Podcast: Why Your Ads May Not Be as Profitable As You Think

Written By Sherilee Maxcy

Episode Summary

In this episode of the Free to Grow CFO podcast, Jon Blair and Karl O'Brien discuss the common misconceptions surrounding the profitability of advertising in e-commerce. They explore the importance of understanding unit economics, the distinction between new and returning customer profitability, and the critical role of customer lifetime value (LTV). The conversation highlights the traps brands often fall into when assessing profitability and offers strategies for brands that may not have meaningful LTV. Ultimately, the episode emphasizes the need for a profit-focused mindset in scaling e-commerce businesses.

Key Takeaways

  • Many brands misjudge the profitability of their ads.

  • Brands should aim for first order profitability based on their business model.

  • Small operational changes can lead to significant profit improvements.

  • Attribution models can distract from core unit economics.

Meet Karl O’Brien

Karl is the co-founder of StoreHero, a real time profit reporting tool for e-commerce. With an interest in business from an early age, Karl founded a digital marketing agency based in Dublin, and over 10 years worked with hundreds of business from local stores to fortune 500 companies on utilising digital tools to generate business results. During that time, he saw how data tracking, privacy changes and a lack of visibility on profit has made it really difficult for e-commerce businesses to grow profitably , and from there the idea for StoreHero was born. Karl has appeared on a number of e-commerce & business podcasts and has spoken on e-commerce and digital marketing for organisations and universities alike.

Transcript

~~~

00:00 Introduction

03:03 Understanding Store Hero and Its Mission

05:52 Common Traps in Assessing Profitability

08:51 Analyzing Unit Economics for Growth

11:51 New vs Returning Customer Profitability

15:11 The Importance of Customer Lifetime Value

17:50 Should Brands Be First Order Profitable?

20:57 Strategies for Brands Without Meaningful LTV

23:55 The Role of Returning Customer Rate

26:46 Final Thoughts on E-commerce Profitability

Jon Blair (00:01)

Think your ads are profitable? Well guess what? They actually might not be. And today you're gonna find out why. Hey everyone, welcome back to another episode of the Free to Grow CFO podcast where we dive deep into conversations about scaling a profitable DTC brand. I'm your host Jon Blair, founder of Free to Grow CFO. We're the go-to outsource finance and accounting firm for eight and nine figure DTC brands. And today I'm here with my buddy Karl O'Brien, co-founder of StoreHero. Karl, what's happening man?

Karl (00:31)

Jon thanks for having me, great to chat as always.

Jon Blair (00:34)

Are you calling me from Dublin? Are you in Dublin right now?

Karl (00:36)

Dublin based, yeah we're actually fortunate enough to have some nice weather which anyone who's been to Dublin or heard of Dublin knows that that doesn't happen too often so everyone's a bit happier today.

Jon Blair (00:46)

I need

I was out there what, a year ago in January, which, not the greatest weather but still a lot of fun but I wanna come back out, I wanna- Yeah, yeah, exactly.

Karl (00:50)

Mmm bit chilly. think the expectation yeah the expectation is low so anything other

than like freezing is everyone's happy. ⁓

Jon Blair (01:00)

I love it, I love it man. Well, I'm stoked to chat today. As I mentioned in the intro, we're gonna chat through why your brand's ads may not be as profitable as you think. We're gonna break down some myths around some common mistakes and misconceptions that we see brands make in the way that they measure and assess profitability of advertising, and we're gonna get into the metrics that actually matter so that everyone listening, will be positioned to make much better, more strategic scaling decisions that actually drive profit. So before we get into the nuts and bolts of this, Karl, can you give us a quick background on yourself and StoreHero

Karl (01:38)

Sure, so my background is on the digital marketing agency side. I ran a digital agency based here in Dublin for about eight years. And I suppose in that time saw the ups and downs of COVID and saw how ultimately while e-commerce, it's never been easier to start. It's also never been more difficult to grow a business profitably online as well. I saw that in interacting with clients in the agency and saw how data tracking, privacy changes just made that conversation a more difficult.

My co-founder Thomas has also had a family business in this space for about 20 years, one of Ireland's first e-commerce stores. In his time working at Shopify, he also saw that other dynamic and other side of the coin. So between us, ultimately we saw a need to help businesses really unify the marketing and finance conversations happening on different sets of metrics at different times within the business. I think what can often happen is revenue is used as the daily indicator of success in an e-commerce business but ultimately we're held to account by that profitability metric or P &L at the end of the month. Those are very disjointed. Our marketing team often doesn't have that maybe financial literacy that we might like but equally our financial team doesn't understand the levers of marketing in a lot of cases either impression of Meta is one consolidated invoice they see at the end of the month and that ultimately doesn't tell the full picture. So really in essence that's what we've tried to solve with StoreHero. So StoreHero is a unified profit platform for e-commerce brands and agencies. So what we'll do is we'll unify all your sales data, your marketing data, but unlike other tools also your costs, full cost of goods and a lot of detail as well as your fixed costs as well.

We'll give you a consolidated view of that performance and also actually help you forecast and track and see those metrics on a day-by-day basis versus your goals where you're on track and off track, all with the goal of growing with profit in mind.

Jon Blair (03:47)

I love it, man. Yeah, so I've been fortunate enough to get to know Karl and his co-founder Thomas quite well over the last couple years, as I mentioned earlier, I've traveled to Ireland to meet with them and what they're doing with StoreHero is really, really cool because it gives full transparency, I'll call it top line to bottom line, and on how your marketing efforts, particularly your advertising efforts, are driving or not driving profitability. And so I've actually started kind of this new I've started this list of like, I always say phrases that I'm trying to use more and more and more to get simple ideas that are important out of the marketplace. And one that I came up with recently that I think speaks to what you're saying is growth marketing is not a revenue growth game. It's a margin dollars growth game. That's a game changer to change that mindset. You as a growth marketer or an ad buyer, your job is not to grow revenue.

Your job is to grow margin dollars. And between top line revenue and contribution margin dollars are a number of line items, right? There's the discounts and returns, there is landed product costs, there's credit card and merchant fees, and there's shipping and fulfillment costs. All of those need to be factored into. Are we growing, all those are needed to answer, are my advertising efforts growing margin dollars, because that's your real job, right? And so like, that's the basis of today's conversation. Let's switch our mindset from growth marketing is about revenue growth, to growth marketing is about margin dollar growth. So my first question to you, Karl, is like, with all the brands that you guys are talking to, and you're helping, you're at the forefront of trying to change the perspective of what growth marketing is and what the outcome should be, what do you see as the top, maybe one to three most common traps?

Karl (05:35)

Sure.

Jon Blair (05:42)

that brands fall into that cause them to improperly assess margin dollar and ultimately profitability growth.

Karl (05:52)

Sure, a couple of things come to mind. So first of all, one of those kind of common sayings we have on our side is that e-commerce is ultimately an industry that has attracted people from every walk of life. Most e-commerce business owners haven't started as accountants and built a financial model and built a business off of that. But the challenge and the harsh reality is that at the end of the day, it all comes back to a P &L that we're held accountable to.

You know from a you know, know, that's what's the you know the ultimate representation of our business at the end of the day and how we create value for ourselves our stakeholders, whatever the case may be I think e-commerce is ultimately a finance game masquerading as a marketing game and so often we can see situations where e-commerce store owners are trying to grow themselves out of per unit economics. So that's probably the first piece. I think ultimately

Jon Blair (06:41)

Totally.

Karl (06:52)

Meta has made it so easy for us to adjust that ad spend budget and see that ROAS go up and down and the perception that it's a lever in front of us that we can control. But what that often does is it means that if we have a hammer everything looks like a nail. Everyone of I think has been in a position over the last couple of years because there was an opportunity to double down on spend we didn't know exactly how much incremental profit we were making but our cash balance in our bank account gave us the impression that at least it was positive and because that's no longer the case that disconnect between marketing and ultimately or sorry maybe revenue and profit and marketing and finance has never been bigger.

Jon Blair (07:30)

Mm.

Karl (07:42)

I think another piece that we would see that has caused a big trap over the last couple of years is attribution as a whole. Ultimately, attribution definitely has a place and the concept of wanting to know exactly what each channel contributes to our overall marketing is a great concept that everyone, of course, would want to get around. But I think what we've seen over the last couple of years is a fixation on trying to find a perfect

Jon Blair (07:53)

Yeah.

Karl (08:12)

attribution model and flow and in turn it's meant we've lost focus on those core unit economics of our business.

Everyone is looking at different attribution windows to suit their own narrative and we're missing the critical piece in the middle around are we actually profitable on first order? What's our gross profit we're generating on a new customer order? How much is it costing us to acquire a customer and what is a customer worth over time? And the way I tend to think about this or the phrase says it's like rearranging deck chairs in the Titanic. It's, you know, oftentimes unless, you know, there's more often than not, it's not the priority focus, it's not serving your business. I'm sure everyone has had a position where they've seen maybe additional sales attributed to different marketing channels using attribution tools, they have a place, but again, as a core focus and as a philosophy, we feel a more profit first, profit focus mindset is ultimately a much clearer view of your business that allows you to make more decisions.

Jon Blair (09:22)

Okay, so there's a couple things that you mentioned that I think are really key, right? The first one is analyze your unit economics, right? In the way we do it at Free to Grow and I think similar to the way StoreHero does it, the order level, right? Are you generating the needed outcome at the order level? Because if you think about scaling, scaling is just the average order outcome times the number of orders. And so if the average order, if the average order outcome is not what you want it to be and you just multiply it by a volume of orders, you're just multiplying an outcome that you don't want again and again and again and again. But then there's a second piece you brought up, which is what I want to dive into further. You brought up new customer. It's about saying the new customer order outcome at the order level is this. And the returning customer order level outcome is this.

Do I want to scale each one of these and is the way that they are connected producing the right blended outcome? And so like the trap I see people fall into, it's actually I think one in the same is what you're saying. I'm just explaining it maybe in slightly different words is the trap I see people fall into is using blended marketing efficiency ratios or blended just marketing KPIs. Blended meaning for the entire business or for an entire sales channel.

Right? And saying that, that, which is an average, it's a blended average of many different order outcomes, that appears to be profitable. But when you peel away the layers of the onion, you may find that returning customer outcomes at the order level are what you want, but your new customer outcomes are not what you want or vice versa, or even worse, they're both not what you want. Right? And so we have begun to say we really need to break out new customer

Karl (10:51)

Sure.

Jon Blair (11:20)

profit, specifically new customer contribution margin dollar at the order level and returning customer contribution margin at the order level and measure how they're changing over time. Do you agree and do have anything to add to that?

Karl (11:35)

It's exactly the model we use on the StoreHero dashboard. again, as an alternative to again, trying to kind of mess around with finding this magical attribution window, have a, what otherwise might be considered a relatively simplistic approach, but we've seen time and time again the value of the clarity that it brings. So ultimately, exactly as you've said there, we would look at new and returning customers as two separate buckets. Ultimately, we're looking at channel level reporting to help give us signals as to what channels are contributing to those sales, but working on the basis that we can't build a plan relying on any single one alone.

So let's just take new customers for a second. So ultimately what we want to try to understand here is on each new customer order, again, looking at that order level, what's the actual gross profit we generate on that new customer order? And to pause on that for a second, that's with fully loaded cost of goods taken into account.

It's so often we see kind of there's a number of percentage margin of floating around internally as part of the narrative that may actually represent your product margin. But ultimately that will often erode over time between your welcome 10 discount, your free shipping threshold, adjusted for refunds. You have your fulfillment costs in there, transaction fees, taxes, discounting, whatever the other discounting, whatever that is. There's a, you know, a calculatable gross profit on that first customer order. Now ultimately the way we look at that is to say, okay, depending on our business model, we need to understand what a customer is worth to us. If we're a furniture business and we're not going to see that customer again, we need to make sure that our new customer acquisition cost comes under that amount. So the second number I would say is that new customer acquisition cost.

What we're doing in that case, we're taking our marketing spend and we're dividing it by the actual number of new customers on our store, not using Meta or Google, their own determination as to what those numbers are. Again, we might also want to factor in other related marketing costs, agency fees, or could just be purely on an ad spend basis. So again, broader business level, but very reliable. Let's say for example, we generate $50 of gross profit on our first order and we generate, it cost us $40 of a new customer acquisition cost. The third piece we would look at then is our lifetime value.

And ultimately that lifetime value is going to be on a gross profit basis rather than revenue. That's the trend between all of these three numbers. So ultimately what we're doing in this scenario is we have a lot of clarity. We're putting the burden of our advertising and marketing spend on those new customers. But ultimately the way we think about this is you're always going to have repeat customers fall into the net. But principally we want to make sure that our marketing spend stands on its own two feet in relation to those new customers.

And therefore, if you can be clear that, okay, I generate that gross profit on first and that first time customer order based on my business model, I'll understand what should I spend all of that to acquire the customer? Should I spend half? Should I spend more? And then from there, thirdly, see what that longer term path to profitability looks like based on the lifetime value on a profit basis.

Jon Blair (14:46)

Totally.

Yeah, I love it. Okay, so we do the same things at Free to Grow CFO to summarize new customer. You wanna reorient, right? You wanna break down the contribution margin dollars generated by new customers at both a customer order level and an aggregate for a month.

You wanna do that for new customers and you do it separately for returning customers. What's the difference in the calculation, right? Like Karl said, you take new customer gross profit, which is inclusive of all variable costs except for ad spend, right? Subtract your ad spend per new customer order or per new customer, depending on whether you're doing it at the customer order level. But the bottom line is we're burdening new customer revenue and new customer margin dollars with 100 % of the ad spend.

Because in principle, like, Karl mentioned, we view ad spend as primarily a new customer acquisition activity, even if there is some spillover to returning customers, right? And now to answer the question, and this is where we're gonna take the discussion next, we wanna use these aligned with LTV, which LTV in simple terms, and actually let me point out a caveat that Karl mentioned, which I talk about a lot on this show, and that we make sure our clients understand it Free to Grow.

When you pull up in the cohort model in Triple Whale or Shopify, it's not lifetime value, it's lifetime revenue. We call that LTR instead of LTV, just to remove any confusion. Because that's average dollar spent. That's a revenue number. To convert it to LTV, because what is LTV? It's the lifetime value to your business. And guess what? The value to your business is not the revenue, because you don't keep it all. You gotta subtract all those variable costs.

So that's why we express and StoreHero expresses LTV in margin dollar terms, excluding ad spend. And you'll see in a second why we exclude ad spend, right? So you restate the cohort model and whatever tool you use, you restate it from revenue terms to lifetime value terms, which is in margin dollars, excluding ad spend. And you can use that alongside your new customer profitability economics to decide this next question, the answer to this next question that we're gonna discuss, should a brand be first order profitable or not? So if a brand asks you that, Karl, well first off, actually before we answer that, how often do you see brands even actually asking themselves that question at all, let alone if they do answering it correctly? Because I don't see as many as I would like.

Karl (17:50)

I completely agree. I think ultimately the concept was over the last couple of years that our new customer acquisition would kind of...

We would be in a position where requiring new customers, they're paying for themselves relatively quickly and our repeat customer revenue after accounting for all of our variable costs, that repeat customer gross profit is ultimately what we have left over for net profit for our fixed costs. But ultimately we could easily kind of separate those buckets. The challenge has been that ultimately one is kind of seeping over to the other.

we're often loss making on those new customers and our repeat customer revenue isn't the profit we want to keep ourselves, it's financing that unprofitable new customer acquisition.

So ultimately, the question around, should I be first order profitable, really depends on what is a customer worth to you over time? What's the value you return from that customer? And again, value in the context of profit. So just to take an example, there's three kind of paths to profitability we often talk about. So one is, I suppose the first situation there would be situations in which you should be first order profitable.

Those are the situations in which you earn more profit on the first order than you expect to earn over the next 12 months in subsequent orders. So as a same example, furniture business, unless you're the best marketer in the world, you're not going to sell somebody a second sofa next month. You need to account for that profit today. And ultimately that makes sense. It's kind of, I think in those kinds of businesses actually, it enforces a level of discipline.

Jon Blair (19:38)

Yeah.

Karl (19:38)

that

just, you know, just figures, you know, we figure out a way for it to work. I think there's a messy middle there where ultimately there's a product or a business where most people would fall in this category where there's repeat purchase potential, but it's not necessarily locked in subscribers. And ultimately we're operating in industries in which they're quite competitive. They might have good margins, but we have to, you know, really have to fork up in order to cover the cost of new customers acquisition. So for example, whether it's fashion, beauty, skincare, anything like that, we would see often businesses operate in the middle. And in those situations, they're often, maybe they don't have to be first order profitable, but they should work on the basis that they should be first order break even.

On that basis, they have an opportunity to drive more profit later, but ultimately they're not waiting and relying on that to happen because they're not guaranteed to happen very quickly. And you're at risk of a cash drain on the business. And then thirdly is a situation where somebody could justifiably not be first order profitable. So the reverse number one, where we said on the furniture business, we generate more profit now than we will later. It's the opposite.

in the third situation, we're gonna generate more profit later than we do now. So subscription, supplements, business, for example. I'm willing to forgo that margin, not because I'm selfless, because I know that if I actually put the investment in to acquire that customer, I'm going to see more profit over time. Ultimately, we would look, let's say for argument's sake, you generate $50 of profit on first order and maybe $80 of profit later on.

It doesn't make sense to give up, you know, or maybe even a different, a slightly different example. Let's say you have $50 of profit on first order and maybe you have additional $10 of profit you generate within the next 90 days. It doesn't make sense to give up $50 now in most cases to generate $10 later. We would try to look at that, look at that LTV and just on a percentage basis, are you giving up too much of that slice, too big a slice?

Jon Blair (21:47)

Totally.

Karl (21:55)

of that pie to acquire the customer and you're leaving any return for yourself.

Jon Blair (22:00)

That's a great way of putting it. I wanna add to that and look at the same concept through a slightly different lens, is that what we're saying here is how much, it actually really depends on how fast the streams of LTV or returning customer margin dollars, how fast is it coming back versus how fast are we losing money in aggregate on new customers? Because if you,

You know, we're talking to, think, I'd imagine us and you are talking to a lot of brands that are actively trying to scale. So what does actively trying to scale mean? Actively trying to scale means they're actively trying to increase ad spend. So let's go back to the situation where there's a loss at the new customer order level. That's our unit economics is we're losing money on new customers. The faster we accelerate ad spend, right? The more orders we're multiplying that loss by.

And furthermore, there's another variable, your CAC's probably going up because you're scaling ad spend. So the order level loss is getting bigger multiplied by a higher volume, meaning the aggregate loss on new customers in any given month is growing in the negative direction. You have to make sure LTV is coming back from previous months, right? In the same month that you're accelerating the new customer loss, it's got to be coming back faster, right? And so one thing we've done recently, is graph this out for clients on a 12 month time series and say, the negative bars growing faster or slower than the positive bars? The negative bars are the new customer loss at the monthly aggregate level, total dollars lost. And you can see really quickly, I've run this on several brands and I've seen brands where the new customer loss is going as fast as the returning customer profit.

And so all they do is keep making zero every month, right? Even though they have strong LTV, they need to slow down the new customer loss and let that returning customer LTV accumulation catch up. So there's actually another component which you touched on Karl, which is like, there's first the decision, can we be unprofitable on new orders, right? Or new customers. The second decision is how fast can we acquire unprofitable

Karl (23:55)

if they're lucky.

Jon Blair (24:21)

new customers? And that is governed by how fast people repeat purchase and accumulate more LTV or more margin dollars over time. So if you have someone who doubles their margin dollars in 90 days, they can lose money faster on more and more new customers than someone who doubles margin dollars in 180 days because it takes twice as long, right? So that's another thing that's really important. It sounds like, it looks like you might have some thoughts on this.

Karl (24:50)

A lot of thoughts. So in that particular case, I completely agree. Our repeat customers are financing that unprofitable new customer acquisition. And it's often the analogy I use where, let's say, for example, you've acquired a thousand new customers, whether it's in the last week, month, day, whatever the case may be and we're losing maybe $30 on each of those new customers. I often think about this, that's like you've loaned $30 to a thousand people. It's nearly like you're operating as a bank. Now, ultimately, if you were a bank, well, what would you do? You wouldn't loan somebody $30 if you didn't think they were going to pay you back and pay you back in a reasonable period of time that allowed you to stay liquid. Now, liquid as a bank, liquid as a business, whatever the

Jon Blair (25:23)

Yeah.

Karl (25:41)

case would be that you could ultimately pay your bills as they fall due. So you need to kind of assess that risk maybe like a banquet as well. You know am I willing to forgo that profit now and not only forgo profit but actually eat up cash because if my repeat customers aren't going to pay that bill I need another source of financing to help kind of bridge that gap and here's where you can where I think the discipline of you know using

Jon Blair (25:49)

Totally.

Karl (26:11)

these simple, clear profit-focused calculations can be so important.

Jon Blair (26:17)

I wanna talk about returning customer rate. This has actually been getting on my nerves recently and I've been talking about this a lot in my content because I do all our sales at Free to Grow, so I do all of our CFO audits. I'm analyzing several cohort models a week and financials and doing the calculations that you're talking about for multiple brands. And I'll have a brand that I meet on a discovery call and they say, we have really strong LTV. And I go, look, and they have zero LTV.

Karl (26:20)

Yep.

Jon Blair (26:46)

But they're like, but what are you talking about? My returning customer rate is 45%, right? I wanna get your take on why returning customer rate in Shopify, which people just love to quote that term. We have a 45 % repeat purchase rate. Why is that not equal to LTV?

Karl (26:49)

Yep.

Sure, it's a really important one and something we see consistently as well. So oftentimes people are looking at their sales in any given period of time, let's say in the last month. They're looking at the pie chart of sales. That's nice on the Shopify dashboard, nice pie chart and will show, okay, here's the level of sales from new customers and here's the level of sales from repeat customers. The challenge with that is let's say it's 45 % in that scenario. Sometimes those are repeat customers from last month.

Maybe some of those are repeat customers that you haven't seen, you know, you haven't heard from in five years. So ultimately, it's not necessarily a representative view. It's certainly credit to you for building a product and an offering that's actually getting those customers back, but it's not necessarily the same as the profit you can expect from a given customer in a reasonable period of time. So one thing we have on our store here, a cohorts view, is we'll ultimately group your

Jon Blair (28:01)

Totally.

Karl (28:06)

cohorts or groups of customers by month and kind of lay out a timeline on the profit you accumulate from those customers over the course of three, six, nine, 12 months. What we'll also show is the repeat rate. So with that in mind, let's say we want to look, we're recording this in June, 2025. Let's say we want to look at the cohort of customers we've acquired in June, 2024.

By looking at that group of customers, we wanna see how many of those, if 12 months is the lifetime that we consider when we talk about lifetime value, we wanna know, okay, out of those 500 customers who made a purchase in June, 2024, how many of those are coming back? Because ultimately that's what we can use as a reference point in order to plan what the return we can expect the value in a reasonable period of time.

Jon Blair (28:49)

Totally.

Well yeah, I think the point you're making is if you have low 12 month LTV, when I say like, hey, your brand has almost no 12 month LTV, I'm not saying no one ever comes back and repeat purchases, but what I'm saying is, is it reasonable, like using your example, is it reasonable to use this really hard to forecast group of people who purchased originally five years ago and four years ago and three years ago and two years ago, is it reasonable to use that to determine how profitable someone I acquire today should be. That's not, in my opinion, it's too disconnected, right? And the whole point of a cohort is to say, is the person, really it's just, the person I'm acquiring today profitable? It's a framework, right? And it's not, to be clear, just like every other framework, there's no KPI framework that's bulletproof. But this one is, it's about picking one that's reliable enough that it's not gonna put you in a hole.

And in my opinion, if you consider the LTV over a, I call plus or minus six months, Like some brands need it in three, some need it in six. Yeah, there are some who can get it over 12, but I would say that takes too long to scale fast on losing customers. You have to go slower. So if you wanna scale at a decent clip, six month plus or minus LTV, and then also probably look at your three month plus or minus LTV.

Karl (30:10)

Sure.

Sure.

Jon Blair (30:26)

That's what is reliable enough to decide, going back to your example of the bank, like, can I lose money on this person today? Because a bank also, right, when they give you a loan, they want to get paid back in a certain amount of time. And if you're late, you default, right? And they have recourse against you. And so this is about it being within a predictable amount of time that allows us to feel confident in taking a risk.

Karl (30:41)

Sure.

Jon Blair (30:55)

which is losing money on a new customer, right? I wanna ask you something else that we've been dancing around, because this is something I've been dealing with a lot in doing CFO audits for our prospects, and I'm starting to form this rough roadmap or playbook of what a brand should do if they don't have meaningful LTV over a six plus or minus month period, because what I don't wanna do is I don't want people to hear this and say,

I don't have that and so my brand will never make it because I can tell you right now, I have helped scale brands to nine figures that have no LTV. It's a different playbook, right? And so do you have any thoughts or opinions on just very high level strategies that first order dominant brands that have no LTV need to consider as they scale to keep scaling profitably?

Karl (31:48)

Definitely. ultimately, way I would look at that in that scenario, when you don't see incremental sales, ultimately sometimes, you know, the more durable your product is, the less people are coming back quickly because it's a, you know, the nature of the product, it's not a consumable and you're nearly causing your own problem in this case. But the way I look at that is, okay, whatever profit you're generating on the first order, that is your lifetime value. And again, this is about a trade-off.

Ultimately, let's say you're generating $30 of profit after all those various cost of goods are taken into account. Ultimately, of course, you're going to need to be first order profitable in this case because you can't expect and wait for somebody to come back. But equally, you need to look at that amount and say, okay, you know, what's the, what are the different pathways for me to scale? And when do I hit a point of diminishing marginal returns? So sticking with this analogy, let's say again, I've got $30 of profit on first order. I could have a customer acquisition cost of $10.

Jon Blair (32:45)

Yep

Karl (32:56)

and capture kind of $20 left over after marketing on a certain volume of orders. I could be willing to spend 15 and you know, again, I have 15 left over in that scenario. And ultimately, this is where really contribution margin overall can be a much better indicator than just looking at return on ad spend.

because ultimately what we're trying to do here is we're not necessarily trying to look for the most efficient orders. And what I mean by that is you don't necessarily want your ROAS to be as high as possible what you want to do is find what's the optimum ROAS that allows me to generate the most profit overall and what that could mean there is you could do a higher volume of orders with more profit left over per order or sorry a higher volume of orders with less profit left over or a smaller volume but more it's it's whatever you know there's a simple formula there and if you're looking at contribution margin which is why we have it literally as a north star on the StoreHero dashboard you can continue to spend as long as you know the sum of its parts the the cumulative or the profit each order contributes to your overall profit pile is still growing.

As long as that's the case, then again, that's going to give you a lot of clarity to figure out if you're in an optimum position. And the other piece I would mention there as well, having clarity on what that gross profit is on each first time customer order. Also to go back to like that previous analogy where if you can, you know, it's easy to adjust your meta budget and based on your CPA, but you could say, okay, well, I need to get my CPA down. It's increasingly tough to

Jon Blair (34:28)

Totally.

Karl (34:43)

especially if you're trying to scale. What the other side of that coin is is okay well how do I make that CPA work for me and be profitable?

Jon Blair (34:44)

Yeah.

Karl (34:52)

Okay, well, it just depends on what I'm getting. You're making an investment. What are you getting in return? So there's so many times we've seen this scenario where if we can construct an offer that allows us to drive a higher gross profit on that first order, we may not see our customer acquisition costs fall necessarily, but we make it work for us because we're spending $15 to acquire a customer, but they're actually generating 20, 25, 30, $35 in return.

Jon Blair (35:21)

like it, I like it, that is a great angle. And another thing that I always tell brands is like, you might need to think about when is it time to add on another sales channel, right? Like, and you don't wanna do it too quick, but a lot of brands that are first order dominant, no meaningful LTV over a six month period, they need to get onto Amazon sooner, and then potentially physical retail. But again, what you're talking about is laser focus on that CAC, because even moving to Amazon and physical retail, it's actually, they're doing the same thing you're talking about. They're managing their

Karl (35:28)

Yep.

Jon Blair (35:49)

their blended CAC, they're looking for new TAM, new addressable market, where they haven't reached the law of diminishing returns yet, where they can return back to that $15 or less CAC, right, so that they can keep turning a profit. So I have one final question for you, and then we're gonna have to land the plane here. What's most important to you personally, about the mission and purpose of the work that you're doing at StoreHero and what it ultimately achieves at the end of the day?

Karl (35:56)

Exactly.

I think a big part of it actually comes back to my own ⁓ running a digital marketing agency, running a bootstrapped business, albeit service business. I kind of empathize with any business owner in e-commerce.

I know what it's like to be trying to scramble to pay salaries on Christmas Eve. The dynamics of e-commerce are tough. There's so many variables to think about, variable costs being some of those variables. And ultimately,

time and time again we've seen the clarity that not necessarily only StoreHero is given but a clear view or a methodology to think about their business and again it's not flashy it's not going to make your ads look better than maybe the Meta dashboard will but it gives you the clarity to scale and every e-commerce business puts in so much work

Small changes, but fundamental changes can have a dramatically different outcome for you as a business in order to return value and actually see a proper return for the work you're putting in.

Jon Blair (37:30)

I love that man, we have the same heart at Free to Grow. When I started this business, I was like, man, who is a group of people that I can serve, right, and make their life better? And I was like, man, e-comm brand founders, they're doing one the hardest things that they could possibly ever choose to do by trying to scale an e-comm brand. It's super stressful, and if our fractional CFOs and our accountants can help them make better decisions, with more confidence and help them sleep easier at night,

any incremental founder we can do that with is making the world a better place in my opinion. And so I love what you guys are doing, man. I really appreciate you coming on. Look, this is a conversation chocked full of real practical advice on how to make better decisions that actually drive profitability in your advertising. And so this is a master class in the right way to do things amidst an ecosystem in which so many brands are not doing these things.

Karl (38:03)

100%.

Jon Blair (38:27)

they're measuring ad spend profitability in the wrong way. So I appreciate what you guys are doing over there, Karl. For anyone who wants to find more information about you and StoreHero where can they find you?

Karl (38:37)

Sure, so thanks again for having me on Jon. I think best place to find more about us is storehero.ai. Ultimately, one thing I'd always recommend is to sign up to our free trial.

That free trial will give you visibility on these metrics nearly automatically with a couple of additional costs to add in. But there's very infrequently situations where someone doesn't get some value out of seeing this LTV chart, seeing the profit they're generating on first order, and ultimately what actually return that's driving for the business. So we'd recommend anyone check that out and we'll be more than happy to walk them through it.

Jon Blair (39:15)

Definitely check out the free trial, it's super easy to set up and man, another great episode. Look, in closing everyone, don't forget, if you liked today's episode, please hit the subscribe button wherever you're listening and leave us a review. It helps us reach more people like you. Also, if you want more tips on scaling a profitable DTC brand, follow me, Jon Blair, on LinkedIn. And if you're interested in learning more about how Free to Grow CFO can help your brand increase profit and cash flows you scale, check us out at freetogrowcfo.com Thanks for joining, Karl.

Karl (39:45)

Thanks Jon.


Sherilee Maxcy
Next

Why You Should Pay Yourself First: A DTC Founder’s Guide to Salary and Distributions