The Inventory Mistake That Can Kill a Growing DTC Brand
If you think inventory planning is basically the same problem no matter what kind of brand you run, this episode will change your mind.
In this episode of The Free to Grow CFO Podcast, Jon Blair sits down with Dylan Byers — co-founder of Aplo Group and his co-host on the Ecom Scaling Show — to break down how inventory risk shows up completely differently across FTG's three growth marketing games. They dig into why new-customer-dominant brands need to place smaller, more cautious inventory bets due to volatile acquisition channels and stacked "single points of failure," why apparel brands can be profitable on paper while quietly building up a cash-killing pile of slow-moving SKUs, and why high-LTV subscription brands can actually afford to be the most aggressive with debt-financed inventory purchases. Dylan also walks through how tools like Allan's product feeds let apparel brands trigger targeted email campaigns to liquidate overstocked SKUs before they become a cash flow problem.
If you're trying to figure out how aggressive you can really be with your next inventory PO, this episode gives you the framework.
Episode Links
Jon Blair - https://www.linkedin.com/in/jonathon-albert-blair/
Dylan Byers - https://www.linkedin.com/in/dylan-byers-046010149/
Free to Grow CFO - https://freetogrowcfo.com/
Aplo Group - https://www.aplogroup.com/
Key Takeaways
Product-level, not just brand-level, targets are needed to keep apparel inventory from outpacing what cash flow can support.
High-LTV subscription brands can generally be the most aggressive with debt-financed inventory, since overstocking there rarely turns into a permanent loss.
New-customer-dominant brands should place smaller, more cautious inventory bets since a shrinking acquisition channel can leave years of unsellable stock.
Transcript
~~~~~~~~
00:36 Intro & the three growth marketing games
02:36 Inventory planning in the New Customer Dominant game
05:17 Single points of failure to watch for
07:15 Inventory planning in the Apparel (High SKU Count) game
10:13 Proactive liquidation strategy & seasonality risk
13:52 Inventory planning in the Subscription (High LTV) game
15:57 Why high LTV brands can be more aggressive with debt-financed inventory
16:48 Comparing inventory risk across all three games
18:31 What is Allan? Aplo Group's product feed tool
20:06 Where Allan gets used most across the three games
21:19 Where to find Aplo Group and Allan
Jon Blair (00:36)
All right, we are back and I've got a special guest again. my buddy my buddy Dylan Byers, co founder of Aplo Group and Allan and co host of our other podcast, Ecom Scaling Show. Dylan, what's happening, man?
Dylan (00:41)
Ugh.
Dylan (00:52)
I'm excited to chat about inventory today, Jon. It's one of my favorite topics. It's it's gonna it's gonna be fun. It's gonna be fun.
Jon Blair (00:59)
Yeah, man. So we have been talking a lot about on this podcast and the the podcast you and I co-host, Ecom Scaling Show, that a big overlap when it comes to marketing and finance is one, understanding the game you're playing, but two, where does inventory of planning fit into each of those games? Because there is different risks associated with inventory in each of those games. And it's not a risk that is managed
specifically just by the finance team, or specifically just by the marketing team, or just by the the ops team. It's something that's very much interdisciplinary and cross-functional. And so that's what I wanna that's what I want to focus in on today. So in terms of let me just set the stage with the three games really quick and then we're gonna dive right into the inventory planning best practices or do's and don'ts within each game. So we've got the new customer dominant game.
Usually durable goods, no meaningful LTV, must be first order profitable. Then we have the high SKU count game, which of oftentimes in D T C shows up in apparel. You can be break-even-ish on new customers and realize your profit through repeat purchase, largely driven by new product launches. And then we've got the subscription game, CAC to LTV optimization. Lose money on new customers, make it back by month three to six. So let's start with the new customer dominant game.
When when we're talking about a new customer dominant brand, what are some of the do's and don'ts that come and come to mind for you, Dylan, when it comes to the inventory planning r for that game?
Dylan (02:36)
Yeah, so at a high level, it's important to remember that when you're selling a consumer product, you essentially have the balance the never-ending game of buying inventory with an expectation of selling a certain number of units in the future. And one of the biggest variables when assessing or doing that exercise is assigning a level of conviction or a confidence to that scenario occurring. And
When you do the when you're playing the game of first-time customer dominance, you tend to see a greater range of potential outcomes over a given time window, namely because new customer revenue tends to be more volatile. due to the platforms that tend to drive new customer revenue. So, what that means is that if you have a lower conviction of your base case occurring in the future, you should generally be more cautious with inventory
Purchasing. because the more you speculate on an upside scenario, there's a higher probability, often in these games, that you can have serious negative consequences if they don't come true. And why is that? Well, the reason I just gave, but also because let's say you're forecasting growing from 200k a month to 600k a month in the next six months in sales, which would be aggressive. But let's just use it for the sake of an example, because usually the aggressive assumptions
tend to cause issues. Well, what happens if during that process something changes with your with your primary source of new customer acquisition? And let's say that you all of a sudden start, you know, shrinking and you go to 140K a month. If you purchased for 600K of a month of inventory at some point, and then you do the math on how much inventory you then have, you may have like years of inventory on hand. And that can kill your cash flow. And if you use debt to buy that inventory,
That could also maybe bankrupt you. So, like the the game that is new customer dominance, you have to generally be more cautious with your POs because you don't necessarily have a huge repeat purchase base that you can just expect to sell through stuff in the event that your new customer base all of a sudden starts shrinking because of something that changes in your in your acquisition channels. So there's benefits to this game for sure. First order profitability can mean that,
Dylan (05:02)
Oftentimes the path or the speed of scaling can sometimes be the greatest in this category. But the durability of revenue in this category, especially if you're direct to consumer only, can often be the weakest.
Jon Blair (05:17)
Interesting because as you were talking, the thing that kept running through my mind is single point of failure. right? And in the new customer dominant game, there's actually multiple perspectives of a potential single point of failure killing the business. But let's just talk in terms of repeat purchase profile. One single point of failure can be that new customers are all you have to sell those units profitably. The other two games.
Dylan (05:37)
Mm-hmm.
Jon Blair (05:46)
Have some amount of significant LTV. So you can sell overstocked inventory positions potentially to returning customers to your existing customer base. So you have the single point of failure risk. If you then look at potentially sales channel in the single point of failure risk when it comes to a new customer dominant game, if you have one sales channel and only new customers to sell it to, that's two single points of failure. That's sales channel risk.
Dylan (05:58)
Mm-hmm.
Jon Blair (06:16)
If you then I've seen this a lot, there are a lot of single product or single hero product new customer dominant brands. That's another single point of failure potentially. There's there's this other maybe less obvious single point of failure that I have actually personally seen almost kill several new customer dominant brands, which is if if more than fifty percent of your revenue every year comes from Q 4, Black Friday, Cyber Monday, a four week, four to six week period, that that's a single point of failure.
Dylan (06:40)
Yeah.
Jon Blair (06:45)
That that you have to do over half of your annual revenue in four to six weeks. And so I guess the point that I'm making is if I think about this from a CFO perspective, it's not that you can't grow a new customer dominant brand fast, but it's that when you're doing inventory planning, you should go through the checklist of single points of failure that your brand has. And the more of them you have, the, the, the less risky, the the smaller bets you should be placing, in my opinion, when it comes to inventory.
Dylan (07:13)
Yeah, a hundred percent.
Jon Blair (07:15)
So let's talk now about the high L T V game and let's let's zero in on the apparel version of the high L T V game. What are some of the best practices or do's and don'ts for inventory planning in the apparel game from your standpoint?
Dylan (07:29)
Yeah, so I think that where this game tends to have the most issues is that because you're purchasing so many different SKUs, and oftentimes high SKU count stores have high variant count as well, sizes, colors, so on and so forth. it's not that you necessarily will have the like as high of a probability of having like your hero's SKU be like on hand for two or three years, but you can kind of
over time build up this basket of just like these really slow moving units that can just continue to build and it's right if that basket is is growing at a rate faster than your business and that your cash flow can permit, you can be profitable, but you might have terrible cash flow. So I think this game actually has a different problem to solve that is still inventory planning, but it's more on the demand side.
So what these businesses tend to get wrong the most is when they go to their marketing team, they might say, Hey, I want to target this percentage of growth year over year, and I want to target this percentage or dollar value of EBITDA or net margin or contribution margin. The problem is that that matters, but if you're trying to improve free cash flows, you also have to have product level objectives. And what does that mean? That might mean that I'm willing to move a unit that I have a year's worth of inventory on.
at a lower margin profile or at a low at a lower return profile than that of another SKU because even though it'll blend down my EBITDA, I might actually be in a better position on a cash basis because of it, that allows me to reinvest those dollars into something that can make me even more money faster. So like I'm a believer that like for example our tool Allan, one of the features is product feeds. And what that does is that allows you to essentially set rules
That if certain inventory outcomes persist, you can automatically send emails to people that you think may buy that product in the event that it's overstocked. Because right now most stores do not have a good liquidation system, especially e-com only. So I'd say that this game, inventory planning matters maybe like the most. It always matters so much because it's like it's sort of just the game of consumer goods.
Dylan (09:53)
But like I think that the brands that are in this category learn a lot of the lessons the fastest because of how many SKUs and and variants they're planning for. And then I think once you do your planning, the next step is how do you start taking actions when you get it wrong? Because you're inevitably never gonna forecast it perfectly.
Jon Blair (10:02)
Yeah.
Jon Blair (10:10)
That's a good call, man. That that like liquidation strategy is a part of your strategy for inventory planning on the front end. Because just by virtue of like what you have to do with new product launches and seasonal obsolescence risk because in apparel that, you know, there's different actual seasons that people buy apparel for, you just have to have that baked in on the front end and you want to do it proactively instead of reactively.
Dylan (10:30)
Yeah, yeah.
Jon Blair (10:37)
And I think there's another thing that you mentioned or that that I thought of as as you were talking is like you're running a high SKU count brand and let's talk specifically about the apparel case. You have got to you really need to be willing to understand the seasonality of your customers. The best apparel brands that that I've ever worked with, they just know they can't exit the winter with
Dylan (10:58)
Mm-hmm.
Jon Blair (11:06)
too much winter styles on their balance sheet. They just know that. And it actually plays into their willingness to discount stuff if they look like they're off track of their forecasts. And they just want to get it off the shelf because they've already lived that painful they've already experienced that painful lesson in the path in the past of like, dang, I exited the winter with all this excess stock of winter styles and I I couldn't even blow it out in the spring. No one cared because it wasn't cold enough and I had to wait until next winter.
And so they just weren't willing to do that again. And it also that also should play into how big of a bet you're willing to place on new product. Like new product, you should already be, you should already be very thoughtful about how big of a bet you're willing to place. But if you then look at the seasonality of said product that you're launching, and
You really need to factor that in into when you launch new products as well. Like I there's a one brand that I've worked with, the the person who's the founder and does the product development, she is just like she is so meticulous about timing when her winter styles are gonna show up because she knows she's just got this compressed window of getting those things sold. And if she misses it even by a week or two, it may completely ruin her balance sheet. And so
The the trap is you can't swing back to the other side either and say, I'm gonna stop launching new products. You do that, you're gonna kill your returning customer sales. And it's it's kind of a death sentence for many of these apparel brands. So you do need to find this sweet spot of launching the right product at the right time, ordering it in the right amounts, to drive returning customer sales, but not get too far out over your skis with overstocked inventory positions. It's a hard game.
Dylan (12:56)
Yeah. Yeah. I think what one of the benefits of the game though is what makes it hard is actually a little bit of a a mini moat. Like it's maybe not the best business mode ever, but you basically have the ability to over time get more and more data on what sells compared to incom compared to the new brands entering the space. That allows you to make better decisions on what to buy. it's even if like someone were to come and rip you off or make a very similar product, that
maybe last year's style. So the hard part of the game is almost almost what makes it a good business. The hard part is you have to be really good at inventory planning and really good at designing or making new products or procuring new products. And that has its own host of downsides in terms of like revenue predictability. But if you're a if you're a company that can excel at that, I actually think it's how you win this game. and most things to win is hard.
Jon Blair (13:31)
Totally.
Jon Blair (13:52)
Totally. Yeah. It's a it's a it's a blessing and a curse at the same time. well let's talk about the subscription or high L T V game next. What are the keys to inventory planning from your perspective, Dylan, for a subscription brand?
Dylan (13:57)
Yeah.
Dylan (14:07)
Don't sell out of some something that you have people paying you for on subscription. That's the worst. Yeah. I d you don't think that too often, 'cause, you know, it's like I don't want to say it's common sense, but it's it's like you really want to focus on that as a I and I think most people get that. So it's not a common mistake we see. I guess like it's most commonly seen if there's issues procuring product for one reason or another, and that's a painful thing to deal with. So that's that's like a very simple inventory planning trick.
the other variable with this is I think these businesses uniquely probably have the greatest ability to use debt or be more aggressive on growing inventory PO sizing. And the reason why is basically just because of the d the durability of the revenue that these categories tend to have, meaning that
Even in the event you overorder, because you were expecting to go from 200K to 600K, you because your revenue is more baked by return customers, let's say your downside there is you end up doing 400k a month in that scenario because you're still, you know, compounding your cohorts of active customers. Well, all of a sudden, it may not be that it may not be that you're two or three years overstocked. You might be six, seven, eight, nine months overstocked or some arbitrary example.
And in the event that occurs, yeah, it still sucks for your cash flow, but it may not kill your business. basically, in short, when you know it it it's so balance sheet dependent and context context dependent and like, you know, everyone has to have a good finance team, free to grow as an example, to to help assess these risks because if you, you know, use some of these forms of capital, like you could go bankrupt and that's not good.
Jon Blair (15:49)
Mm-hmm.
Dylan (15:57)
But this category I think has the greatest opportunity to be the most aggressive with going big on POs. not only the LTV, but also the SKU counts tend to be smaller. Cause I've had people make, you know, comment to me before, like, hey, like I have really good LTV and I'm a clothing and apparel brand. Like I should go and you know, use a bunch of debt to buy inventory. And it's like, you know, you have good LTV, but what if you use the money to buy the wrong SKUs? Because if you do
You may need to move those SKUs to service the debt, but people are buying these SKUs. And then you have to buy more of those SKUs and it's a and then it becomes a cash flow nightmare. The benefit of the high L T V brands is not always, but generally they have fewer SKUs and the and the recurring revenue is often the same SKU. So that that just changes the risk profile completely.
Jon Blair (16:48)
Yeah, and I was I was just thinking through as you were talking, like contrasting this with the on the other side of the spectrum, the new customer dominant game, right? So let's say you order too much in the new customer dominant game and you have to acquire customers at a loss to move that, you're acquiring customers at a loss that will will never become profitable for you. So it's a permanent loss on that inventory that has a certain financial impact and downside to it. If you have to continue to acquire customers at a loss,
In the new customer dominant game, they may be profitable by month three, four, five. And so you may be liquidating excess inventory positions at a loss in the first month, but you're actually acquiring an asset in terms of that customer relationship that does become profitable within a few months. So it that that is a different financial impact to the business. And so you can go more aggressive. There's still a limit to how aggressive you should go.
But you can be much more aggressive because there aren't those single points of failure. And there's the opportunity for an unprofitable customer acquired today to become profitable to the business over time. And so there still can be a positive ROI on that quote liquidating inventory kind of investment. So yeah, man, this was super, super helpful, super practical. But I the last thing I want to ask you about is Allan.
And how you guys are using Allan to i help brands line up some of their email marketing tactics with inventory management. Can you walk the audience through really quick what Allan is and and how brands are successfully using it right now?
Dylan (18:31)
Yeah, so Allan has like two most commonly used features for for brands. So one is email ads manager, which basically lets you send personalized one to one emails based off of a specific user and segments. and that's you know, one thing that helps us drive higher click through rates, higher email performance, so on and so forth. But in the context of inventory, there's also a great product called Allan Product Feeds. And basically basically what that can do is it can sync with your inventory data.
And then it allows you to build segments around that inventory data. So for example, let's say that you are a clothing and apparel brand and you are wanting to liquidate certain SKUs, you could basically say, Hey, any time that you know I am you know expecting to be on inventory on hand to be greater than nine months based off of the current forecast, or maybe I'm saying, hey, I have that more than this many of this specific type of unit on hand, you can essentially
Go in, set up that trigger, and then have emails be dynamically sent with that product to users that you think may purchase. So a a very common way of using this would be size-based. So let's say I'm overstocked these SKUs in XXL. I want to then dynamically send an email to people who have bought XXL before with this discount. So essentially it's a product level strategy.
to move through those units. there's a bunch of other ways you can trigger it, but that's like one of the most common ones that we see.
Jon Blair (20:06)
That's awesome, man. I'm just curious, that c wha what are are you seeing it used successfully across all three games or is there a specific game or games where it's being leveraged more?
Dylan (20:19)
Th that specific feature, product feeds for with the inventory data, is mostly used in the first two games. There's and as a child with our team, there's probably instances where you're overstocked of the of the of the high LTV game, but it's it's it's uncommon for that to occur in that game, right? So it's like the odds of like if you get it, your l brands are much less likely to get inventory wrong. And again, like the hope is you don't get it wrong.
Jon Blair (20:38)
Yeah. For sure.
Dylan (20:47)
But there's just some games where you're inevitably gonna get it wrong at some at some clip. So definitely most common in a high SKU count. And then secondly would be the one time purchase. The one time purchase doesn't happen as much just because it's easier to inventory plan if you have fewer SKUs. But when it when it the the art the counter to that would be when it does happen, it sucks because it's harder, it's it's harder, it it sucks the most in that game. So
Jon Blair (21:09)
Yeah. Totally, totally.
Dylan (21:14)
Those are the two for sure. The the the one time purchase dominant and then the high SKU count.
Jon Blair (21:19)
And if people are interested in learning more about Allan or the Aplo group, where they where can they go to find out more information?
Dylan (21:25)
getAllan.com. Allan is A-L-L-A-N. and then Aplogroup.com on the agency side. So we'll always be happy to chat and share two cents.
Jon Blair (21:37)
Well, Dylan, I appreciate you coming back on the show. For all of you who don't listen to our other podcast, Ecom Scaling Show, definitely check that out. Check it out if you want more conversations like this between me and Dylan. But thanks for coming on, man. I think this one was super helpful and I look forward to chatting soon.
Dylan (21:44)
What are you doing? You gotta listen to it.
Dylan (21:54)
Awesome. Thanks so much, Jon
