BONUS EPISODE: Ecom Scaling Show: Build Financial Resiliency Into Your E-Commerce Business (Ep. 2)
Episode Summary
Welcome to the Ecom Scaling Show, brought to you by Free To Grow CFO and Aplo Group! Join hosts Jon Blair (Founder, Free to Grow CFO) and Dylan Byers (Co-founder, Aplo Group) as we dive into the crucial—yet often missing—link between marketing and finance in DTC e-commerce.
In this conversation, Jon Blair and Dylan Byers discuss the essential components of building a financially resilient e-commerce business. They explore the importance of understanding key financial metrics such as gross margin, average order value (AOV), and customer lifetime value (LTV). The discussion emphasizes the need for brands to assess their financial health, manage operating expenses, and develop strategies for customer acquisition while maintaining profitability. The conversation provides insights into how e-commerce businesses can navigate challenges and ensure long-term success.
Key Takeaways
Financial resilience isn't about high revenue—it's about having the flexibility to weather volatility.
If your return customer margin can't cover your fixed OpEx, you're building on shaky ground.
The most resilient brands keep fixed costs lean, manage inventory tightly, and avoid overleveraging.
Episode Links
Free To Grow CFO: https://freetogrowcfo.com/
Aplo Group: https://www.aplogroup.com/
Jon Blair on Linkedin: / jonathon-albert-blair
Dylan Byers on Linkedin: / dylan-byers-046010149
Transcript
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00:00 Building Financial Resilience in E-Commerce
02:49 Understanding Key Financial Metrics
06:05 The Importance of Gross Margin
09:05 Strategies for Increasing Average Order Value (AOV)
11:57 Leveraging Customer Lifetime Value (LTV)
14:57 Managing Risks in Customer Acquisition
18:13 The Role of Operating Expenses (OPEX)
22:23 Understanding Financial Resilience in E-commerce
32:18 Navigating Inventory Management Challenges
43:11 Key Takeaways for Building Financial Resilience
Jon Blair (00:01)
Alright, welcome back everyone. Episode 2. Dylan What's happening man?
Dylan Byers (00:06)
Not much. Excited to chat about building a financially resilient e-comm business. It's going to be a good time. It's going to be a good time.
Jon Blair (00:13)
Yes, man, let's just dive right in because there's so much to talk about here. So to frame the discussion, as Dylan mentioned, we're talking about how to build a financially resilient e-comm business today. Why does this matter? This matters because there's a low barrier to entry to start an e-comm brand. You source a product and you start a Shopify store. It's actually easier than it's ever been in history to do that today.
But just because you're able to do that and get people to buy the product and ultimately experience some form of product market fit, it doesn't mean that you have a financially resilient business. Dylan, from your perspective, just like when you think about financial resiliency, is that a word? Either way, financial resilience. What, like, if someone says, hey, Dylan, is my business financially resilient? What are some of the first things that come to mind?
Dylan Byers (01:01)
We're gonna roll with it. We're gonna roll with it.
Yeah, I mean, I think that like, there's a couple of kind of areas to dive into first. I think the obvious one is like in the event that you had to scale back volume some amount for some amount of time, how would you fare in that situation? Like would you run into cashflow problems? Would you still be able to be profitable and cover your OPEX? I think that like, the most normally having a high lifetime value is like one of the areas that is correlated with being, I would say, financially resilient. Because in those situations, you can often have more of a reliance on that return customer revenue if you ever have to pull back due to issues with acquisition efficiency, maybe something happened in your supply chain and you don't have as much stuff, the products that tend to perform well in acquisition, because sometimes it's different as to what works on acquisition versus what works on retention. I'd high LTV is like one piece of it.
Healthy first order contribution margin is sometimes a piece of it, especially if you're very first time customer dependent. And then low OPEX is probably another piece of it as well. Again, in this kind of like worst case scenario, for whatever reason, maybe you don't get enough product, so you can't do the volume that you want to do, and therefore you gotta do less volume. Do you actually have enough contribution margin left doing that less volume to cover that OPEX? So I think like diving into like the first order contribution margin is like more of the acquisition piece.
Jon Blair (02:12)
Mm.
Yeah.
Dylan Byers (02:35)
How do you engineer LTV to ideally have that stability? And then how do you think about OpEx and team building and when to go in and do, you know, X, Y, or Z for me hiring or team building standpoint. So those are some of the things that come to mind. there, are there any that you think I'm missing there?
Jon Blair (02:49)
Well, so it's interesting, like kind of stepping back from and kind of bringing in kind of a higher level concept to thread the needle between the things that you mentioned. It's really like how resilient is your P&L, right? And another word that was coming to mind as you were talking is like optionality, right? Like do you have the optionality having multiple options in any given scenario is a completely different ball game
Dylan Byers (03:12)
Yeah.
Jon Blair (03:19)
then this is the only way this business makes money. When you have a single option, you have finance, what we call that as concentration risk. And you can have concentration risk in ad channels, in products, in seasonal times of the year. If you have a B2B presence, you can have concentration risk with a single big customer or a couple big customers. Those all reduce optionality. It's heavy reliance on some aspect or aspects of your business, those bring more risk into your P &L. And then when you're talking about on the OPEC side, that's another, that's called operating leverage, right? From a finance perspective. Operating leverage meaning just like financial leverage, which is debt financing, operating leverage can actually increase profitability at scale, but just like debt, it's risky if you can't cover your operating leverage. So can talk about that more in a second. The other things that come to mind are the balance sheet side.
Right? we, that's like, obviously inventory being one of the big ones, especially in the e-comm world, but like thinking about how many days do you hold, how many days it take to replenish. So ultimately like your lead time, you can get a little more complicated and you can even look up, look at product development and say, what kind of interchangeability is there on components and materials if you have to switch?
and you start seeing that a certain skew mix, your skew mix is changing, so how quickly can you react to skew mix changes? And then there's the capital structure side of financial resilience, which is like, again, coming back to leverage, how much are you leveraged? So that means how much of your capital structure is debt? Because debt can enhance owner equity at scale, but it's also riskier because you have fixed payments that you have to make, just like fixed overhead represents operating leverage. It's a risk.
But also can enhance your financial return. So let's dive in first on the P &L side. Let's talk about first order contribution margin or just first order profitability. One thing I wanna like ask you about, cause I get asked this, this is one of those questions I get asked all the time. And I'm in an e-commerce mentorship group called Daily Mentor. I've probably got this question, like a dozen times in the last week, which is what should my gross margin percentage, my gross margin ratio be? Is there a floor? I have some opinions about this and I think there's some flexibility, but before we talk about first order profitability, what are your thoughts on gross margin and how that contributes to first order profitability?
Dylan Byers (06:05)
Yeah, I mean, it really depends on what you're selling, but at the end of the day, the higher, the better. It's easier said than done. But I think it's really, really, really hard to give like, has to be this. I'd say that like directionally on new customer ROAS at scale, unless you're really high AOV and in like, you know, specific, maybe uncompetitive categories getting a new customer ROAS outcome in excess of a 2X is relatively difficult. So like a fair starting point is like you want to at least have probably like in the realm of 50%. So like I'd say that that's like directional advice, but you got to be careful with that because there are nuances where sometimes you can survive with less. And then in some cases where like in certain categories, you just need more because it's so competitive over time. I think another piece of it too is like, how big is your TAM? And do you have LTV? Because if you have very little to no LTV, but you have a very high TAM, at the end of the day, you're probably gonna see less attrition in your acquisition metrics as you scale very quickly. But if you have a lower TAM, you probably need to have more gross margin available, because you'll probably just see that attrition faster.
Jon Blair (07:03)
Yeah.
Dylan Byers (07:28)
And if you don't have that LTV to help supplement some of that attrition over time, I think that's where you start kind of having these like typical conversations of like the fundamentally the offer that I'm selling today is probably reaching some amount of saturation, at least in the channels I'm running. And do I need to go and add more channels and, or do I need to go and make new products and new offers? So I'd say that like, yeah.
Jon Blair (07:51)
So I want to camp on that for a second because we come across this a lot. There's another piece of the puzzle really quick though from a metric standpoint which is new customer AOV, right? Because at the end of the... When people ask me about what should my gross margin percentage be, I'm like, well look, hold on a second. I actually care more about gross margin dollars, right? And I'm not saying that the percentage doesn't matter. The ratio does matter, but the dollars matter more. Why? Because CAC is a dollar amount, right? It's not a percentage. You can mess with the percentage by messing with volume and ad spend scale. And so you could have, the reason I'm bringing this up is because if you have a $200 AOV, first order AOV product, and your gross margin percentage is 40%, right? You could get the same dollars by having an 80 % gross margin product with a $100 AOV. So AOV matters because it's ultimately gross margin dollars minus CAC equals new customer profitability. So how do you, what are some things that come to mind when you start thinking about gross margin dollars versus percentage and what like brands should be thinking about there?
Dylan Byers (09:05)
Yeah, I think that like, to some degree, you can look at it either way. Ultimately, you're kind of looking at both at any given time, whether it's a ROAS outcome or a cost of acquisition outcome. The only risk with going like that, hey, how do I increase my AOV? Which by the way, I think is like, probably in most cases, the way you should be thinking about it, if you're running a net of contribution margin dollars on acquisition, is some strategies that get deployed to actually increase AOV are offset by a decrease in conversion rates.
And therefore they add our net out to being equal or worse. So that's why like it's, it's, you gotta be careful that it's easy to say let's just increase first order AOV and assume a constant acquisition costs. So when you do those AOV deployments, it's strategy implementations. It's important to understand that you want to make sure that your conversion rate is actually not being negatively impacted. And a lot of the deployments that do increase AOV often will have some negative implications to your conversion rates.
Jon Blair (09:35)
for sure.
Dylan Byers (10:04)
And that's potentially okay. I've wanted the gains from the AOV bump are greater than the decreases in conversion rate and you get out to a better outcome. So that's kind of like the balance. I think that like different, different types of products have very different mechanics on site and, or in offer construction that impact the path of least resistance to actually getting AOV to be higher. Generally speaking, in my experience, consumer packaged goods are sometimes the easiest because you can often just have a very simple mechanism to get people to buy more, save more. If they like the product or they think they're going to like the product, if you have a structure set in place where the more they buy, the more they save, it kind of encourages that increase in AOV. On like another category, like clothing and apparel, it can sometimes be a little bit more tricky because unless you're selling like basics, like it may be difficult to get people to buy like five of the same t-shirt. So you have to get a little bit more, I guess, creative with how you're kind of incentivizing people for either free shipping cutoffs or like,
Jon Blair (10:56)
Totally.
Dylan Byers (11:03)
upsells, cross-sells and cart. Or maybe there is some sort of a buy more, save more elements. But again, that buy more, save more element I find is often better when you're not like, when you're selling more like the basics. So it very much matters into what you're selling. I'm not sure if you've seen any other like common AOV boosters. Obviously there's like post-purchase upsells and that's a whole other realm of opportunity, but those are kind of like the most common ones I'll see.
Jon Blair (11:24)
Yeah.
Well, okay, so couple things here. I agree with you. There's a difference or there's a difference between trying to impact the economics of new customer profitability with your current product base and channel mix versus thinking about it from a product development standpoint as you decide, hey, we need to bring new products to market. Or even let's say you're even earlier stage and you're just getting started. What I'm walking through here about thinking about gross margin dollars is, calculate that before calculate the estimated gross margin dollars, right? Before you develop the product do some it you don't you're never gonna get your forecast perfect But do some scenario analysis of like what might the first order AOV be right? And the point that I'm making is I think there's some brands we've worked with who have a $65 first order AOV who maybe would have never started their business that way had they thought about how many gross margin dollars were available because the brand that I'm thinking of it was like 22 bucks. And if you go talk to an ad agency and say, got 22 bucks to basically cover CAC, and I don't know if anyone's gonna repeat purchase, well, we'd advise that maybe, hold on, let's slow down, let's rethink this. They ended up later pivoting, they ended up doing some customer research and finding that one of their higher AOV products that was more like 75 to 80 bucks actually had a lot of tractions with their customers, but they weren't advertising it, they thought of it as a follow-on product as opposed to their flagship product, they switched to that being their flagship and it worked and it changed everything about their business. But the point I'm making is that it's not by accident. You don't just find a product that you think people will buy for the price you're gonna charge, right? And bam, you've got a business. We're talking about financial resilience on the P &L and in this case, we're talking about first order profitability. You gotta ask yourself, okay, what might the AOV be for the price point that I'm selling and how I'm packaging it and bundling it if you're even doing that, right? Multiply that by the gross margin percentage and say, this is the dollars I have to work with. And then a good ad buyer is gonna be able to tell you like, like this is the band within which I can spend, right? Like it's, you can tell them roughly how far you can go and you're gonna know very quickly if you can go far or you can't. And here's the other thing. Let's say, let's just say for a second you have,
You're on the lower end of the spectrum of gross margin dollars per order What's my first? What's my first follow-up question gonna be? Does this product lend itself to LTV? Like LT a fast enough LTV velocity to offset that right so so let's let's change the kind of conversation to Okay, we've talked about first order profitability a little bit. How does LTV lack thereof or potentially strong LTV velocity?
Dylan Byers (14:06)
Yeah. Yeah.
Jon Blair (14:20)
How does that change how we can think about first order profitability?
Dylan Byers (14:25)
Yeah, I I think that on our side, ultimately, when we're thinking about forecasting and planning growth, we're always looking at how does contribution margin grow over time as a byproduct of some assumed compounding of acquiring more customers month over month via an estimate new customer ROAS slash CPA outcome and the historical cohort trends. Though in some cases, that means that like the LTV is just not good enough to really justify going negative on acquisition.
But we do see some brands where it makes a ton of sense to go negative on acquisition because the upside on the volume and how that impacts contribution margin growth over time is just worth it instead of being super risk averse and refusing to lose money on acquisition. So there are cases where it makes just a ton of sense. But the key thing there is making sure that you actually have the data to back your thought process and your strategy of acquiring at a loss.
Jon Blair (14:57)
Mm-hmm.
Dylan Byers (15:23)
One thing that we see in some businesses too, and it's not super common, but there are definitely instances of this is like, and you're talking about, Hey, there are another product in the business that can increase my AOV that works on ads. And all of a sudden the business changes. The same can be said for LTV. Like we've seen it sometimes where maybe there's a product that is like marginally worse on acquisition. And therefore it just doesn't get the attention on paid acquisition. But if you break out LTV by product or category, you might learn that, a second.
I'm willing to take like a 10, 15 % worst first time customer ROAS or first time customer CPA because the LTV in this product or category is just like way better than the alternative. And I know like that's one of the things that people can look more at and how you decide to allocate your media dollars because often there are these outliers that do exist in some businesses. I'm not sure if you've seen any other examples like that, but here's the LTV. That's where my head goes.
Jon Blair (16:08)
Yeah.
Well, I want to mention something because I've been talking about this a lot with my team and specifically on a few of the mutual clients that Apple and Free2Grow CFO have. We're trying to explain, I'm sure you guys have to explain this too, we're explaining to one of our mutual clients like, listen, we're going to look at the cohort data. We're going to look at the data that explains historically how repeat purchase has behaved and how CPA has changed as we've changed ad spend levels.
But that's historical data. It's not a crystal ball that ensures as we make changes to spend and trying to mess with LTV that the same thing is gonna happen. But it at least gives us some way to forecast a couple data-driven scenarios. So I had one that I was working with on Friday. They have very strong repeat purchase because they have a strong subscription base and they sell a consumable. And they came to me and they said, Hey Jon, I wanna try spending 40 grand on this podcast. They've had success on other podcasts in the past. they're like, do you think we can do this? And I said, okay look, ultimately you've gotta make the decision on how risky you think this is, but let me outline what some of the risks are. This is a brand that loses a little bit of money every month on first order acquisition, new customer acquisition.
But because of their subscription, they have very strong repeat purchase velocity and it more than overcomes that every month. But at the pace they've been scaling ad spend, if you like take off on new customer acquisition in a given month, month over month, you just really increase spend, your loss is bigger in that month and you don't have a big cohort of people coming back to cover that. So I was explaining to them like, look, we have to forecast, can we cover a big kind of one time loss or short?
short-term loss that should pay for itself, right? Within, and I looked at it I said by month three, it should pay for itself and be profitable. And I was able to give him the estimate of the number of dollars that we'd probably lose in month one on that cohort. And so I was like, hey, look, we're gonna lose 14K on this cohort based on historical data. We could potentially lose more, but if we get at least to this much in revenue which is, which he felt very confident that they were gonna get to at least X in revenue. Here's how much we would lose. So we got to cover that loss for this month. And it was totally based on the rest of their P &Ls, like we can cover this. And based on their cashflow, I like, we can cover this. And by month two, that loss will have shrunk to this dollar value. And by month three, it'll actually be net profitable. And I said, so what do you want to do? How do you feel about this risk? And the brand founder is like, I feel good about this. I want to give it a shot.
And so did we give him a crystal ball? No, but he was able to feel more comfortable because he was like, hey, I'm probably not gonna lose more than X in month one and I'm not scared of that. And I feel very confident that by month three, this cohort's gonna be profitable. That's how we help brands from a CFO perspective. We don't predict exactly what's gonna happen. We help you understand the range of possibilities and if they're not scary and you're good with taking that risk and we feel like your P &L is resilient enough to cover placing that bet, then we try it and we see what happens.
Dylan Byers (19:46)
Yeah, no, I think that, and this is like another prime example of when you have higher LTV, it's easier to like manage your downside risk in a lot of these things. Because at the end of the day, even if you have like a terrible outcome, depending on how terrible it is, there's probably some chance that in some timeframe you make your money back. That's more on like a P and L side, less so on the cash flow side. And that's what you were talking about, like, Hey, like, can we stomach this in like a single month loss? But again, that's, that's another, you know, prime reason why LTV generally.
Jon Blair (19:55)
Totally.
Dylan Byers (20:16)
is correlated with being highly financially resilient.
Jon Blair (20:20)
Yeah, and so let me just summarize a couple things before we move on to the next aspect of a resilient P &L. We first talked about gross margin, right? We talked about gross margin ratio or percentage of revenue. We talked about dollars, and now we're talking about LTV frequency or velocity. What should you be taking away as a brand founder? What you should be taking away is that it's no single KPI that makes your contribution margin dollars resilient within their business, in your business, right? We're trying to outline some of the key levers so that you can think about how these apply to your efforts to develop new products, to think about ad spend strategy, right? So to think about channel selection. And so, you know, this isn't fully comprehensive, but it gives you more than one lever to think about. And I'll say the most financially resilient brands that I see on the P &L side from a contribution margin standpoint,
they address both the first order margin and LTV. And when you bring those together, there's this compounding effect on the resilience and health of your P &L. let's chat next about OPEX, or on the CFO side, we call it fixed operating costs. What do you see on your end, Dylan, as like kind of some of the most common questions, or maybe, mistakes or misconceptions that you see around like OpEx relating back to a financially resilient P &L.
Dylan Byers (21:57)
Yeah, so I think that how you treat OPEX is probably a byproduct a little bit of how resilient your business is because if you're, for example, very first order contribution margin dependent, because return customer revenue isn't great, a good rule of thumb that we like to kind of think of is you do not want your OPEX. And this is more so applicable if you're like, you know, scaling from
Jon Blair (22:12)
Mm-hmm.
Dylan Byers (22:23)
seven into the eight figures into the low eight figures. As you get bigger, sometimes it becomes a little bit easier to kind of accomplish this. But if you're like a low eight figure scaling brand, making sure that your return customer revenue, contribution margin dollars, easily cover your fixed costs. Because in that situation, even if you do have like an issue with first order contribution margin dollars, you at least have that kind of resiliency existing from that active customer base. And again, you can debate if you did have to pull back, how long can that active customer base actually hold you if you don't have great LTV and that's why you want to give some sort of buffer. But like, I often consider the first order contribution margin type brands with low LTV, some of the riskiest in the basket of DSE brands, not to say they cannot work.
Jon Blair (22:54)
Mmm.
Totally.
Dylan Byers (23:16)
because there can be volume and there can be profit achieved, especially if the total addressable market is super large. But you've got to be really cognizant of like, you're probably signing up for a fairly volatile business in terms of ups and down, because you're going to be very, very much focused on like the slim marginal acquisition. And you want to make sure that in those down periods, you're having that resiliency to exist, easily cover that fixed cost. So that's like the biggest risk we see is like over hiring into a business.
that is inherently not resilient and about identifying that, hey, I'm resilient enough to say, I can maybe make a bigger bed here. And the second piece I'll say is like different businesses require different levels of human capital and resources. And this is something that we've observed is like, if you're running a CPG brand, you don't have any SKUs, you may not need as many people as a clothing and apparel brand with hundreds or thousands of SKUs. Where there's way more work on managing that entire, basically everything multiplies, whether it's
Jon Blair (23:59)
Yeah.
Dylan Byers (24:14)
creative inventory planning, products planning and design.
Jon Blair (24:18)
product development cycles, like product development cycles, like, and product development, people don't realize, dude, product development takes so long, so much effort, and it's so cross-functional, it consumes a lot of resources in the business. Yeah.
Dylan Byers (24:31)
100%. Those are mine too. I'm not sure if you have any other recommendations. will put in the books, there's some value in saying keep your fixed costs below X percent of revenue. But again, it gets really dependent brand to brand in what you're selling.
Jon Blair (24:42)
Sure.
No, I mean, first off, it's a fascinating concept about like thinking about returning customer contribution margin dollars that you can basically at least break even. What you're saying is that based on what you expect in returning customer contribution margin dollars, you can at least cover your fixed overhead, which means you can at least break even on just your existing customer base. That's definitely like a fascinating concept. And it...I would say you're exactly right. I've seen multiple instances of brands that are, they have no repeat purchase, no LTV. They're very first order profitability dependent. And they've had historically healthy new customer contribution margin dollar outcomes. But then you're really at the will of seasonality of consumer demand and in your product category. Acquisition like, diminishing returns of ad spend within whatever channel that you're at and like capping out or hitting that ceiling in your channel. And I have seen, I mean, I've worked with a couple brands that are, that have that makeup and they've scaled super fast because of the TAM in their product category to like, I was the CFO for a brand that went from 1.8 million in revenue to 35 million in one year, all on meta. And the next year when they were trying to go from 35 to 70, their acquisition costs shot through the roof and profitability became really hard. The ultimate solve for them was to get into physical retail, right, and open up that channel. But that was like such a huge effort to go from a $35 million DTC brand to a $50 million like DTC brand that's becoming retail heavy. And the head count they had to bring on to invest in that and inventory, it all changed things, right?
But so I agree with that and it's interesting I've seen it. On the looking at like maybe a simpler version of fixed overhead health, we see best in class brands who are scale. Look, the Ecom brand of today, the DTC focused brand of today is super lean. Way more lean than 10 years ago when I was scaling Guardian bikes and we had the likes of like Tuft & Needle and Casper and like I'll call it like the early DTC darlings that were exiting or going public or whatever when we started Guardian. You know, back then we needed, I was the full-time CFO. I was a full-time CFO, I had a full-time controller, full-time accounting team. One of the reasons why Free to Grow, fractional CFO and bookkeeping services for D2C brands has grown so quickly is because no one needs a full-time CFO anymore and that's the case. We see that across the business, right? You're contracting out to specialists like Aplo for ads and email, right? Free to grow for CFO and bookkeeping services. I mean, it's even a lot, you you're outsourcing to a 3PL for fulfillment. Contract manufacturing on the production side. So what you're doing is you're taking all of those either what are typically huge fixed costs and you're making them smaller fixed costs or on the op side, like with fulfillment and contract manufacturing, you're taking what would otherwise be a big fixed cost if you did that in house and you're converting it to a variable cost. And so what we're talking about, the difference between shrinking your overhead versus doing that stuff in house, it's not that brands can't do that stuff in house anymore. We see some that have to based on their business model and their value prop, but they're experiencing something called operating leverage, which I mentioned earlier, which is they have high fixed costs and the risk is, every month they have to cover that. So getting to break even, you have to do more revenue. But the upside, because leverage always has upside, that's why it's called leverage, is when you pass your break even point, if you have more capacity left in your warehouse and your production facility, you actually take something that normally would continue to scale as a variable cost and it's fixed and you open up the floodgates of profit. But the trick is, when do you have to add more fixed costs to then open up capacity? So it's a different game.
So I'm saying a lot of things, but all this is to say is that like the financially resilient, the average, there are verticalized brands, meaning they do their own production. Guardian Bikes today, the brand that I helped start, we have our own manufacturing facility in Indiana. We have verticalized. But there's a reason behind it. There's a strategic reason behind it. We had to raise a lot of capital to pull that off, right? And so most brands, the average brand we encounter, has a lot of that stuff outsourced. run lean and mean and they really rely on outsourced specialists and those brands, they're running an OpEx of like 10 % or less, a lot of them, the best in class ones. They may have to step it up to 13, 14, 15 in a season where they're like hiring people and then they scale on that and they get it back down to 10, but it's about 10 % or less.
But, again, you have to dig into that a little bit deeper and think about what Dylan was saying. that like, is that 10 % every month? How much, how much, seasonal is your business? How seasonal is first order acquisition? I have some brands who have really strong repeat purchase, but they have a few months out of the year where they acquire all their new customers because those are the months that they can afford to do it. And so you definitely have to think about both of those things. And here's the biggest thing I'll say about Fixed Overhead before we...turn our attention to the balance sheet. It's about reversibility, right? Because when you commit to fixed overhead, here's stuff that's hard to reverse. Opening up a bunch of your own warehouses, right? Buying a bunch of machinery. That's really hard to reverse. If you have an agency who's doing your books like we are, if things go bad, if you have to turn this off, you can. Although the cost is so low these days that you usually keep those things on and you cut other things. When you're outsourced stuff, it's a lot easier
cut and right size things, right? And so think about the reversibility of your fixed overhead cost investments and if something is highly irreversible or expensive to reverse, then it's gonna make you less financially resilient. It doesn't mean it's the wrong thing to do, but as it relates to resilience, it's gonna make you less resilient on the P &L.
Dylan Byers (31:16)
Yeah, reversibility is such a key thing because I've been having conversations similar to that recently and looking at trying to reduce fixed costs for a specific brand and kind of working with the client to discuss what are some of the options. And there's a couple, a lot of the bigger ones are just not reversible. And when they're not reversible, it's a lot more difficult to view. There are just certain things you need to have to keep the lights on. And the more, if you can...
That is not a word I have used to think of it in the past, but I think that's a great way to think of it.
Jon Blair (31:50)
Well, and one, it's directly in line, it's another way to say optionality, right? Optionality is like, I reverse course and go down a different path, right? So resilience in many ways is about not just financial flexibility, but it's about optionality that you get into certain situations. You have multiple options. You have more than one option to survive and ultimately, hopefully thrive. So yeah, let's turn our attention to the balance sheet.
So we've already talked a little bit about inventory a bit at the beginning. But maybe we can start with, are there any examples that come to mind, Dylan, that when you guys are scaling a brand on the ads side, on the paid acquisition side, do you see some common places where brands get stuck in not being financially resilient on their balance sheet?
Dylan Byers (32:44)
Yeah, I mean, you guys probably see more into this specific piece far more than we do, but from the, the, from the pieces that we kind of do somewhat interact with at Aplo, I'd say that one of the most common things is like, just like a crazy overstock of unpopular skews or items. and basically having that become like cash tied up in a relatively unproductive asset. So.
I think that like how you strategically go about your inventory purchasing, as well as how that kind of relates to where you're at from a balance sheet perspective, is probably one of the big things. And that's more common in like high skew count stores. Normally if you have a low skew count store, especially at the tile TV, it's somewhat more rare that you kind of get in those situations because at the end of the day, even if you acquire less customers than expected, the return customer piece is there to kind of help.
Jon Blair (33:40)
Mm-hmm.
Dylan Byers (33:40)
you know, sell through maybe instead of selling through it in three months, you sell through it in six months, nine months, whatever. But if you're first time customer dependent, you really got to make sure you're moving those units, especially if they're seasonal. So I'd say like the biggest kind of things to not to try to avoid to stay more resilient is like, if you are very first time customer dominant and or seasonal at the same time, making sure that like, almost like not being too overconfident in the types of orders you're placing because that can get you into tricky situations. You got to basically wait a whole year to go and sell that inventory effectively again. And then for a lot of high, high skew businesses is like kind of having that, you know, that, that, conversation is like these, you're scaling an e-commerce business is very cash intensive as you invest in inventory, depending on like what kind of payment terms you have, et cetera, et cetera. I'm sure something you'll get more into.
Jon Blair (34:11)
Yeah.
Dylan Byers (34:31)
and it's like, do you want to kind of focus or nail your focus a little bit on some of these SKUs and make very conservative bets on kind of something like the B tier, C tier, D tier SKUs to make sure that the A tier SKUs that meaningfully drive acquisition in LTV are properly taken care of. What you don't want is a bunch of C tier, D tier SKUs and then no A tier SKUs. So from our side, that's kind of the more common things to avoid.
Jon Blair (34:50)
Yeah.
Dylan Byers (34:56)
If you can avoid that, I'd say you're probably going to be more resilient. But curious your thoughts on that as well as if you have some other like common things that pop up.
Jon Blair (35:05)
Yeah, unfortunately dude, I think a lot of brands have way too... have skew catalogs that are too big. We come across that a lot. That's a hard thing to reverse quickly. It's next to impossible to reverse quickly. You have to really, really work at it. I'm actually curious, I have a lot of thoughts on this, but like... I'm curious, how does... Because I've been dealing with this a lot with several clients that we work with. When you have a brand that...
Potentially has too big of a skew catalog and it it it it lacks focus Right like like there's maybe some they have a kind of this hero product category, but then they have this like tangential product category How does that affect you guys on the marketing side because like I have a brand that I work with that I think they have a skew catalog That's way too big. They're known for a specific Category that's what they're known for and they have these kind of like tangential products. It feels to me like it it
actually probably makes it harder to be focused on the advertising side, right? Because there's this pressure to veer off from the hero product category that has made the brand. And it does well financially because they're starting to get overstocked on these tangential kind of products. So it's like, well, do we shift ad spend there? But then you're shifting it away from really what they're known for. how do...
Do you guys ever see that and does it make it more challenging on the outside? I gotta imagine it does, but like I'm curious.
Dylan Byers (36:29)
Yeah.
Yeah, I mean, like when overstock happens, like the general workflow is if a client's like, Hey, we have way too much of this. It's like, Hey, how much is too much? Like what are we dealing with here? First things first is like, can we move as much of it as possible via email and SMS? Second thing is like some brands have different kinds of thoughts around this, but like whether it's like a perpetual clearance section on the site or sales section, sometimes you can increase sell through just by having certain things live in that category.
as a byproduct of people landing on your site from some of your other ads, and then naturally being more like discount shoppers and kind of going towards and looking for what's available on sale. Those are like the ideal situations. Ideally, you can just move it on email and SMS, but as you and I both know, oftentimes an overstock is happening, it's really happening, and that's not gonna be sufficient. The sale path is arguably better because you're not having to allocate that new ad dollars to a dedicated funnel.
Jon Blair (37:22)
Yeah.
Dylan Byers (37:29)
The second you have to allocate net new ad dollars to a dedicated funnel to move an overstocked product is usually a recipe for disaster. Cause there's usually a reason that it's overstocked and it's because it's not popular. So if you're going to have to move it on ads, unless you get lucky or you find some sort of angle that actually works, it's usually going to skew down your account performance. And then it's just an honest conversation of like, do I care more about getting my money out of these units faster or do I care more about my P and L? And that's.
Jon Blair (37:58)
Well, so look,
I want to say something about that. Well, so this is where I see this happen most often. It's new product introductions and being too bullish on what the demand is. And so one strategy for having a more resilient balance sheet as it relates to the inventory side is when you just be willing to stock out of new products, that's not a bad thing, right? Like, like validate the demand of new products and then go bigger, make data driven decisions, right? Or, or even the most
Dylan Byers (37:59)
probably where you come in.
100 % 100 %
Jon Blair (38:27)
The most resilient thing you can do is just sell them on pre-order to start, right? And not actually have purchased the products. I'm not saying you should do that. I'm just saying there's a spectrum of there's like, you can go really big and make yourself very not resilient if you're wrong. You can go the other side of the spectrum, which is pre-order, but you can also, there's also a place in the middle where it's like, let's just be more conservative until we validate demand, right? So inventory is a big piece, but the other thing is how do you pay for the inventory, right?
Dylan Byers (38:37)
Yeah.
Jon Blair (38:56)
And the big thing I wanna mention is debt. Just because you can borrow the money to buy the amount of inventory you wanna buy doesn't mean you should. You have to look at the whole capital structure. You know, in real estate, real estate is just like a really simple example, because a lot of people have a mortgage on their house in the US, and it's like, look, they won't, unless you have like a special government-backed mortgage program that you apply for, generally, they want a 20 % down payment, right? That's actually 80 % leverage, right? 80 % debt to asset value. I am not even, if you look at your whole capital structure, 80 % leverage, that would mean 20 % of your capital's equity and 80 % is debt. That's super risky. An 80 % leverage business is very risky. 70 % leverage business is less risky. 60 is less, right? And so like what percentage is right?
It depends on a lot of different things. It depends on how resilient your P &L is. It depends on how much cash you have in the bank. It depends on how quickly owners could inject equity capital into the business, right, if needed. And the reality is not all debt is healthy. It's called leverage because it's riskier and it might, you might be able to leverage it for a higher return, but you have to make sure you can service the debt.
And so one thing that we do as CFOs is help brands look at, okay, you wanna take on 500K in debt, how much equity do you have? I've had a brand, many brands come to me and say, I need to get this million dollar loan, I got approved, but their equity on the balance sheet is negative because they've actually lost more money than the business has ever made or that equity investors have put into it. And what that means is you're over 100, you're 100 % debt leverage, which means you have to make it or refinance the debt or you're done. And that is not resilient, right? So we talk about, balance sheet resilience from a capital structure standpoint, it's about choosing a healthy mix of debt to equity, not just the amount of debt you need for the inventory purchase. You have to step back and look at a higher level beyond that inventory purchase and actually have to look at the whole capital structure of your balance sheet. That's where a CFO can really help is like help you decide what is healthy and what is unhealthy.
Dylan Byers (41:16)
Yeah, agreed. And want to add one thing specifically to something like the being okay with selling out of new products. I think it's also about being very intentional about what you want out of like a new product launch. I think the default approach is let's go and promote it over email and SMS. And often that's good. like generally that's going to be a higher profitability channel for most brands. So when you do launch some of these new products, can kind of think of it this way as one option.
Jon Blair (41:31)
Mmm.
Dylan Byers (41:46)
I am going to promote it to email and SMS, be it both people who haven't bought and who have bought. And if it has a high take rate and it is like a relatively high demand product, that will be an indicator that it may go and work on ads. That indicator is probably going to be more effective when you're already pushing it in like the same category that your customer base is used to buying from you. Not always, not always an indicator, but sometimes there may be correlation.
Whereas if you're going go into a completely new category or it's a pretty new thing, you may actually want to make the decision to not promote it on email and SMS, to save the units, to actually test on ads. And again, still making the smaller purchase order to just have that skew count to validate that it may or may not work on acquisition. Because I do think it's important that when you do roll out SKUs, that you're intentional about how you wanna move those units initially just from like a data gathering standpoint to better inform your future POs. And also is it a retention skew or an acquisition skew? Because some skews are like just retention skews where it's like, do I make this like, how do I increase my LTV? I wanna go and get something that's complimentary to what people generally buy on first order, but naturally has higher. So those are some like other ways of thinking about it too.
Jon Blair (42:44)
Totally.
Dylan Byers (43:06)
when kind of managing the bets, but also getting the most utility out of your bets.
Jon Blair (43:11)
I love it, I love it. Well, we're gonna have to land the plane here. We might have to talk more about this. Well, hey, you know, this is only episode two. We got plenty of time to talk about this kind of stuff. But really quick as a recap for everyone, we're talking today about how to build a financially resilient e-comm brand. Your takeaway should be there's multiple levers, right, in your business that build financial resilience in your P &L.
Dylan Byers (43:16)
I know, I know.
Jon Blair (43:40)
and your balance sheet. It's not one without the other and it's not a single metric, right? So you should be thinking about and intentionally managing first order profitability, LTV, fixed operating costs, inventory health, really thinking about the health of your capital structure and leverage, which is debt versus equity. And we didn't get to touch on it, cash conversion cycle, maybe we'll do another episode about that. But...
Yeah, hope this is helpful. Remember that you as the founder, you don't have to understand all these things at a deep, deep level and, and, and, you know, put together, it's synthesized the strategy. You can hire experts like the Aplo group and free to grow CFO to help you with these things. So don't forget, you don't have to do it alone and hope this is helpful. Looking forward to episode three, man.
Dylan Byers (44:33)
Let's go. Yep.
