors is always a good thing. And the conversation was, hey, here's roughly what we think we're going to purchase over the next 12 months, right? Here's the forecast. And that opened up, that transparency,
Jon Blair (10:09)
Totally.
Jeff Lowenstein (10:19)
opened up a whole new set of options. And so what that brand was able to do was give them that forecast. They would actually start making stuff in advance. And only when it was shipped out of the warehouse in China was the brand then paying for it. And so that was a much, much...
Jon Blair (10:39)
Mm.
Jeff Lowenstein (10:41)
cleaner, more agile supply chain because you can make much smaller shipments rather than saying like, hey, here's what we're ordering for Q4 and Q1, you know, ahead of those like really long lead times, which was a massive cash outlay that they would have been overstocked if they had done that. And so saying like, here's the next 12 months of...
sales we want to do, okay, so let's make that in batches and then only pay for that once we release those batches from your warehouse. And by the way, the amount you release, you can react to that in real time based on sales data. It doesn't need to be predetermined. It's a huge advantage and makes you much more agile. yeah, anyway. Yeah.
Jon Blair (11:23)
You know, I actually want to drill down on that a little bit because you brought up several, let's talk about strategic financial management concepts in what you're talking about here, right? So how do you reduce the risk? Going back to what Jeff said earlier, risk adjusted bets, right? So what are the dynamics or the levers that you as a brand can potentially strategically pull or maneuver to reduce risk? One that Jeff just brought up is
batch size, right, or purchase lot size. The smaller, more frequent releases of inventory you can commit to, the less risk there is in ordering more. And it's because you're committing to small lots at a time financially. The extreme case on the other side is like, you commit to a year's worth of inventory all at one time, massive financial risk, right, huge cash outlay at the beginning, and like, you're very reliant on releasing that cash.
Jeff Lowenstein (12:10)
Yeah.
Jon Blair (12:21)
over time based on sell through, right? like lot size and batch size is a huge one. The other thing is lead times. And there's actually a very tight connection between lead times and batch sizes. Like if you think about, we used to look at this at Guardian Bikes all the time, like how do we do like frequent releases, right, of product that there's kind of like always this continuous flow. And so when you think about like lead times,
If I always have this continuous flow of like SKU mix on the water at that time, like I may only... And if like what Jeff's talking about, there's a continuous production happening on the other side, right? At the manufacturer. They might have work in process or raw materials or components already ready to go that would decrease your lead time. We saw that at Guardian. Where like when we would order twice a year, they didn't have a stockpile of what they needed to get production going. But when we're ordering all throughout the year,
Jeff Lowenstein (13:12)
Yeah.
Jon Blair (13:18)
and they were kind of like getting these little drip campaigns, so to speak, right, of like shipping out product. They, if we had to change the SKU mix, they're like, cool, we already have those components, let's just put them on the line, let's change the line, and we can get those out the door in the next few days. So, like lead times, decreasing lead times. The other thing to consider is when you're, when you have a, this depends, this doesn't work for bikes, because air shipping bikes, you just, you lose money because of the size and the weight. But if you have a smaller product you can air ship,
If you're talking about a, for example, like a big sales period, like Q4, commit to what you feel comfortable committing to, put it on the water or the slowest, cheapest transit method to maximize your margin, but be okay with air shipping some if you have, if that does produce incremental contribution margin dollars and you place that shipment late, right, in the season once you see you're gonna stock out and yes,
Jeff Lowenstein (14:01)
Thank
Jon Blair (14:15)
Is your margin lower? Yes, but as long as there's incremental contribution margin dollars, it is still incremental to the bottom line. So that's another thing that I've done with brands before in the past.
Jeff Lowenstein (14:26)
How many Guardian Bikes did you airship? Zero.
Jon Blair (14:30)
We did not airship many, zero because we couldn't, but I always wished we could. We were always trying to figure out how we could and make money and we couldn't. But we have apparel brands we work with that can still turn an incremental margin profit, right, at airship. But unfortunately we could never pull that lever at Guardian. always wanted to.
Jeff Lowenstein (14:34)
Yeah.
Certainly. Certainly.
And there's another thing that I wanted to respond to that you said earlier, which is it's about maximizing revenue in a holiday period. there's also something about being understocked as a forcing mechanism
to preserve contribution dollars and contribution margin because in the, let's say you're overstocked you're holy crap, it's December.
Jon Blair (15:08)
for
Jeff Lowenstein (15:17)
First, we got through Black Friday and I have way, way, way too much inventory that I need to sell before Christmas here. What are you going to do? Well, the obvious thing is you're going to either increase budgets or increase discounts or both, right? If you really need to move inventory and that's going to absolutely decimate your contribution margin, right? And so the advantage of having that extra stock, you know, is not even there, right? And it hurts your overall P&L. It's not just like, it's only, you you can't just do that.
Jon Blair (15:30)
Mm -hmm.
for sure.
Jeff Lowenstein (15:47)
a certain amount of units, right, that affects your full business. And so if you think about it the other way, if you're understocked a bit, you're actually going to be able to preserve price much better and you're going to be able to be more efficient on your spend as well. So that's something to think about.
Jon Blair (16:03)
Totally.
Jeff Lowenstein (16:07)
those, you know, obviously you're not going to be at either extreme where you're like, hopefully, like, hopefully you're not discounting, you know, 30, 40, 50%. And hopefully you're not like cutting ad spend off altogether if you're under, if you're understocked. it does seem to me like based on my experience and the brands I've worked with, that it's a less stressful place to be in, be in, to have to say like, we're selling too well, let's preserve margin. that, that is usually a less stressful conversation for, for,
Jon Blair (16:26)
Mm -hmm.
Jeff Lowenstein (16:37)
the founder to have than slashing price and increasing budgets. What do you think about that?
Jon Blair (16:42)
That's a really good point. That's a really great point. And actually, you know what that made me think of too is... This is kind of the elephant in the room, I think. The thing you're not thinking about that's lurking right there, why is it that you're so scared to have to capitalize on this moment? In this case, we'll call it Q4. Why are you so scared of fear of lost sales?
And what I'm gonna bring up here is like the difference between building a brand that people are loyal to and they're gonna purchase from you at some point after the holidays versus a one -hit wonder and you acquire a new customer, they buy one thing from you and they never come back. At the end of the day, like you still have to build a brand and if you are truly building a brand and you stock out, yeah, you're leaving sales on the table for that period, but if you're building a brand that people really connect with and really believe in, they are gonna come back and buy when you're back in stock, right? If you're a one -hit wonder, yes, you're leaving money on the table, but like you've got bigger problems, which is you don't have a brand, which is what you need in the end, right? And so like, that's the other thing is, I think, I
You need to be very focused on strategic marketing. We're building a brand. We're selling things that people are gonna come back and buy again from us later, right? And like, the more and more that I work with DTC brands, I mean, because we don't just say that we are fractional CFOs and accountants for DTC companies. It's DTC brands. Because, at end of the day, the unique...
Jeff Lowenstein (18:22)
Great.
Jon Blair (18:25)
And I think even Taylor brought up something akin to this on the webinar last week. It's like, you can have a really great product, but unless you truly have IP locked up around the world, which basically no one does, and even eventually your IP, your patent is gonna expire, Eventually someone's gonna copy it and your profits are gonna get competed down to zero, right? But what doesn't get competed down to zero is building an amazing brand, right? And so at the end of the day,
It's about, when I say like, over the years I've learned it's better to risk stocking out and live to fight another day, it's not just that. It's over the years I've learned that if you're really building a brand, it's okay to stock out. And I'd rather stock out and build a brand that people are gonna come back and buy from later when I'm back in stock, than freak out and put my brand at risk, its existence at risk, by trying to go too big.
Jeff Lowenstein (19:22)
For those who didn't catch that, I did a webinar with Taylor Holliday on the Bridges series. It's on YouTube. It's posted on my LinkedIn. please feel free to check that out as well. What was the question, Jon? What was the problem?
Jon Blair (19:37)
No, mean look, at the end of the day, mean we're just kind of, no, I mean we're just, we're just riffing, it's, mean, look, there's one other thing I actually wanted to mention, and then we're gonna move on to the marketing agency one. There's, the statement is that, you know, I originally made that we started talking about is like, unless, says, unless you have excess capital, right? And so the one other thing I want to point out is, like, we have some brands that we work with, I have one that's my client, they took a
Jeff Lowenstein (19:50)
Yeah.
Jon Blair (20:07)
big swing last Q4 and they would have been put out of business had we not put the right debt facility in place that allowed them to be overstocked and they're selling a product that's not going obsolete, right? Obsolescence is a whole other thing, right? And yeah, so like what I, the, the, be careful.
Jeff Lowenstein (20:10)
Yes.
That's a whole different conversation. Yeah.
Jon Blair (20:32)
Debt is risky if you structure it the wrong way, but we as CFOs really were able to help this brand not only put the initial debt facility in place that got them the inventory, but once they realized they were definitely gonna be overstocked for a year plus, we helped them refinance into the right debt facility to help them sell down that inventory that again is not gonna go obsolete, right? And so they took a big swing and many brands, they quite likely would have gone out of business if they didn't have a CFO.
Jeff Lowenstein (20:46)
Yep.
Jon Blair (21:01)
to be quite honest with so that's another thing to just keep in mind. If you have excess capital, on the equity side, you're paying the cost of equity, which is really expensive, to take that swing, but maybe there's a reason you wanna take that swing. But CFO can also help you get the right debt facility in place to take that swing.
Jeff Lowenstein (21:20)
for sure. I think I know who you're talking about and I agree.
Jon Blair (21:24)
So let's chat marketing agency fees because the next thing that we see very commonly, this is super common, we work with about 25 growing e -comm brands and we see very frequently brands paying too much in marketing agency fees. Now, as I said in my LinkedIn post, I'm not saying agencies are bad because they definitely are not. But...
You can't pay 20 to 30K a month in agency fees if your annual revenue is only a few million dollars a year. And so what my initial advice was, choose an agency that specializes in working with brands of your size and has fees that align with your cost structure needs. What are your thoughts on this topic, Jeff?
Jeff Lowenstein (22:09)
Yeah, mean, of course, I agree. I think that a CFO can help you do the math. That's very simple. The agency fee, which is typically a fixed amount plus a variable, maybe a percent of app spend, right? The math that we help our clients do is what is the incremental revenue?
that that agency needs to generate to offset their fee. Because that's not a very obvious calculation that people are doing, right? They're just thinking, well, if I can get extra 10%, 25 % on my ROAS, then it probably pays for itself, maybe.
but we can actually help you figure out what that exact dollar amount is. So that's definitely like step one that I would do. I would also say...
Getting an agency to do an audit for you is super important, and getting their thoughts on how they would make changes to your account. What would they do differently? What would they do better than your current setup? Sometimes they have good answers and sometimes they don't. So really assessing them during that audit phase is quite important as well. And then lastly, like, I mean...
I don't know how many people have pulled this off, but I have heard of it in a couple cases. Why not negotiate for a percentage of contribution margin instead of percentage of spend so that the incentives are actually in the right place, right? Because that is their job at the end of the day, is to generate extra contribution margin dollars. They're gonna argue, they're gonna say, there's all these other things that are out of our control, but.
Jon Blair (23:50)
Totally.
Jeff Lowenstein (24:00)
If they're a true partner, I would hope that they're willing to at least consider that. So that's another tactic I would urge people to try.
Jon Blair (24:10)
So, Jeff just brought up a couple of really important things. Let's start first with profitability, right? The first thing that Jeff mentioned is the incremental cost of investing in that agency, is it actually profitable, right? Because it's not just, hey, an agency's getting me revenue. It's, is that agency generating more contribution margin dollars than their cost is, right? So just as a simple example, if you hire an agency for 10 grand a month,
does hiring them produce more than $10 ,000 of contribution margin incrementally compared to before you use them? Because if not, you're losing money on that agency, right? They have to produce more contribution margin dollars than they cost, right? But like Jeff mentioned, second to that, the agency has to understand their impact on contribution margin dollars or else how can they...
Jeff Lowenstein (24:49)
Right.
Jon Blair (25:04)
How can they ensure that they're generating more than what they cost? Right? And so that's another big topic in the marketplace that we see all the time is like, there are agencies who really understand contribution margin dollars and how to influence them. And there's others that don't. There's a lot that don't. And so like really doing your homework on like testing them on do they understand contribution margin dollars. And I would say that's a big place where we help our clients, right? Is that like,
Jeff Lowenstein (25:30)
Yeah.
Jon Blair (25:34)
we can help vet agencies. We can tell pretty quickly if they understand contribution margin or not. And we can help you and the agency understand what's the ROADS or the MER and the revenue that they have to hit for them to truly be a profitable investment, right? Because that's the reality. That's what they need to be or else that investment is losing money. Do you have any other thoughts on that, man?
Jeff Lowenstein (26:01)
Just the last thing I would say is your original question is, you know, can you spend 20 to 30 K a month if you only have a couple million dollars in revenue? And the answer is no, but I guess the thing that's hard about this, right, is like I'm victim to this as well. I'm on Twitter scrolling, I'm on LinkedIn scrolling. I see people on podcasts, on webinars talking about how they're killing it, right? And everyone's posting like how great they're doing. And...
First of all, like not all of that is true, right? Even revenue screenshots don't tell the full story. But the other thing is just like, think about what's right for me at the stage that I'm at, which is something you said earlier, Jon. There's some really, really great agencies out there that are doing really, really great work. And you'll see them posted about on LinkedIn, Twitter, whatever. And they probably are killing it, right? But.
Jon Blair (26:43)
Totally.
Jeff Lowenstein (26:57)
Think about what's going on internally, right? They might be working mostly with those large, like premium accounts that can afford to pay 20, 30, 40K because they are, you know, healthy eight figures or nine figures. And so if you're a much smaller client to them.
The question is like how much actual personal attention will you get on your account? And so there might be a smaller shop that is much happier to have you, that gets to devote more time into managing your ads or creative or whatever it is, right? And so just think about not just the brand name, but also the actual people that are gonna be working with you and the individuals behind it, I think is something that will really move the needle.
Jon Blair (27:21)
Mm
Yeah, you know what? You brought up a really great point there. This actually got talked about in the thread of comments when I posted this originally on LinkedIn, which was like, when you, it's really easy to like fall into wanting to work with like a LinkedIn influencer or a Twitter influencer who like has an agency, right? But like, or to follow a brand that you follow aspirationally and see what agency they use.
Jeff Lowenstein (28:11)
Right. Right. They... It worked for X. It must work for me. Right?
Jon Blair (28:13)
We actually, this happened to us at Guardian Bike, so we looked really... Totally, yeah. So we really looked up to a lot of the early DTC darlings and, you know, there was Harmon Brothers. I don't know if you've heard of Harmon Brothers out of Salt Lake City, Utah. They made all these direct response videos for like mattress companies and direct to consumer like grill companies.
And we were really enamored with Harmon Brothers and we went like we got to go work with them and we went and talked to them and like their fee was like We were like a two million dollar brand at that time was like, okay We definitely cannot afford that and they they referred us to another group out in Salt Lake that was like more aligned with our needs but they were kind of like the Harmon Brothers guys were like their mentors kind of situation, right and and so we and ultimately like we
Jeff Lowenstein (28:47)
Yeah.
cool
Jon Blair (29:07)
that actually ended up even not going over very well. Like it just, it didn't perform, that campaign didn't perform. But the point I'm making is we got sucked into the allure of like doing exactly what an aspirational brand that we follow did, thinking that that would work for our brand. like sometimes it does, but you had to think from a first principle standpoint about why that would or would not work.
with your brand, right? And so when going to work with an agency, like, you gotta think about things from a first principle standpoint. Like Jeff is saying, like, is this right for the stage that we're in? Why is it right or why is it wrong? What are the constraints that I have to deal with? What are the constraints on the margin side? Like, maybe they're crushing it for a brand that has 80 % gross margins and your brand has 60 % gross margins and an AOV that's half the size of that other brand. Like, you have to break it down and go, what do I have available in CAC?
Jeff Lowenstein (29:56)
Yeah. Yeah.
Jon Blair (30:03)
Right? You have to help inform that the agency can't do it for you and like if they're used to working with brands that have higher AOV, maybe it's not a revenue thing. Maybe it's an AOV and a margin thing. Right? And then like, like how much room is in the margin for your CAC. And so these are all questions you have to ask yourself from a first principles standpoint. These are all questions that a CFO that can help you think through. Right? In like crafting and vetting this relationship with an agency. And then there was one other thing that you mentioned.
that I think is really important and it's that like you have to well you actually didn't mention this directly but it made me think of it an agency may work for a season and not work for the next season and again this comes back to right like I've seen agencies crush it get a brand of 10 million and they're just not the agency to take that brand to 20 million
Jeff Lowenstein (30:50)
Mm. That's a great point. That's right.
Jon Blair (31:03)
Right, and so just know that like, that's something that you have to always be assessing. can't just assume a brand or an agency is gonna take you from one to a hundred million, right? You might have several along the way and maybe even insource some stuff along the way. So I don't know if you have any follow on thoughts to any of that, Jeff.
Jeff Lowenstein (31:21)
I mean, it's a great point and I think even the individuals within an agency might be right for you in different seasons as well.
Jon Blair (31:28)
Mm.
I've seen that play out for sure.
Jeff Lowenstein (31:32)
Yeah, we've seen people stay with an agency, but having a different person on the team brought in on the account can make a big difference. just because it's not working, you don't need to move agencies. You might need to just shake things up a bit internally as another option. Cool. Should we go to the next one?
Jon Blair (31:52)
So yeah, yeah, for sure. I mean, I probably should have done this one first given that we're a fractional CFO firm, but we'll save the best for last, right? So the third point in this post about top mistakes that we see DTC brands make when they scale from one to 10 million, not reviewing financials and a forecast every month. Now, at minimum, you need to review your historical financials and a forecast model monthly. Why?
Jeff Lowenstein (31:58)
Yeah.
Jon Blair (32:22)
to assess if your actual execution is on track with your plan. If not, then you make adjustments. And waiting longer than a month to adjust can be way too costly. We can probably do a whole episode about this, but Jeff, what are your thoughts on reviewing financials and forecasts in every month and why from one to 10 million, that's so critical to be doing?
Jeff Lowenstein (32:32)
My gosh, well, you're talking to a finance nerd. So obviously I love this stuff. I've been in FP&A my whole career basically. And this is like what I love doing, right? It's understanding what are the financial trends? What are the financial margin profiles of your overall business? But then different channels, different SKUs, different decisions you make.
Inventory purchasing and on ad spend, you know, 3PLs, etc. Right? All these all these different little things, all these different decisions add up to a financial picture. And that review period, I think, is when you get to actually understand how you performed against your goals and against your plan. And to me, if you're not doing this review, you might be just, you know, it's like sailing without a compass, right? You're definitely going somewhere, but you may not end up where you want to go. You may end
up very, very, very, very far away. So this regular review process keeps you honest and keeps you on track. And something that, you know, we do that's table stakes with every client we work with is a simple variance analysis every month of what was my forecast? What were my actuals? Line item by line item.
where was I wrong? And you'll be, you you don't need to work with us, but you can to do this, but you can definitely do this on your own and just have the discipline of doing that every single month. And you'll see you're pretty far off in month one, but don't get discouraged. You're a little bit closer in month two and by month three, four, five, like that improvement will just get so much better very quickly. And you'll be like, okay, I have a much tighter understanding of my financials, right?
And then therefore as I go about making decisions in my business, you have now a gut feeling about how all those decisions are going to impact your financials that you maybe didn't have before. So that compass gets internalized as you do this monthly review process. So I'm passionate about it. It's the boring nerdy stuff in Excel that a lot of people don't like doing, but I do love it.
Jon Blair (34:47)
Totally.
Well, and so like, let's riff off that a little bit more. So, let's say, why monthly, right? Why monthly? Well, scaling a DTC brand is like insanely hard and everything is changing always, right? And so like, your supply chain costs are changing, your freight out costs are changing, your marketing returns and know, CPMs and CACs are changing all the time. And so,
Jeff Lowenstein (35:19)
Absolutely.
Jon Blair (35:31)
The reality is I've seen brands go like, I only need this like once a year or twice a year or every three months. like, no, you don't, like, if you're scaling from one to 10, remember, that's the context of this discussion. You're scaling, you're intervening on your system all day long. You're trying new creatives, you're maybe trying new ad channels, you're launching new products, maybe you're trying fully new sales channels, new suppliers, new 3PLs. So you're introducing all these variables that impact
Jeff Lowenstein (35:38)
Yeah.
Jon Blair (36:01)
your profit margin, your contribution margin and your fixed overhead, but furthermore, your cash flow, right? And so every time you're messing with your system, which DTC founders are doing all the time, rightfully so because they're scaling super fast, right? You need to then model and assess the forward looking impact of those interventions on your profitability and your cash flow. And so every single month, you're making decisions as a founder
under the assumption that the business has a margin profile, fixed overhead cost structure, and cash flow expectations. And guess what? Every forecast is wrong. So at the end of the month, you missed those in different directions. And so you need to regroup, have your CFO take you through where you missed and where you hit it, and then re -forecast forward, right? With all of those tweaks and changes that have happened to your business, re -forecast forward the future.
And then you make a new round of decisions. And it's it's rinse and repeat. You gotta do this every month for the rest of your life as long as you wanna scale a DTC brand. What are your thoughts on that stuff, Jeff?
Jeff Lowenstein (37:11)
I mean, yeah, 100%, but like something you said that I want to comment on actually is, hey, for all you e -comm founders that are listening to this, like...
Congratulations, you chose one of the hardest industries to be a founder in. Your financial profile is changing every month, like Jon was saying, for all these reasons. It's extremely dynamic. It's extremely complicated when you have multiple channels, multiple products with different margin profiles, doing different ad channels as well. So attribution is complicated, and you're looking at cohorts as well.
Jon Blair (37:30)
for sure.
Jeff Lowenstein (37:53)
Like all these things, all these different types of analyses have to come together for you to make decisions. You know, there's a lot of more simple businesses you probably could have started. So I have a lot of respect for the e -comm founders, especially, know, bootstrapping is particularly challenging. So I think it's important to acknowledge that as well and say like this stuff is really freaking hard a lot of the time.
Jon Blair (38:15)
Totally.
Jeff Lowenstein (38:20)
There's no perfect answers, but there is, you know, just trying to sort through the data in an organized and structured way to try to make the best decision you can in real time, right? So that's the type of stuff we try to help with.
I have a lot of respect to be a brand founder. You have to have a certain stomach for some of this stuff as well. you know, one of our missions, it says it in our company values as well, right, is we try to help brand founders sleep better at night, which is not always easy. And implicit in that is that they're already getting pretty bad night's sleep because it is so stressful. So I just want to comment on that.
Jon Blair (38:50)
Totally.
It's overwhelming, Totally, totally. Yeah, I mean, look, at the end of the day, what we are here to do is make sense of all of this complicated financial data and help you make sense of it quickly so you don't have to unwind it and figure it out on your own. Because chances are, just like most brand founders, you're product -focused and or you're marketing -focused, right? That's what got you in the business in the first place. And so...that the last thing you wanna do is try to learn how to do the bookkeeping and how to make sense of your numbers, right? And so, again, the whole point of this is to get you the insights and the strategic recommendations that you need grounded in your numbers to understand what happened.
How aligned is it with my plan? What new decisions do I need to consider? And then you go out and you execute for another month and then we regroup and we do it again. There are very few businesses that are as complicated and challenging to scale as an e -com brand. And so this is just like, this has to happen. There is...
I've even worked with very financially sophisticated founders and they still need this on the journey from one to 10 plus million because it just gets harder and harder and harder and harder to track in your head. So, well look, we do have to land the plane on this one and I feel like we could actually probably talk about all this stuff again to be quite honest with you and just have a whole new discussion on
different aspects of this topic. But like the bottom line is to summarize for everyone, scaling a brand, a DTC brand from one to 10 million is hard work, right? And we see very often three really big mistakes, purchasing way too much inventory for fear of lost sales, paying too much in marketing agency fees, and not reviewing your financials and a forecast every month. The good news is...
Free to Grow CFO or firms like us can help with all three of these things and more when it comes to scaling a DTC brand from one to 10 plus million. So that being said, before we do land the plane, Jeff, if you want to share really quick where people can find more information about you.
Jeff Lowenstein (41:18)
Well, you can find us on FreetoGrowCFO.com. You can find me on LinkedIn, Jeff Lowenstein. Twitter is @JeffLOW791. You know, we're the go -to option for outsource CFO and bookkeeping for growing profit-focused direct -to -consumer brands. So, you know, give us a shout, fill out the form, send us a request if you want to chat.
Jon Blair (41:47)
Absolutely. Well, everyone, thanks for listening to another episode of the Free to Grow CFO podcast. Don't forget, if you want more helpful tips on scaling a profit-focused DTC brand, consider following me, Jon Blair on LinkedIn, or like Jeff said, Jeff Lowenstein. We got great content we're cranking out every single day. And don't forget, check us out at FreeToGrowCFO.com if you think we can ever be of service. until next time, scale on.
Jeff Lowenstein (42:13)
All right, thanks everyone. Take care, Jon.
