Scaling DTC Profits by Optimizing Contribution Margin

Episode Summary

In this enlightening episode of the Free to Grow CFO podcast, join host Jon Blair, as he dives deep into the world of scaling Direct to Consumer (DTC) brands with profitability at the forefront. Our special guest, Thomas Gleeson, co-founder of StoreHero, shares invaluable insights on achieving marketing efficiency, profitability, and positive cash flow. Discover Thomas' personal journey that led to his co-founding StoreHero, a revolutionary product helping brands pinpoint their successes and pitfalls in ad spending. From discussing the landscape of e-commerce and targeted marketing strategies to exploring the significance of contribution margin, this episode is packed with essential knowledge for anyone looking to scale their DTC brand sustainably. Tune in to gain a comprehensive understanding of how StoreHero is making a significant impact in the e-commerce world and how you can apply these insights to your own brand.

Meet Thomas Gleeson

Thomas Gleeson is a co-founder at StoreHero! StoreHero is a cutting-edge tool for ecommerce brands and agencies to combine their ecommerce, marketing and finance data to cut out the noise and focus on what really matters - PROFIT!

Episode Transcript

00:00 Welcome and Introduction to Thomas Gleeson

02:51 The Journey to StoreHero: Thomas's Background

05:34 The Evolution of E-commerce and Marketing Efficiency

15:11 Understanding Contribution Margin in E-commerce

22:17 The Importance of Aligning Marketing and Finance

27:11 Exploring Dynamic Marketing Strategies

27:35 Case Study: Impact of Pricing and Ad Spend on Profitability

33:38 Maximizing Profit: A Deep Dive into MER and ROAS

44:52 Leveraging StoreHero for E-commerce Profitability

52:15 Final Thoughts and Recommendations

[00:00:00] Jon Blair: All right. Hey everyone. Welcome back to the Free to Grow CFO podcast, where we talk about all things scaling a DTC brand with a profit focused mindset. I'm your host, Jon Blair, founder of Free to Grow CFO. And for those of you who don't know, Free to Grow is an accounting and finance firm that works exclusively with growing profit focused DTC brands.

And what we do is we provide bookkeeping and fractional CFO services that help growing brands scale alongside healthy profit and cashflow. Today, I'm super excited to be chatting with Thomas Gleeson, co founder of StoreHero. Thomas, thanks for joining me, man. 

[00:00:38] Thomas Gleeson: Hi, Jon. Uh, thanks very much for having me on.

Uh, really, really looking forward to getting into it. 

[00:00:43] Jon Blair: Yeah, it's, uh, it's, uh, I think the last time we were chatting on a video call was me on your podcast, and we were actually in the same building, but, uh, in different rooms. I was in Ireland, um, what was that, about two months ago? And, um, yeah, that was a really good time.

I, I do want to, I've been talking to my wife a lot about coming back, um, on a vacation without the kids, um, so that we can actually see the rest of Ireland and not just Dublin. I was told by you and many others there's a lot that we didn't get a chance to see on that trip. 

[00:01:16] Thomas Gleeson: There's way more Guinness in the rest of the country as well, Jon.

[00:01:21] Jon Blair: Love it. Love it. But, uh, so yeah, look, today we're going to continue the conversation we've been having for the last few weeks where we're talking about this balance of marketing efficiency, profitability, and cash flow as you scale. Um, as I mentioned before, our fractional CFO firm, all we work with is scaling DTC brands that are profit focused.

We're not working with venture backed startups that are pre product market fit. We're talking about brands that are scaling a capital intensive business, right? Because it's inventory based and needing to do so in a self sufficient manner, which means what? Profitability and what's one of the biggest components of profitability for a scaling DTC brand.

It's marketing efficiency and then on, on the heels of that profitability equation, we need to be looking at cash flow as well. Um, I've got Thomas on today because he's the founder, uh, co founder of a very interesting, um, product, SaaS tool called Store Hero that really helps brands focus in on where they're winning and losing the battle.

for listening. on the, uh, profitable, uh, ad spend front and really just like profitable scaling front. And so, um, because of that, Tom, Thomas has a really interesting personal background that led up to his time at Store Hero, but Store Hero itself is doing some really, really powerful things to help brands scale alongside healthy profits.

So I'm really excited to dive into this topic. Um, with, uh, with Thomas's perspective. So Thomas, before we get into talking about store hero and some of the things that you and I are both seeing out in the marketplace, um, as it relates to brands trying to scale profitably, tell me a little bit about your background and your journey that led you to starting store hero.

Because I think there's just a lot of very relevant information or there's a lot of, there's a lot of relevant history. In your journey that positioned you well to come up with this idea for store hero and, and, and ultimately co found this SaaS product. 

[00:03:23] Thomas Gleeson: Brilliant. No, absolutely. And I mean, I think to your point there, it's.

Personally, for me, it's been a very lived problem. Um, I grew up with it in a house with e commerce at home. Um, my mother's had an e commerce business since 2004. So, I mean, you're going back to 2004 e commerce. We all think of e commerce today and it's very, you know, it's part of our nature. You, you, you jump on your phone, you buy an app and you buy it, you buy a product.

It lands in your door a couple of days later. You don't really think about it too much. If you go back to 2004, e commerce is very much in its infancy. You have to kind of convince people it wasn't a scam. Um, so you had all of this, all of these challenges that we don't really think about today, you know?

Um, so our, our family business would have been personalized gifts, so baby gifts, wedding gifts, Christmas gifts. Um, we probably saw that business grow over a long time. So we're nearly 20 years old now at this stage, which is kind of hard to even think about. Um, so. Um, we would have seen, first of all, our business was kind of built on SEO.

So we didn't run any paid ads until probably 2016, 17. Um, I then got the job of trying to figure out how to run Facebook and Google ads around that time. And my parents, I suppose, had seen that, you know, they got the business to a certain scale without ever spending on ads. So there was definitely a big reluctance to spend on ads because this is something that we kind of had perceived that we got for free for a long time.

Um, now, obviously, that's a terrible way to look at it. You should look at your, your, your marketing as an investment rather than a cost to the business. But that was kind of very much ingrained. And anytime I was spending money, then I need to be a clear ROI on the spend that was coming back to us. And to be honest, Jon, I was probably figuring out and mapping out contribution margin on a spreadsheet before I actually even knew the name for it.

Um, so that was the business that that's my family business at home. Um, I would have had a couple of e commerce businesses myself, I think two or three. Um, over the years, and then I suppose I went to work at Shopify in July, I think of 2019, um, which was an incredible experience. I think, I think I was six to eight months in the door before, uh, before COVID hit.

So, um, I mean, yeah, it was crazy. It was a crazy, crazy time, but such a massive learning curve for myself. 

[00:05:33] Jon Blair: That's really interesting. So you come from a family that had an e commerce store, definitely in the early days, the heyday of. of e commerce and and funny enough me having come out of the Brand side of the e commerce world on the founding team of guardian bikes.

We Launched I believe in 2016 on our shopify store 2016 to me compared to today feels like the old school days of E commerce. In fact, there was a lot more working with Uh, lower funnel activities like SEO and Google. There was actually white space with Google pay per click advertising. You could still get into a product category and be like, no one else is spending on Google.

That's pretty hard to find today. I don't want to say it's impossible, but it's pretty hard to find today, right? Um, but so you come from a family. That is, uh, has an e commerce business. You guys transitioned from this kind of lower funnel, like just capturing existing demand or existing search for, you know, uh, search intent for products that you guys offer to actually paid advertising, and then you go work at Shopify and arguably.

The one of the most incredible times you could possibly be at Shopify when there's an e commerce boom because of COVID, right? So from those two experiences, walk me through how you met your co founder Karl and ultimately why you guys landed on, Hey, we've got to start store hero. 

[00:07:08] Thomas Gleeson: Sure, I mean, so I started running ads around 2016 17, um, we were actually on a platform called Volusion, pre Shopify.

Um, and it was really actually hard because we had the Facebook pixel in there, but none of our conversion value from the product prices and stuff like that was pulling into Facebook ads. So I could see the cost of a purchase, but I actually had no even idea of ROAS figures at that time because, you know.

That data wasn't being put into the Facebook ads manager. And so you couldn't actually see the conversion value. So we moved over to Shopify. I think in, uh, around the same time, I actually started working there. So my mother never had a cue for support because I was the support. Um, but what I quickly started seeing was that, uh, You know, obviously your, your experience from growing up in your own business, uh, family business, then having run your own, it's very insular.

You, you, you know what, you know, and all of a sudden I started off in Shopify in customer support and all of a sudden you're talking to hundreds, if not thousands of different businesses on a, on a, on a couple of monthly basis. And I quickly started seeing, I mean, it was such an amazing learning curve.

There was so many different businesses doing so many different things. Um, and I realized that I had so much to learn. Um, So what I kind of started doing for my parents was on a Monday evening, basically trying to create a spreadsheet to map out all of the core Shopify metrics. So, you know, sales, new customer, traffic, conversion rates, so on and so forth.

Then I decided I need to bring in Google ads, metrics, Facebook ads, Klaviyo metrics, GA4 metrics, well, UA at the time. Um, and then my, my, my father is an accountant and, you know, accountants, not like you, Jon, but most accountants by their nature can be, uh, apprehensive of marketing spend and it's true effectiveness.

So he would make me bring in all of the core costs, um, not just product costs, obviously, but, you know, staff costs, uh, software fees, uh, along with the rest of it to make sure that when I was kind of bringing this spreadsheet together on a weekly basis, that it was actually a true reflection of the actual profit that we were making.

Um, so yeah, I mean, why do I need to bring in the cost, the profit piece. I think, and I think a lot of, you probably see this yourself, but I think a lot of brands, you can get hung up on purely looking at ROAS, and I mean, ROAS and Google is great, ROAS and Facebook is great, but, you know, ROAS is a, it's, it's fine, but it's, it's really a derivative of the, uh, the attribution tool or the attribution software model or the window, whatever you want to call it, that's being used in those, those platforms.

And it's, yes, it's a great indicator in terms of is Facebook working, is Google working, but really. I mean, if you're trying to link the finance and marketing function of the business, what you really need to understand is the impact of your marketing spend on the profitability. And what I was doing for years without again, really, really knowing the name for it was trying to get your contribution margin, which in my opinion, you know, as we kind of move towards a more cookie less world and as attribution probably gets murkier and murkier.

You know, that's the North Star metric. Every business needs to follow on and work on. So in terms of, I suppose, where did Karla come into the picture and how do we join forces to make store hero during my time at Shopify? I was doing my business degree in the evenings. And then final year, I had to do a business plan project and I was like, okay, well, this spreadsheet that I've been working on for a number of years, let's try and see if I can just work on my, my project and something I'm actually interested in.

Um, so I spent probably 9, 10 months working on that. And this is just really random because Karl and I were connected on LinkedIn, but we didn't really know each other that well. Um, I was just about to submit my project and Karl messaged me out of the blue and asked me to check out this project that he had started working on.

And my face dropped because he presented about 85, 90 percent of what I had just done my whole project and actually spent a couple of years working on. And I was initially sitting there like, has, has my lecturers tipped this guy off or how has this landed on my lap? Um, because, you know, you hear about founders and the journey they go on to try and find a co founder, and it can be quite lengthy and really, really difficult.

And the idea of starting a software business was always something I was very, very interested in. And all of a sudden, you know, it kind of had landed on my plate, to be honest, to a certain extent. We spent the next couple of months chatting and we realized it was a great fit. And then we kind of joined forces officially probably around October of 2022.

And I left Shopify a month later. Um, and the rest is history, I suppose. 

[00:11:18] Jon Blair: It's so funny. We were talking about this over dinner in Ireland. We were like swapping co founder stories, like how, how we found our co founders and my co founder, Jeff Lowenstein, we have a, we have a similar story. Um, as you guys, in terms of like, I, I, you know, I had been scaling Free to Grow CFO, um, as the only CFO on the team.

Um, but having built out some back office support and accounting function, I really wanted to partner with someone, but for us, the guiding principles that, um, really, um, You know, set the direction for our business are neaR & Dear to my heart. And there's only so many people out there who are going to align with our core values and our purpose and reason for existing and meeting Jeff really kind of fell into my lap just through a introduction of a friend of a friend.

And he was looking to start his own e com fractional CFO shop. And, um, really was just kind of picking my brain on what has, what worked and what didn't work. And I realized here's a guy who had a complimentary skill set to me, not exactly the same, right? Cause like I always say in business to people who are exactly the same.

Means one of them is useless, right? He like, he very much complimented my weaknesses and vice versa. And, um, and very much aligned with our core values and guiding principles, which I, I believe there's a, is very, very hard to find. Um, and I was like, wow. Here's a, I convinced him, I pitched him on joining forces and let's, let's co found the next generation or, um, you know, next phase of Free to Grow CFO instead of you going and starting your own firm.

And that was the birth of our co founder story. And like, I would say that's, we're probably the exception. Not the rule. I think there's a lot more for, for as many co founder stories as there are like ours. There's probably four of just like real horrendous co founder stories that don't end well. And so we're lucky in that regard.

But I think another thing that's interesting for the audience to understand about you and your co founder Karl. Karl comes out of the agency world, right? And so him having, um, let, was he, did he own an agency? Was that part of the journey 

[00:13:34] Thomas Gleeson: and I just kind of what you said there is really in line with us as well.

We, we definitely have very, very different skill sets. Um, but we both had like. Both are like very relevant, but very different experiences and background. Like mine was at Shopify and on the brand side, whereas just as you've alluded to there, Karl's background is on, he had an agency for a big number of years.

So kind of full service agency. Um, and he had actually started building out, you know, A mix of super metrics and funnel into a Google data studio reports for a lot of his clients. Um, and, you know, they were really, really good, but often they're not very nice looking and the connectors can break and you spend a lot of your time actually fixing the data and fixing the connectors that are broken instead of actually logging into a platform and actually trying to Get a sense of, you know, making decisions on the data instead of actually fixing the dashboard to make sure the data is actually there.

So, Karl's experience was largely from the agency side. It works with loads and loads of really big Irish clients here and some other ones in Europe as well. And we'll probably run into a lot of the same challenges I ran into from the other angle where a lot of clients were asking for, you know, this is fine.

The ROAS reporting is fantastic, but really, can you tell me how much profit I've generated after this marketing spend and. You know, when we joined forces and we kind of started chatting around this, it was a bit of a, one of these moments, you're like, how does this not exist? Like, you know, contribution margin is a term.

Was definitely in its infancy, by the way. I still think it's very much in its infancy for the e commerce industry, but even going back 18 months ago, it wasn't as much of a talked about term as it is today. So we kind of joined forces and said, this was something that the market really needed. Um, and thankfully we, I think we backed the right horse.

[00:15:14] Jon Blair: It's funny because I originally am an accountant before becoming a brand operator and a CFO, right? And so contribution margin is, is, it's an accounting term, really. Um, I have a certification in the States called the CMA, which is Certified Management Accountant. It's, it's kind of, This is a poor description, but this is what it's known as.

It's kind of the cost accounting equivalent of a CPA in the states, right? And um, contribution margin is a management accounting term that's been around for a really long time. And you normally only heard about it in a managerial accounting Um, classroom setting or a managerial accounting, um, textbook.

And so what's funny is that I was talking about contribution margin much earlier in my career in different settings. And most founders looked at me like I was crazy. Like what, what I, I, I don't care about this, right? It's, it's gross margin. It's EBITDA. Um, even just the gap way of looking at a P&L, which is like breaking out operating costs into SG and a selling costs R & D.

And, um, it's interesting because at guardian bikes, what, seven, eight years ago, I We were talking about contribution margin, but their CEO and a business school, um, friend of mine, Brian Riley, he originally had a finance background. So like, even though he was the CEO and he was kind of the marketing and product visionary, he had a finance background.

So contribution margin was a term. That made a lot of sense to him that he knew deeply so we were talking about it eight years ago But I think you're right that it this old term that's always been there in the accounting world is now becoming mainstream because the reality is Understanding reorienting the profit equation, right?

I actually just wrote a post about this today on linkedin Profit is not revenue minus expenses Profit is contribution margin dollars minus fixed costs That sounds possibly like just semantics. But it's not just semantics. The underlying concepts within contribution margin dollars minus fixed overhead is a much different way to look at your business and your profitability equation and understanding what those things mean is key.

And so, um, One thing that I want to chat about here a little bit is like, what conversations are you and Karl out there having? Cause you guys have generate, you guys have created store hero, which is a piece of software that amongst other things helps brands, uh, uh, calculate and analyze their order level and skew level, um, contribution margin.

Right. Um, so you guys are on the forefront of helping brands. Calculate contribution margin. You're helping them bring in the data sources into your platform. That, that, uh, that ultimately drive those calculations and drive that reporting. In doing that day to day, what conversations are you out there having with founders over and over again?

What are you seeing about, about founders ability to like internalize? The contribution margin concept. 

[00:18:38] Thomas Gleeson: Yeah, I mean, really, really good point. It's, it's a lot of education still on what it actually means. Um, people can understand it, but you can see the moment the light bulb goes off and they actually realize, you know, what this actually means.

And again, we're not talking anything revolutionary here, and it definitely is a term that's becoming more and more mainstream in e commerce. Um, But there still is a huge gap in understanding industry wide around what contribution margin actually is, what it stands for, and how you can really utilize it to.

Almost reorientate how exactly you look at your marketing for your e commerce business and how you, again, look at contribution margin minus OPEX equals EBITDA because there's still such a massive gap in education between just in the industry as a whole. And in terms of, I suppose, conversations that we're typically having with brands, they're moving a lot of agencies.

The good agencies are moving the reporting way more towards contribution margin. , 

[00:19:33] Jon Blair: Some agencies, the way they're structured, the way their strategies are structured, they are not inherently maximizing contribution margin dollars.

And, and to be clear, not a lot of them aren't doing it on purpose. They're not seeking to minimize contribution margin dollars, right? It's just that their, their playbook doesn't have alignment between the activities they're doing and driving contribution margin dollars. And so if that gets exposed, it really exposes.

The underlying issues with their whole playbook. And I'm, I'm actually seeing that more and more like agencies are embracing it or they're like, please stay away. I don't want your help showing this to my client. Are you seeing the same thing? It sounds like, 

[00:20:23] Thomas Gleeson: Oh, so much, so much. Um, to be honest, it's more validation for us that we're on the right track.

That that's the kind of attitude good and bad agencies have towards us. The good agencies that really want it because it really shows off the work that they are doing. Um, again, what we're talking about here is nothing revolutionary. Again, we've said that a couple of times and it's, I think it's worth going back to understanding how is e commerce function for so long.

Without this term, which sounds so blatantly obvious to me and you, how does this never come to the forefront for a lot of brands or how has e commerce matured to a point where there's millions of Shopify stores out there? And this hasn't been the fulcrum in which businesses spin on to a certain extent.

And I think it goes back to, you know, years of cheap CAC and ROAS on Facebook and Google. You know, if your margins were so good from your, your advertising spends on those platforms, you really didn't need to understand the boring parts of your business. Like, you know, margins and costs and that whole thing, you know, that all took care of itself.

As long as you were spending on Meta and Google and the return on the advertising spend was so good. And let's face it, it was for so long. You know, the rest of the business just took care of itself. You could have had a really, really profitable business out there without really understanding the intricacies of it all, but I think, you know, in the last probably two years, as you know, the, the, the post COVID boom has kind of subsided and iOS 14 has come in and the rest of it, those ad costs have gone incredibly much more expensive.

There's way more competition out there. And now more than ever, I think people. You know, for years you could have operated an e commerce business with marketing, knocking it out of the park, finance, doing a really good job, but those two functions in a business, not really understanding how each other works.

Um, but I think to grow a successful e commerce business today, that intersection between those two functions is where the rest of the business needs to build from. Because if your marketing team don't understand. Deeply, the unit economics, or your agency don't understand the unit economics of your business and your finance team are building out, you know, forecasts or reports for the year.

And they don't understand the marketing lingo to a certain extent. You have two functions who need to lean on each other, really not understanding each other. And if that's the way your business is going to try and operate, you know, that's a really, really difficult to, it's a really difficult environment to operate in when those ad costs.

If you look at an e commerce business, the gas that you have to accelerate is your, your ad spend. It's your marketing budget, but if you're not fully clued in or the business isn't fully clued in on the impact of that marketing spend on the profitability that you're trying to generate, it's like operating your business blindfolded and that that's never a good idea.

[00:23:00] Jon Blair: Yeah. So there's something I want to bring into this conversation for us to chat about that you and you and I actually haven't talked about this before specifically. But it's something I'm starting. It's a pattern I'm starting to see, which is that, um, and it's, it's built around this concept of monthly budgets and targets to give to an ad buyer, give to your agency as fractional CFOs that work exclusively with scaling DTC brands.

That's one of the questions we get the most often. I'd say the two questions we get the most often, like one, can I buy this much inventory and two. Um, what's the budget, what's the ad spend budget and the, uh, uh, marketing efficiency target for our agency this month. And here's the thing I'm starting to form this opinion and it's something that I'm working with my team on.

Um, and we're kind of testing on a few clients, but we used to just give guidance on an ad spend budget and, uh, marketing efficiency and MER marketing, marketing efficiency ratio, um, target for. The month and I'm starting to realize that that by itself is very unhelpful. And here's why I actually do believe that you should give guidance, right?

We should have a target because if we don't have a target for how much we want to spend, your ad buyer can't reverse engineer. How much they're going to spend on a daily basis and what the stair steps of of ad spend increases are going to look like if you don't give them a target they're just going to be running blind there but if you give them a static target on ad spend and M.

E. R. here's the problem what's rule number one of planning of like forecasting M. E. R. and ad spend and M. E. R. Same thing as rule number one for every other forecast. You will not hit exactly those numbers. So when you give that to an ad buyer who this day and age ad buyers are freaked out, I talk to them all the time.

They're so freaked out that they're going to get to the end of the month and they're going to get chewed out by the brand because they totally screwed something up and they ended up driving. Not as much profitability as everyone was hoping. And so, you give them an ad, let's just say you give an ad buyer 100, 000 ad spend target for the month, and then you give them a 3 MER target.

Well, if they start scaling spend, and they're on track to spend 100k, but their MER is coming in at 2. 5 instead of 3, they're actually not sure what to do. Like, they can go ahead and retreat and pull ad spend back until they see the MER rising back up to three, but they don't actually know the impact that that's having on the bottom line.

They're just blindly, pretty much blindly, following an MER target of three, right? And so what I've started to realize is that what we need to do is As e com focused fractional CFOs is we need to give our brands actually kind of like a scenario chart where it's like, Hey, look, our goal is to hit a three MER at a hundred K ad spend.

But if you spend 125K in ad spend, here's the new MER that produces the same contribution margin dollars as our target. Or if you only spend 80, 000 in ad spend, here's the new MER target that generates the same contribution margin dollars as a 100K and a 3K. And what that does is it empowers an ad buyer to go to that chart and go, you know what, I'm pacing towards this one.

And actually, um, I actually can, I can beat this MER. Um, and so I'm spending more, my MER is lower than three, but I can see on this chart, I'm going to produce more contribution margin dollars so that ad buyer can keep, keep executing with a lot of confidence. And so we're trying to think through how we kind of build out these look up kind of scenarios, right?

So that an ad buyer can have a direction set at the beginning of the month, but have something intuitive to use. What, what is your opinion on that kind of a strategy versus just a static MER and ad spend target? 

[00:27:10] Thomas Gleeson: I think, I think it makes a lot of sense. I think it makes an awful lot of sense. Even one example I would give, I spoke to, um, an eight figure brand at the end of January, um, and they made some pricing changes.

Um, they increased, I think, product prices by about 20, 25 percent in, 20, 25 percent in just the very, very start of the year. And they didn't really move the MER target, um, so I think they spent 170k on spend in January, which was up 78%. And I think the contribution margin was up 110 percent on a 78 percent increase in spend.

So I was kind of looking at this going like, you know, your, your contribution margin dollars. Are actually rising on a percentage basis faster than your ad spend to which I was looking at this. I'm like, I rarely see that kind of scenarios. Like, this is a huge opportunity you're missing. If you need to make sure this when you're talking about all the kind of contribution margin conversations that you need to be very, very careful.

Diligent to make sure that the business actually has the cash on hand to make that happen, because we've ran into that a couple of times as well, or they mightn't have, but, you know, they made that bigger swing because they were fixed on this 3 MBR target. I think in February, they increased spend from, I think it was 169 to, I think it was 270.

So pretty, pretty substantial increase based on the conversation that we had at the end of January. And month over month from February, uh, from January to February contribution, margin rose by, I think, Oh, I think it was 70%. Um, so, you know, did the NER actually dropped by about 15%, 15 to 20%. So substantially more at a reduced MER.

And I think to your point there, if they had had a chart like that, where, you know, you can drop MER to a certain extent, um, in, in line with increased levels of spend, that's probably what they were missing and that didn't give them. You know, they actually, based on the year targets that they had hit for January, they had had a three MER and everything was going well.

They were actually planning to spend the exact same amount in February because they had hit their target. Now, what we saw was we did a substantial increase in spend, reduced MER below what they had initially anticipated, but actually the profitability of the business was much better off in February than in January, even though they were below target.

So I think the matrix that you've kind of outlined there in terms of. Understanding that and giving that to media buyers is incredibly valuable. What I would probably ask you is like, do you think most brands have the wherewithal or the The tools in front of them to actually create what that, that, that plan or that outlook actually looks like.

Obviously a lot of the brands you're working with as a fraction of CFO, we'll have that level of guidance, but I actually, I don't think most brands are at that level, unfortunately. 

[00:29:59] Jon Blair: No, they, they definitely, they, they aren't. And that's why I'm realizing that as CFOs for. Scaling Econ Brands, we need to provide that intelligence and I want to go back to, I want to connect this back to what you were saying before about like the need for finance and marketing to be communicating and working together.

Is that like, um, your finance team needs to understand marketing at a high level. They need to build to understand the jargon and the acronyms and understand mathematically what they mean. And how they tie back to the financials and likewise for the marketing team, right? They need to understand, um, things like MER and contribution margin and how they tie to the financials, but at a basic level, they need to be really good at marketing.

Right? And so, what I've found is like, hey, yeah, in a perfect world, you'd get your marketing team, like, super schooled up on finance and they would be super badass because, uh, they actually really get all this stuff and can internalize it and they can create their own spreadsheets, but the reality is, in practice, what are we asking these marketers to do?

We're asking them to work outside of their job description. And so, really, in practice, where I'm starting to see, Uh, finance's ability to, uh, partner with marketing in the, in the scaling and e com brand context is Let's provide them with these tools like that lookup chart, right? Where they don't have to necessarily understand how we did the math to come up with those numbers But they need to understand they should understand that contribution margin dollar maximization is bottom line profit maximization, right?

And that it's okay for them to spend more at a lower efficiency. If per that chart, they're going to drive more contribution margin dollars. And if they do that, if they follow that chart and those contribution margin dollars don't come to fruition. In reality, when the books get closed, that's on the finance team.

Right to figure out where they went wrong in the math. And so I think I think Let's put it this way. What I'm realizing is it's really easy to talk about this ideal scenario this utopia Where marketing and finance work together and they all totally understand what the other one is doing That doesn't, that doesn't make any sense in practice, I'm realizing.

They need to have conceptual understanding crossover so that they can communicate, but they should be providing tools to one another, right, to make it easier for them to draw off of each other's expertise. But, like, to, to your point again, most Brands don't, um, already have the kind of conceptual understanding to build these things out themselves.

And in large part, like we do know some, but they're, they're not really a fit for our services because they, they've kind of got their finance function on lockdown already. They're already doing really well there. So like when it comes to the market of, of brands that we kind of, uh, that we serve, that's definitely, um, that's definitely a shortcoming.

Um, I want to talk re oh, go ahead. Go ahead. 

[00:33:15] Thomas Gleeson: I was going to say from, from what I see at like founders and media buyers that I've seen in the last 12 months, they're overly fixated on revenue maximization and more traditional older school finance people. Are too focused on marketing being a cost and neither of those functions are focused on profit maximization and both of them think revenue maximization equals profit maximization and marketing spend reduction equals profit maximization.

But unfortunately the truth is somewhere in the middle and it's marrying the two functions together and it's about, yeah, maximizing spend where it's efficient. And obviously that would help drive profit maximization, but that's just kind of some, some stuff I just typically keep seeing in the last 12 months.

[00:33:57] Jon Blair: Well, and it's interesting because there is some truth. There is a truism behind, um, minimizing costs, right? But there's a difference between a fixed cost and a variable cost. And, and the profit maximization formula is not always true. The minimization of variable costs, right? Um, I, I, I wrote a post that's actually going to go live on LinkedIn in about two hours.

And it talks about rethinking your profit equation. Like I mentioned earlier, instead of revenue minus expenses equal profit, revenue, net revenue, times contribution margin ratio as a percentage of revenue, equals contribution margin dollars. And then contribution margin dollars minus fixed overhead equals profit.

And there's a really important distinction there, which is that your contribution margin ratio, the percentage of revenue, that's where ROAS maximization is. Comes into play. Is that generally speaking, if you're maximizing your MER, right, your contribution margin percentage as a percentage of revenue is going to be maximized.

But if you do the opposite, it's going to go down, but you multiply it by a net revenue volume. Right? And that's what gives you contribution margin dollars. So I used an easy example where, if you've got net revenue of 100K, and a 25 percent contribution margin ratio, that's 25, 000 of contribution margin.

But let's say you could increase ad spend, and hit 150K in net revenue, at a 20%. Contribution margin ratio. That's a lower contribution margin ratio, but guess what the contribution margin dollars are 30 K instead of 25 K. So if you operate at the same fixed costs in both those scenarios, you made 5, 000 more by increasing revenue to 150 K and letting your contribution margin ratio come down by 5 percent of revenue because you're letting your MER fall.

Now, word to the wise warning, I'm not saying that this math means if you do that for your brand. Your profit is going to go up. What I'm saying is understand these dynamics so that when you're sitting down and you're working with your ad buying team and they're talking about different MERs, they can hit at different spend levels.

Don't just discount a lower MER at a higher spend and assume it's not going to maximize profit. It could, but you need to understand conceptually this math to forecast out if it's going to be better or worse for your bottom line. Um, So really quick in talking about all of this, there's this kind of thing that we've mentioned a couple of times.

We're kind of circling around its attribution. And I guess more specifically what I hear all the time is like ROAS versus MER ROAS versus MER, which one do you prefer? Right? Um, the reality is They're related, but they're not the same thing, right? They're, they're, they're, by definition, they're not the same thing.

What, what are some of the kind of thoughts or, or opinions you have around ROAS versus MER? And, and how you consider contextually using those metrics in different contexts? 

[00:37:09] Thomas Gleeson: Yeah, um, I'm going to give the most marketer answer ever here and say, it depends, but, um, I, I'm firmly in the merge train, to be honest with you, uh, me or all day is my best metric in terms of the efficiency of your marketing spent.

Robust is great. Um, I think it's fantastic. It's great as a guiding indicator, but I just think attribution, no matter what kind of tools you're using out there has become so murky in the last couple of years, and it misses a lot of the picture from a margin perspective as well that I think merges cuts out the noise.

Um. Really just gets to the, gets to the point a lot quicker in my opinion. I think roas on a channel level absolutely is really, really important. And on a campaign level, obviously it has to be because your mirror is more of a business principle rather than a campaign level, ROAS driven principle. But ROAS is obviously still really important on a, on a campaign level, but if you're looking to gauge the effectiveness of marketing on a business.

Mer, in my opinion, is the only way to really do that accurately. 

[00:38:09] Jon Blair: Yeah, I have a, I have pretty much the same opinion, and said in, in terms, in the way that, that I think about it, ROAS should be used to look at a more granular level, like you said, channels, ads, and if it's going up or down as you're making changes, right, within a given ad channel, or within given ads, Um, generally speaking, you, you should, you should really consider those changes in ROAS to make more tactical, granular changes to your advertising strategy.

But, you should correlate those changes in ROAS back to MER to make sure they're heading in the right direction. Especially if you're talking about the ad channel level, if you're looking at Facebook ROAS, when you see it go up and down, you should go back and look at MER during that same period and see if it's going up or down in concert with it, right?

A lot of times I do see them going in the same direction. So directionally, that tells me that ROAS tends to be correct. It may not be the correct dollars of return on ad spend, right? But directionally is correct. And so there's this correlation that you should be following between ROAS and MER to make sure that what the ad channels are telling you is correct.

Um, is correlating to M. E. R. If they start going in the opposite direction, you have a problem somewhere in your funnel that you need to dig into because it just it would indicate that your row as is going up and your M. E. R. is going down and that there's, there's, you know, some, there's something weird going on there.

Um, so here's another one that, you know, um, I think is really interesting to think about. And to be honest with you, there's no right way to think about this, but I'd love to just get your perspective on what you guys see, um, with your store hero clients as it relates to this channel or this as it relates to this challenge.

And it's, it's cross, it's omni channel, having more than one e com sales channel, right? And so specifically an Amazon store, And a Shopify store, right? And so, to set this up, I've got several brands who are spending heavily on top of funnel on Facebook or maybe YouTube, but usually on Meta. They have an Amazon Seller Essentials store and they have a Shopify store, right?

And, and generally speaking, you tend on the accounting side to allocate all your Facebook spend to the Shopify store because it is really hard to, It's really hard to determine how much of that is bleeding over to Amazon, but we know it's bleeding over to Amazon because we've messed with top of funnel spend and seen Amazon go up and down in correlation with it, right?

What are you seeing brands struggle with here in that kind of like cross channel attribution? And is there any advice that you're giving brands of how to think about that when they have both a Shopify and an Amazon store? 

[00:40:58] Thomas Gleeson: Yeah, big time. And the third one I'd probably add in there is probably POS locations as well.

Um, I think there was a stat a couple of years ago that typically when brands open a new physical location, even online sales for that region will have a spike of up to 30 percent in the first month. So, um, you know, you can't discount the, the impact of a physical location on your Amazon and your Shopify store as well.

I probably have a channel like Ecom, like an omni channel MER broken out by Shopify, Amazon, and probably POS to a certain extent as well. Maybe not so much POS, but I probably have it broken out by channel, but also on a business level again, I think it's important just to have that kind of, that breakdown, that clarity to understand what's actually working still on a business level, but obviously still broken down on a channel level as well.

But as you said, that the piece between. Facebook and Google ads and how that bleeds into Amazon is incredibly difficult to try and solve. And as you said, I would be of the same opinion as you that, you know, the Facebook ads should transpire to higher Shopify sales, but we've seen the same thing with a number of stores where, you know, Facebook spend goes down.

Because maybe Shopify sales aren't fantastic. And then Amazon sales also go down directionally the exact same week as the Facebook spend, Facebook spend dips. So it's, it's a bit of a mishmash to be completely honest with you. I, if I was given advice to have a business mirror, but also a channel mirror as well, where possible, because again, you want to just see the directional cues that you're getting positively or negatively.

[00:42:27] Jon Blair: Yeah, I mean, that's the way that we've, um, had to look at it with the brands that, that we work with. I've got a brand who's spending 2 million a month on meta, so there is absolutely a halo effect on their Amazon store, right? And, um, what we've, Done is we have a channel level, um, Mer and we do allocate all Facebook spend to the Shopify store and on Amazon, only whatever they're spending on the Amazon platform gets, um, allocated to Amazon.

So what does it look like? Their Shopify Mer appears super low relative to their Amazon Mer, but we're also. Um, we're also looking at an omni channel blended MER for the whole business, right? And that's helpful because when we make changes, like you said, cut spend on meta or crank spend on meta, we do want to see what it appears the Shopify channel MER is doing, but if the overall business MER still stays solid because Amazon's rises or stays steady, and the overall business MER is healthy, Generally speaking, we'll keep cranking on the spend, even though Shopify looks like it's not doing well from an efficiency standpoint, so that's, that's another kind of example of like looking at more granular channel metrics, but then going, hey, if the business level MER is holding, We might want to not mess with anything cause this is all connected and we're, we're, we're producing the Mer that we want at the business level.

So let's, let's keep on going. I know that that's not always the answer that brands want to hear. They want, like, it's not uncommon that they want their CFO to like tell them basically solve the attribution problems of the world. And, and that unfortunately we can't do that. Um, there are SAS companies spending millions of dollars trying to solve that problem.

Right. And they're still struggling. Right. But we do have some holistic ways by using Murr to at least assess if like the bottom line impact of the, of the marketing decisions you're making are, are heading you to are pushing you towards or further away from your goals. Um, when, so coming back to store hero, this is a tool that helps you.

Um, you know, again, amongst other things, uh, measure your order level profitability with a contribution margin lens, your SKU level profitability with a contribution margin lens also allows you to look at your company's profitability because you guys are pulling in fixed operating costs as well, or the system has the ability to do that.

Where are you seeing the biggest challenges of getting the data that you guys need for a particular brand to have. Rock solid, um, store here reporting. I'm sure there's some that have it together, right? And store here is just working from the very beginning. And then others were, there's a learning curve of like fake walking them through what data they need to pull and having the right definitions, like landed product costs versus just supplier costs.

Walk me through where some of the biggest challenges are that you're helping brands with as it relates to the data. 

[00:45:27] Thomas Gleeson: Sure. And just to kind of set the scene, I suppose, yeah. So Tor Hero is, it's a SaaS platform for e commerce brands and agencies to centralize e commerce marketing and finance operations to get a, a true review of the margins, unit economics and profitability, as Jon kind of said there on an order product and also on a business level there as well, um, the e commerce and the marketing data is.

Not going to say easy, but it's it's plug and play and the, the, the, the secret sauce, I suppose, that we're trying to help brands with is understand the profitability lens. And, you know, to understand the profitability lens and to have accurate data. You know, cost inputs need to go in there. You need to make sure that your, your shipping costs, all of your, your variable, variable or marginal level costs are correct.

And then also your, your operational expenses. So to be completely honest with you, brands are probably using this in two different ways. Some brands are happy to just get to CM3 contribution margin and leave it there. Not input their operating expenses. Um, and then other brands do want to input all of the opex and get down to EBIT r to net profit.

So in terms of the marginal costs or the variable expenses, um, we hook directly in with your shipping carrier. So your ship stations, your ship Bobs, and the likes. Um, then we pull in all of your three PL costs, your return costs, um, any of your transaction fees. They all pull directly in from Shopify. Um, and any and any of the, of the, of the other kind of marginal costs that you might face, that onboarding is probably only 10 to.

10 to 10 to 30 minutes, depending on how ready you are for the call. Really? And the 2nd part, which can be more a little bit more cumbersome, but also not not too bad is the operating expenses and how they get inputted into the platform. So we can do is up your integration or is a pure integration to map indirect as quickbooks or to 0.

But a lot of businesses are, they're using StoreHero to get to like 90 percent or 95 percent confidence. They don't want to input every single cost into StoreHero. They might have the Zapier integration set up with Xero or QuickBooks. So they're kind of putting in 90 percent of what that recurring OpEx looks like.

And say, that's, that's a good enough directional cue for us. We know our bookkeeper or accountant is going to have our accounts over to us at the end of the month. But we're pretty confident that we have. Profitability with 90 95 percent confidence interval here. So you can input your staff costs, your rent costs, software fees, agency fees, very, very quickly.

Typically, even if you want to go ahead and actually input all of the operational expenses of the business, total onboarding time rarely goes over 45 minutes. 

[00:47:53] Jon Blair: Yeah, I love that. Um, another thing that you touched on and I won't get us on a tangent because we got unfortunately got to land the plane pretty soon here coming up on time.

But there's one other thing that I've been noticing recently that you just touched on, which is agency costs. There is often times, there's almost always a variable component to agency costs, because they're usually charging at least part of their fee on a percentage of ad spend or a percentage of revenue.

And so that is a variable cost that often times, um, brands, Tend to leave out of their contribution margin equation. And so I just want to point that out, that that's something, um, you know, if you're not doing that, that's something that you want to consider, um, heavily because those agency fees really do scale, um, if there's a variable component to them and then that catches a lot of founders off guard.

[00:48:41] Thomas Gleeson: Just to double click on that, Jon, because I'd love your feedback on it. Because I, I speak to hundreds of, hundreds of businesses a month, there's such a divided opinion on whether agency fees go into marketing budget or as an OPEX or operational expenses. I'm of the opinion they should see it as a marketing cost and feed into your contribution marriage and figures.

Um, but I get pushback from that sometimes, um, curious. It sounds like you're in the same kind of camp as I am in that sense. 

[00:49:08] Jon Blair: Well, if it's an agency, right, and there's a variable component to it, it's got to be, at least the variable component should be in, in your variable marketing costs at the very least, but at Free to Grow, um, all marketing contractors.

So like, that's whether it's an agency or a freelancer. Get, um, tend to get coded as a marketing cost. And so when we are showing brands, their MER, we call it MER per, uh, QuickBooks or MER per their accounting system, MER per their, um, general ledger. It's net revenue divided by everything coded to marketing.

It's not the same MER that's being measured. On just an ad spend basis, right? And that's so that they understand the disparity between their advertising MER and what they're fully loaded MER, right? And it's, it's important because making an in source versus outsource decision, right, for something like an agency.

Is a true incremental cost decision. We're bringing it at one, at some point I was explaining this to a brand the other day, like, Hey, we don't need to, your agency is crushing it. I don't want to rock the boat, but I want you guys, you guys are killing it. They're scaling ad spend. And I just want you guys to see that like in my model, as you guys scale to these revenue numbers and ad spend numbers, 40, 000 a month.

And so my question to you is how many people could you hire internal, right? That just focus on your brand all day, every day for 40, 000 a month and potentially get better results. It's, it's a, it's a hard decision to make. It's not like black and white, like we're spending this much money. So we need to bring it in house because an agency who's doing a great job as an agency is doing a great job and they're keeping that off your plate and you need to, you can need to take into other considerations, you hire people in house.

You need to be able to manage them, right? There, there's other employment costs. And so, you can't look at it in just, uh, isolation. But, it, it absolutely is a variable cost. And if you, if you take a variable cost, again, because it's, there's usually a percentage based on ad spend. So as you scale ad spend, that cost goes up, making it variable.

Um, It, when you take that variable cost and you convert it to a fixed cost by hiring someone in house, then you should scoop that variable cost out of your contribution margin and now it becomes a fixed operating expense, right? And so it is important to make those distinctions, I believe, from a finance standpoint.

[00:51:34] Thomas Gleeson: Yeah, I couldn't agree any more with you in that, in that, on that sense. Um, yeah, and depending on the size of your, your brand, um, You know, that could be a complete misnomer to your contribution margin and how your business actually functions. So, uh, I think we're on the same page in that one, which is, which is fantastic to hear.

[00:51:51] Jon Blair: Absolutely. Absolutely. So we're running up on time. So I got to help us land the plane here. Um, before we close out, I always like to ask, um, a personal question. And one thing that I'm interested in is what is something you're reading or listening to, or some kind of resource out there that you'd That you've been kind of, uh, consuming and digesting that you've just found, like, really empowering or interesting that you think could be helpful to the audience.

[00:52:19] Thomas Gleeson: Um, at the moment, I have been I'm going to have to edit this and think about it. Um, what am I even reading? See, I want to say, I want to say, uh, take a holiday here, but I probably shouldn't. Um,

um.

Um, so right now I've been reading a lot, um, but probably to be honest where I'm getting most of my educational stamp, educational information from e commerce, just the trends and what's going on in the industry right now. The limited supply podcast from Moiz Ali. And Nick Sharma has been phenomenal. Um, probably the, the unofficial Shopify podcast from Kurt Elster.

I've become a little bit more of a podcast guy in the last couple of months, because I don't have as much time to read. I wish I had more, but I don't. For sure. Probably lent into Ecom podcasts a little bit more. So, um, probably the unofficial Shopify podcast and the limited supply from, uh, Nick Sharma and Moiz Ali.

[00:53:28] Jon Blair: Those are both really solid ones. I listened to limited supply as well. If you're a brand operator listening to this and you're not listening to either one of those podcasts, I definitely. I definitely endorse them and highly recommend you check them out. They're chocked full of knowledge and really also just help you like not just from a strategy and tactics standpoint, but they can really help you just kind of stay up to date on the trends.

It's more of the macro trends within the e com space that can be really, really helpful. So, um, well, Hey Thomas, this has been an awesome conversation. Um, brand operators listening to this. Um, there is so much. There's so much advice that you can follow in this episode. Um, but you know, if you're interested in finding out more about Thomas or about Store Hero Thomas, where can people find out more about you guys?

[00:54:16] Thomas Gleeson: Sure, so you can head over to storehero. ai Uh, you can get me on LinkedIn at Thomas Gleeson and more than happy to chat with anyone, set you up with a free trial and do an initial free consult to help you get the most out of Store Hero and the most out of your business. 

[00:54:31] Jon Blair: Awesome, awesome. Well listen everyone, I'd highly recommend you check out StoreHero.

Super powerful tool. If you're a profit focused DTC brand, um, you need to understand your contribution margin and making it easy to report on and understand is, is, is what shop, or is what StoreHero is really, really great at. Um, so yeah, I appreciate everyone tuning in. Look, if you want more helpful tips on scaling a D2C brand, consider following me, Jon Blair, on LinkedIn.

And if you're interested in learning more about how Free2Grow can help you scale your brand alongside healthy profit and cash flow, consider checking us out at freetogrowcfo. com. Thanks again for listening and until next time, scale on!

Mastering the Art of Scaling DTC Ad Spend

Episode Summary

In this episode of The Free to Grow CFO podcast, host Jon Blair, founder of Free to Grow CFO, discusses the intricacies of scaling a Direct-to-Consumer (DTC) brand with a profit-focused mindset alongside guest Bryan Cano, VP of Marketing at Nood. They delve into balancing paid acquisition with maintaining profitability and cash flow. Bryan shares his entrepreneurial journey, the path to joining Nood, and his experiences in driving the brand's growth through focused marketing tactics. He outlines the importance of understanding contribution margin dollars, some challenges with attribution post-iOS 14, and insights on optimizing ad spend, including protecting the conversion signal on Meta and the potential influence of Amazon advertising. This episode is a true masterclass for founders and marketers alike, looking to skillfully navigate the complexities of ad spend as they scale.

Meet Bryan Cano

Bryan Cano, VP of Marketing at Nood, is a seasoned marketing professional with 8+ years of experience. He has led data-driven media strategies for DTC and F500 Retail Brands with a proven track record of generating incremental revenue by finding the right marketing mix to drive brand awareness, qualified traffic, conversions, and customer loyalty. Bryan is a growth advisor and mentors early-stage startups.

Episode Transcipt

00:00 Welcome to the Free to Grow CFO Podcast!

02:26 Introducing Bryan Cano, VP of Marketing, Nood

09:23 Scaling Ad Spend: The Right Way vs The Wrong Way

19:01 The Importance of Margins in Scaling Your Brand

28:12 Cross-Functional Planning: The Key to Successful Scaling

29:05 Demystifying Contribution Margin in Business

31:11 The Practical Nuances of Contribution Margin

32:51 The Impact of Rigorous Measurement on Ad Buying Strategies

39:27 Exploring Omni-Channel Performance Measurement

41:09 The Theory of Conversion Signal and Its Impact on Ad Spend

51:58 Final Thoughts and Future Learning Directions

[00:00:00] Jon Blair: Hey, what's happening everyone. Welcome to the Free to Grow CFO podcast, where we talk about all things scaling a DTC brand with a profit focused mindset. I'm your host, Jon Blair, founder of Free to Grow CFO. And for those of you that don't know, Free to Grow as an outsourced accounting and fractional CFO firm built exclusively for growing profit focused e com brands.

All right, today I'm super stoked to be chatting with my buddy, Bryan Cano, VP of marketing at Nood. He and I have been working together, um, at Nood. for about a year and a half. Had some really interesting experiences together, um, you know, driving forward the growth of that brand. I'm not going to take credit for driving forward the growth because it's not me.

It's Bryan and the other incredible marketing resources at Nood. But we've worked hand in hand. On how we balance the scaling, um, the scaling of the brand from a, you know, paid acquisition standpoint and balancing that against profitability and cashflow. And so I'm super excited to have Bryan. Today's talk is going to be chocked full of tons of nuggets for you DTC brand operators.

So, uh, Bryan, welcome. Appreciate having you on man. 

[00:01:15] Bryan Cano: Thanks Jon. I appreciate it. Yeah, excited to finally join. I know we've been talking about this for, for months and it's great to finally make time and chat with you. 

[00:01:27] Jon Blair: It's hard to get into your schedule, man. You're, you're a busy dude, rightfully so, doing big things over there at Nood. Um, so look, for the audience, I want you guys to all understand, we're going to continue the conversation that we had on our last episode of this, You know, delicate dance that you have to, um, that you have to manage as you're scaling a DTC brand, where you're balancing, leaning in to paid advertising as you're scaling, having to maintain efficiency and balance that with how it's driving profitability.

And then there's even the cashflow component of all of this. Um, gotten some really interesting, um, discussions talking with Ryan Rouse on our last episode. And I'm really stoked to have Bryan here because he has much more of a focused marketing background that's led up to his time at Nood. And so I think, um, I think that you're all going to find some really, really helpful tips and traps to avoid as you're working on scaling your own D2C brand.

So before we really get into the weeds on this topic, Bryan, I'd love for you to just take the audience through a little bit about your background and your entrepreneurial journey that ultimately, um, you know, ended, journey's not over, but in this chapter, ended with you, you, uh, arriving at Nood 

[00:02:46] Bryan Cano: okay, yeah.

Well, uh, you see, when I was three years old, no, I'm just kidding, um, I think it really began for me, In in college out of necessity to, you know, to pay through school, um, had nothing to do with marketing, but I didn't realize at the time that that's what I was doing. And it was in college. I was, uh. Uh, working at an accelerator program, um, where they were doing seed investments, 50 to 100, 000 checks to multiple startups.

Um, I was, I was volunteering, right? It wasn't getting paid, but I was just kind of there and I was around and I was like, oh, this is really interesting. I like, you know, um, I want to be an entrepreneurial entrepreneur. And I want to be around some of these folks that think this way. And one of these guys, um, he was, uh, the CMO, or he was like the VP of digital over at, uh, Cellucor.

It's a nutrients company, but he was, you know, doing this like Amazon arbitrage thing. And he taught me a lot about that private labeling. And I was like, okay, this is awesome. So, uh, really my marketing career kicked off. When I, you know, source some products from from China, this is back in 2014 as well.

And, you know, we needed to sell them. So did kind of like an email sign up very simple website and ran ads. And I was like, awesome. And, you know, I turned this small investment and doubled it. And I just did that. And like, that's pretty much how I went through and pay my way through college. Fast forward, ended up starting my own agency.

Um, and I shuttered the agency because I couldn't scale it in terms of human, like resourcing. I had the clients, but I just couldn't find the right people that were as passionate about this as I was. And so shuttered the agency and ended up working at a different ad tech firm called Stitcher ads. Um, at Stitcher ads, I, Became the senior director of media strategy, creative media strategy.

And then, uh, uh, basically worked with a series of, of enterprise fortune 500, uh, brands, retailer and non retail brands, um, and oversaw creative and media strategy. We ended up getting acquired and during the acquisition, I ended up becoming the director of efficacy at the car, at the company that we were acquired by, and that's just a long title saying that I was in charge of measurement.

So. I ended up being in charge of measurement and media strategy for the entire organization. Continue to work with the existing brands. And this is kind of where I started to start to look for more. Um, and a mutual friend of, of Sam Garst, who's the founder at Nood, uh, and myself, he introduced, uh, Sam and I.

And we hit it off, had a couple of beers, and I ended up joining Nood as a contractor in October of 2021. Um, so right before holiday. Uh, and that was kind of the start of the journey with, with Sam and I. Um, you know, I stood as a contractor and during that period we were scaling aggressively. Um, and it got to a point where it just made sense for me to join full time.

Um, so. You know, we, we, we was sort of accidental. I wasn't looking, um, but, you know, that, that mutual friend of ours, I think they were like, on a trip to Cancun or something. They were on the beach in Mexico and Sam was just complaining about how he couldn't get past a certain point. The business was having a hard time scaling.

And, um, Peter, uh, shout out Peter, uh, was like, hey, you need to talk to my buddy, Bryan. And so, uh, that's really sort of how the, you know, Sam and I got together and started working on Nood. 

[00:06:34] Jon Blair: I love it. Um, just for, uh, for, uh, the audience audiences sake, Sam is going to be on the podcast sometime several weeks from now.

We're still working on, uh, uh, getting him scheduled. He's a super busy guy, CEO at Nood. Um, you'll be able to hear the story from his point of view. Hopefully he says, uh, Talks about it in similar, similar light. Finding Bryan. No, that's a joke. But, um, okay, so there's a couple of things I want to double click into here.

So I started working with Nood as a fractional CFO, believe in July of 2022. So about a year and a half ish ago, getting close to two years. And I remember meeting Sam. And him saying, I go into a team happy hour that he invited me to you were there. That's where I met you. And, um, I remember Sam saying this distinctly to me.

I love Bryan because he's not afraid to spend ad dollars. And now that, that might sound kind of weird to. People listening because I think a lot of DTC brands are really concerned about the Irresponsible spend that oftentimes happens right from ad buyers and both independent You know freelancers in house ad buyers and and also on the agency front But my perspective has really, really changed on scaling having worked with you because I would say before meeting you, I was on that other side of the fence, which a lot of our audience probably is, is that like, Oh, ad buyers just want to spend all my money and, and, um, you know, frivolously because they get, they oftentimes get paid a percentage of, of ad spend or a percentage of revenue.

Right. And so it's just in their best interest, but working with you, I really realized let's be honest with ourselves, unless you have another acquisition engine outside of paid advertising, which there are some brands that do, there are some creator led brands that have really strong organic, um, kind of like top of funnel, right?

But that's not most brands that would, I'd say that's absolutely the exception and not the rule. And what I learned from Bryan is you have to be able, you have to be willing to, to build out a track of, of increasing spend incrementally on a daily basis or a weekly basis or every other day, some schedule, because if you don't scale spend, you won't scale your brand unless you have some non ad driven, um, Acquisition engine and that really changed my whole perspective seeing what what you have done And I you know, I can't name any numbers because it's confidential but just so the so the audience knows Bryan and Sam Scaled and on the back of Bryan's ad spend they they scaled from zero To healthy eight figures in like two years.

It was absolutely incredible and So walk me through a little bit, Bryan, like, obviously we don't have enough time to get into all the nuances. But walk me through how you think about the best practices involved in, in like laying out a schedule or a plan to scale ad spend over time. Because there's a right way to do it and a wrong way to do it.

I think you are, your brain is filled with tons of best practices and lessons learned on the right ways to do that. 

[00:09:52] Bryan Cano: Well, and I've seen first hand the wrong way. Um, You know, I'll give a quick anecdote before I think a year and a half, maybe two years before I was working with with Nood, I was working on a different company in Australia, and they brought it brought me on to basically help them with their go to market for the U.

S. And they really wanted to scale. And I like I five X this business in in three months. Um, and against all like red flags, We did, we like scaled, you know, they were hitting record breaking numbers five X in, in just a few months and their business was not prepared to handle it. Um, acquisition row as all of, you know, the Mer all of our, our metrics and KPIs to measure the, the efficiency of our ad spend.

Those were holding things were great. In fact, there was more signal things were even performing slightly better by like five, five to 10%. But everything else that's behind the scenes that I think people often forget about, and it's not as glamorous, it's not the thing that comes to mind, that all unfortunately was overlooked.

And margins were squeezed. I think the gross margins of the business were like 60, 60%, 65%. And after everything, it got squeezed down to like three to five. Um, I'm talking the number of customer service agents that they needed to hire. The logistics and fulfillment. Pick, pick and pack. They had their own warehouse.

Um, they were out of Australia so they could very easily source, pick and pack right there and then ship out. So they needed to hire a lot more people, not just that, but the people that they had, they had to pay overtime to handle the influx of orders. Um, so tons of human capital. Just got sucked up right there, not taking into account things like returns, higher return volume from the previous months, right?

As, as you sort of, you know, you, you, you start to hit those, um, those sort of, uh, stair stepping scales, scale exercises, and, um, just a, a plethora of these hidden expenses started to like surface up, completely ate the margins of the business. And so I think with, you know, seeing that, that. First hand, it's kind of created this, this, um, checks and balances, if you will, sort of a checklist.

And I think that's what we did exceptionally well with you with you is having very candid and transparent conversations about can we afford this? What does it look like? How do our lines of credit if we needed to pull the trigger? On supplementing, um, any op ex, like, do we have, do we have the, the, the credit or the funds to do?

So, um, and there were a lot of terminology ended up learning from you, like, quit working capital. Right? And like, how many, um, what, what is the. The future debt and how does that affect the net quick working capital and all of that? And I thought that's that was absolutely brilliant when we, when we going back to your question of how, um, laid out a plan to scale new, it's actually quite simple, right?

You want to basically lay out, you know, a spreadsheet where 1 column is all of your days or your weeks and you just put it together. Go all the way down for the rest of the year. Um, the next column is your current spend. That'll be your actuals column. And then you'll have two additional columns where it'll be your forecast spend and your, like, you know, your, your, um, your scale plan.

And so your scale plan is really what's driving the scale, right? So, Let's say your scale plan is. We want to scale every other week, and so we want to scale every other week by 20%. And how we do that is by scaling, you know, 10 percent on Mondays, Wednesdays and Fridays, uh, because those are our best days.

And it, you know, we give a little bit of breathing room before. And so you would go into the spreadsheet on Mondays, Wednesday, Fridays, you type in 10%. And you would basically map out your forecasted spend to increase 10 percent on those given days. And then you can check in and see, okay, are we, does this plan allow us to scale every two weeks by our target spend plan?

Um, and you, As you get your actuals in, you punch those in and you course correct the scale plan. So maybe you did 30%. It was a phenomenal week. So 30% is what we did last week. We want to continue our pace of 10% every other week. So now the plan is elevated a little bit more and what the beauty of that it's, it's one, it's so simple.

Two, you're actually seeing where your spend, you know what your spend is. And so. There gets to a point where like that 10% increase is not as simple, right? Going from $500 to $550 is very different from going from, um, you know, a hundred thousand dollars to $110,000. And so I think you definitely want to be, you know, realistic and, and not, um.

And look out for those, those, those periods where the scale plan doesn't work anymore. It just doesn't make sense. And you want to pull back those numbers or keep them flat. The biggest advice I have for people is stair stepping your scale. It should not be linear. It should not just be up into the right.

It should be like going up up a series of stairs. So, cool. You scale and then you hold for a little bit, right? Like give yourself about a week or two to hold to make sure that one things are stable too, that there aren't any of those hidden traps, right? That the business isn't aware of customer service tickets returns, maybe because you rushed.

This batch of inventory, the quality assurance of the factory has come down because they just need to get product out of the door. And so maybe there's defects or maybe there's like lower quality products that are now getting returned. So you want to give yourself about a week, um, and maybe a week isn't long enough.

So really based on your business, but give yourself time to make sure that things are stable and then go back up and scale. And then give yourself time up and scale and give yourself and I think that is, it takes a lot of discipline. You have to be very transparent and honest. And one, are we hitting the pace?

Are we going too aggressive? We need a, we need to stick to the plan. Um, and it sort of requires patience because when you see that things are going well, you're going to want to go, well, let's just flatten that out and get aggressive and go up into the right. Sure. I think we had, this was like a topic of discussion of many times with uh, Send you an eye where You know, there was a lot of eagerness and, you know, we almost wanted to like flatten those stairs out and just say, no, no, no.

Like, let's just go, let's just keep going. It's like, no, we, we, we definitely need to establish that discipline because it's the only way when you give yourself a breathing room and you try to stabilize and you say, okay, what does it look, what does the business look like when we are at this pace for a little bit?

That's when you start to surface all of the issues and you want to surface those early on when your spend is up. Is down here for sure. I'd like 10, 000 a day versus when your spend is like up here at 100, 000 a day, that the magnitude of the problems just becomes so much larger. So it's best to catch them early.

[00:17:08] Jon Blair: So believe it or not, Bryan, that advice right there is next level for probably most of the people listening. To this, uh, podcast and a lot of the brands that we work with. Um, there aren't, there are, there are plenty of really talented ad buyers out there, but there are more that don't know what they're doing than there are ones that are really, really talented.

So unfortunately I think a lot of DTC brands get. They get freaked out and become gun shy because they've had some bad experiences with some poor, um, ad buyers. But what you just laid out there, honestly, I got a masterclass in this, just working with you for the last year and a half and learned a lot more.

I thought I knew about scaling ad spend until I worked with you in Nood and, uh, realize how much I didn't know. There's a couple of things I want to summarize to point out here so that the audience can, uh, Kind of let this sink into their mind. One, the days of the week thing. Super huge, right? You hear how Bryan was being very intentional about what days of the week should he scale spend?

Because he had data on which days performed better than others and he wanted to scale into the days where where new typically has better performance. That's super huge. The other thing is the stair stepping, right? Is that you have some period where when you increase spend you're staying level. And you're, you're, you're watching the data and making sure your performance is holding before you take the next stair step.

And then, um, you know, knowing when to pull back or just hold because your, your, your marketing efficiency ratio, or what we call Murr at Nood. And I, um, a lot of people call it M A M E R because of Bryan and Sam, I call it Murr and I've, and I've been spreading that, um, uh, across our client base, but that's a side note, but yeah, knowing when to pull back.

When your MERS is, is breaking down, knowing when to hold or pull back. Now, I want to dig into something that Bryan talked about, uh, for a second, um, which was margins and how important that is. Gross margin, which at Free to Grow CFO, we call gross margin, the margin that just takes into account landed product costs.

And then after that we back out, um, uh, shipping and fulfillment and credit card fees. And we call that contribution margin before marketing. You know, again, we can't name specific numbers, but Nood has healthy contribution margin before marketing. There's a lot of room. I would say there's above average room to spend, um, to spend on advertising relative to the average DTC brand.

Um, walk through, I just love to hear a little bit from you when you've got healthy margins to work with, right? How does, how does that change the calculus? Calculus. of your planning and what you feel that you're able to do in terms of scaling ad spend and kind of compare like, hey, I've got two scenarios.

I've either got a brand with like really healthy contribution margin versus before marketing or another one that's quite a bit slimmer. How does that change what you think is possible and how you set forward, set forth a, um, a scaling plan from the ad buying perspective? 

[00:20:24] Bryan Cano: Yeah. Um, you know, when you have healthy contribution margins just before marketing, it allows you to afford a higher customer acquisition cost.

In short, you can be way more aggressive. Now, you want to find this balance between efficiency. And I was actually talking to a, um, a buddy, uh, Cody Plofker over at Jones Road Beauty. He's a CMO at, uh, uh, with them. And he recently switched from looking at contribution margin ratio or the percent. Uh, and started looking at contribution margin dollars.

He wants volume of dollars. And he's like, you know what, if my margin goes from 10 percent or 15 or theirs is probably higher. My margin goes from 30 percent and it squeezes all the way down to 15 or 10. that's okay because I'm yielding more volume. And so I think this is where you need to have a very honest conversation and really establish the KPI.

That you're after and look like we want we want our cake and we want to eat it too in terms of well We want volume we want efficiency Let's have both but you you have to prioritize one or there has to be agreement on prioritizing one or else you're just gonna You're gonna try to solve for them both and you're gonna be you're gonna get stuck You're not gonna be able to scale this way if you want to solve for both just don't spend scale show that But I think I think the biggest, you know, when it comes to how do you think about it between a high margin?

You Contribution margin brand before marketing versus low, you need to really plot out and exercise. And I think working with a CFO team, like, like Jon, where you can look at both scenarios and you can like scale them out and you say, okay, at 5, 000 daily spend at this row ass, it's basically a matrix, right?

Spend on one column row as on the other going from zero spend to say 50, 000 daily spend and then going from like a 1. 5 row as, um, below your break, even all the way up to, you know, well above your break, even you want to see, like, what is the, what is the ratio contribution margin ratio is a 10 percent over here.

Is it 50 percent over here? What about down here? How's how's that compare? And you want to basically look at, look at that table and say, okay, where, where are we happy? Okay. We're happy at spending a hundred thousand dollars a day and spend, and maybe we're happy doing that at a 2. 5x ROAS. Or you know what?

Maybe that Is equivalent to spending 25, 000 a day of spend at a three XRO ads. And so you really need to have that conversation and what is best for your business, right? Are you going for market share? Are you going for profitability and sort of steady profit or growth? Because you're you in the next two, three years, you need to show year over year growth.

So you want to keep things slow and stable. Um, and I think that's where you need to really understand the vision of your Of your business. Um, you need to, you know, kind of get a sense of what is the most important thing. If you're in a hyper competitive space, maybe you need to be more aggressive than you normally would, because you need to be the number 1 in the space, or if you are in a less saturated space, and you're kind of creating the category a little bit, you can go a little bit slow and steady, because.

There's a lot more white space. You don't have a ton of competitors, but I, I think that's the biggest, um, the, the, the most important exercises is laying that out and sort of comparing the 2 and if you have high contribution margins, then I'll say you can probably afford a lower, uh, Sorry, higher CAC a lower row as if you have squeezed in margins, you're definitely going to need to find what is that balance because your margins are already tight.

And I think this this then opens up the conversation of do we have any lifetime value? Um, I worked with brands before where, like, their row as goal. Was a 0. 7. They were like, Bryan, anything above a 0. 7, we're, we're ecstatic. We're happy. And, you know, and at first glance, you're like, well, wait a second, this business wants to lose money, but they had such an incredible product that just drove an insane amount of repeat that a 0.

7 allowed them to be hyper aggressive. Their margins were already squeezed. They didn't have a ton of contribution margin to begin with. So 0. 7 was like, this is what works for us. And they were really banking on a two. to one CAC ratio, LTV to CAC ratio. So they were looking to get paid back within two months.

And it worked for them, right? It takes a little bit more sophistication and money out, money out, money in, um, because they're, they're really like, at first they were leaning on tons of lines of credit and debt, but now they've got this such strong customer base that all of this, the recurrent revenue is what's driving future revenue.

And so, we're They have to think about it a little bit more, more, um, a little bit more laid out of like, okay, what is the current cashflow of our existing and how many new customers can that afford to get us? And then next month, now that we have acquired those, those customers, we know someone we're going to come back and how does that help us with future acquisitions?

So they really think about it in cohort cycles. Um, but you know, a lot of this is going to be dependent on your brand, but there's definitely some options there, right? You can go super aggressive, low, Row as high CAC, or you can go more methodical, and then if your margins are squeezed, you need, you need a, some sort of LTV or repeat, uh, in order to be able to scale.

If not, I would solve for that first before scaling. 

[00:25:57] Jon Blair: Totally, totally. No, I, that's such great advice. And I want to call something out here that like, uh, I want to bring awareness to some, something. That, um, that I'm noticing in what Bryan is walking, um, you guys through in this episode. Bryan is VP of Marketing.

But he's sitting here talking about awareness of cash flow. And awareness of operational, operations ability to keep up with scaling ad spend. He's talking about contribution margin dollars. These are all non marketing. Aspects of a DTC brand. And the point I want to make for everyone is that whoever's driving the marketing strategy in your business and definitely whoever's driving the ad spend strategy, they can't do it in a vacuum, right?

They need to be aware of your operations functions ability. To keep up, they need to understand how what they're doing is impacting cashflow. They need to understand how what they're doing is impacting profitability and hopefully with a lens on contribution margin dollars and how they're driving contribution margin dollars.

Um, when I first started working with Bryan at Nood, I distinctly remember many different conversations of like, Hey, I think I can scale ad spend. And But am I going to sell through all of our inventory? Um, and like, are you sure we're not going to run out of inventory, Jon? Cause I can scale this ad spend, but if I run, if we run out of inventory, it's going to screw up my conversion signal.

I'm going to have to cut spend and I'm going to have to start at a new floor. And so that whole stair step that we're, that we've been talking about for the last little bit here. He has to start at the bottom of that staircase again because we ran out of inventory and he's got to do it all over again.

There's no magic, like just coming straight back up to the floor that the spend floor that you were at before you ran out of inventory. And so, um, the awareness of. Whoever's driving marketing has to have keen awareness and connecting points, connecting communication and reporting points to your operations team and your finance team.

One thing that, that we started doing at Nood like a year and a half ago was something, um, That I put in place at Guardian bikes and kind of brought that to Nood when I started working with them as a fractional CFO, which is what we call our cross functional planning meeting. It's a 30 minute touch base once a week.

We now do it once every other week, but like some regular touch base where you have whoever owns inventory planning. Whoever owns ad spend and then whoever owns cash planning and basically like your projections and forecasting from a financial standpoint. And it's a simple meeting to make sure everyone's on the same page.

Cause it takes, it's a three legged stool is the way that I like to think about it. If you take one of those legs off the stool falls over. Right. Um, and so. Super, super important that your marketing spend is done, is planned out and executed in a cross functional context. And then, so there's one other thing I want to dive into a little bit deeper.

I talk about this a lot on LinkedIn, and it's a hot topic out in the marketplace, contribution margin. But dollars versus what's called the contribution margin ratio, which is the percentage of revenue. It's important to know the percentage of revenue. But what I always like to say is percentages of revenue don't pay bills, dollars pay bills, right?

So it depends, it matters how many dollars you're generating. And for those of you who don't know, contribution margin, dollars, the definition is, is net revenue minus all variable costs. So variable costs meaning landed product costs, shipping and fulfillment, credit card fees and advertising spend. So what, what is contribution margin dollars represent?

Here's what it represents. The number of dollars left over after a customer is acquired and an order is fulfilled. It's the dollars that stay in your bank account that are available to contribute to or cover your fixed overhead. Right? And if you generate more contribution margin dollars than your fixed overhead, those contribution margin dollars then contribute to or increase bottom line profitability.

And so what Bryan was talking about earlier was, hey, the percentage, you should know it. It should be one of your KPIs. But what really matters is how many dollars of contribution margin you're generating after your ad spend, because that's what covers your overhead. And then hopefully, covers your overhead and drops to your bottom line profitability.

And there are times in which this isn't always the case. We tested this a lot at Nood. There were times when we tried to scale spend and our contribution margin ratio or percentage of revenue went so low that we actually generated less dollars, right? But there is this counter counterintuitive situation where you actually can spend more.

And your, your ROAS or your MER comes down, but you actually can generate more contribution margin dollars. And that's, that's what generally speaking, if you're trying to maximize profitability or increased profitability, it's the margin dollars that matter. Now. Now, here's the nuance in practice, and I'd love to talk about this a little bit, because honestly, I honed this skill, no joke, in large part, working with Bryan.

And, like, let's not, let's be fair to Sam. Sam gets a lot of credit for this, too, and I know you'll agree, Bryan, like, Sam has been, um, very, Um, rigorous about making us focus on daily contribution margin dollars with rightfully so. Like I have a lot of respect for Sam forcing us to really focus on that and forcing us to figure out how to measure that as accurately as possible.

Like, um, and, and I don't wanna go on a tangent, but there's just so much that we have developed organically in terms of a process of how finance and marketing should work together. Specifically at Nood. Like, like Bryan. Is tracking contribution margin dollars generated on a daily basis. And at the end of the month, we're almost dead on with our actuals when the financials get closed.

Right. And, um, it, it, it's a, it's a partnership like finance. I'm always letting Bryan know, Hey, our margins have changed a little bit. You need to change your formula and here's why they've changed. Oh, we've changed price points. If we change price points, our contribution margin for each order is going to be this.

In on Amazon and this on direct. So it's definitely a partnership, but I, I just want everyone to understand, like we are measuring contribution margin dollars on a daily basis and our estimate almost perfectly ladders up to the financials at the end of every month, a lot of rigor, but not rocket science, totally doable, right?

It's totally, totally doable. How has that changed your perspective on ad buying? On a day in and day out like us getting so rigorous about we We can forecast on a daily basis contribution margin dollars that we think we've generated and it's so accurate. 

[00:33:10] Bryan Cano: I, I think it's, well, before I dive into the question, I've, I've, man, it's, it's an ever changing, it's an ever growing continual progression and, and just improvement, I guess, of this.

It's been improvement for, Well over a year now and I don't know if you saw the latest so every morning at six in the morning is it 6 58 a. m We get a slack notification. That's automatic and it's basically the previous day's report and it's got contribution dollar margin It's got contribution dollars.

It's got it by channel amazon versus Versus shopify and then the latest edition in this Um, exercise towards progress and improvement. The latest edition is I've added rolling 7 day for 8 to 14 day, 15 to 21 day and 22 to 28 days. So, basically, I have, like, week 1, week 2, week 3, week 4 to see the progression.

Um, that's the latest edition over the weekend. Um. So yeah, so we're, we're measuring this thing and we all check 

[00:34:11] Jon Blair: it every day. I still, I work with several other brands and I still check it every single day, seven days a week, just because I want it. 

[00:34:18] Bryan Cano: Yeah. I wake up. It's the first thing I look at in the morning.

Um, but how has this affected my, you know, my ability to media buy and just execute marketing in general? Oh my gosh. It is. You know, measurement and attribution is something that's so difficult and the platforms, yes, they try. And, you know, you, you try to make, make the, uh, you know, find the right tools. And there are certainly tools that help.

But if you are like, look, we were, we're, you know, we're, we don't have the funds to invest on a 5, 000 attribution platform. We're a measurement partner. This will allow you to measure very simply put because When you activate these funds You will see the impact in your contribution margin dollars. And when you are doing this on a daily basis, you can definitely see Um that impact right whether there is an impact or not.

I'll give you a plethora of examples one Um, one day I was just like, you know what, let's cut Amazon spend. Just cut it entirely. I don't believe Amazon I've yet to be given proof and evidence and reason to believe that Amazon is incremented to the business. We were spending about a hundred thousand dollars on Amazon ads.

Cut it. Next day, contribution margin dollars hold contribution margins. Well, when you look at them side by side, they, that holds in fact, not, sorry, not, not, it didn't hold. It got better. Yeah, it got 

[00:35:44] Jon Blair: way better. It got way better. 

[00:35:46] Bryan Cano: Money. And we were. That money that we just cut, the expense, was added directly into our contribution to our margin.

And that stuck. I was like, hold that for about 2 3 weeks. It stayed the same. To this day, we cut this back in November. Risky move, doing this before holiday. We cut it in November. Still the same margin. Great validation. We don't need Amazon ads that didn't take a rocket science measurement tool or match market Geotesting with holdouts and all this stuff.

You can definitely do that and I would have a much more accurate view but This this just measuring on a daily basis just allows you to get more accurate right now I'm gonna be doing some stuff with TV and snapchat and tick tocking of scaling tick tock ads And these are, these are platforms that are very view through heavy, they're very difficult to measure.

There's not a ton of click involved, but the beauty of measuring contribution dollars on a daily basis is that when I deploy this capital, I will see the impact right away. Now, maybe I won't see the impact on day one or day two, but I'll definitely see the impact by week two or week three. And I can make a very quick decision and say, okay.

I spent 10, 000 dollars and now I'm my, my daily contribution margin is, uh, or dollar ratio is 10, 10, 000 dollars less than the average. And it's continued to be 10, 000 dollars less. It's probably not an incremental expense, you know, so 

[00:37:14] Jon Blair: I love that. I love that 

[00:37:15] Bryan Cano: super methodical and very, um, intentional with your media buys versus kind of putting it out into the air and relying on some sort of attribution tool to tell you what's happening.

You actually. 

[00:37:28] Jon Blair: Yeah, man, we're going to have to talk another time because, um, we're not going to get to everything that I've learned on, on the scaling ad spend front today. But let's just, let's just keep riffing on, on what we can hear. There's like three different things I want to dive into on what you just said.

I'm going to have to choose one. Um, okay. First off, it is in the world of attribution being just super challenging, right? And other issues like Shopify. I mean, sorry, TripleWhale has ad spend in their ROAS calculation. You have to manually know how to take that out. There's like so many issues with attribution platform tools.

Not that they're useless, but that, you know, fair warning. Know how to use them. Know what's actually behind the data, right? But given that that's the world we're in, post iOS 14, like, for Nood to be able to make it, it, incremental ad spend change, whether it's in a different, a new channel or within existing channels and come back and look at the daily impact to contribution margin dollars.

That is huge in terms of assessing, because at the end of the day, isn't that what matters, right? What matters is that the changes you make on the ad spend front, they either positively impact bottom line, which the best way to measure it is contribution margin dollars. Or they negatively impact it. So now you have to be methodical.

We can't make a bunch of different changes all in the same day and then assume that one of those is what's impacting contribution margin dollars, right? So you've got to be methodical about it. No different than doing a A B test that you run with some A B testing app, right? Um, but if you see contribution margin dollars heading in the right direction, heading up as you're making these changes and it's doing so.

in a positive correlation with these ad spend changes that you're making, then you can likely assume that that move is incremental to your bottom line. That's what Bryan is saying. Um, okay. So I want to talk about, I want to double click into the omni channel performance measurement. So that Nood we've, we've got Amazon and Shopify as, or we'll call it Amazon and meta, right.

As like the primary, um, Kind of like the primary drivers. Yes, Google. Google's a part of it all, right? Like you can't disconnect Google from Meta, but let's just say like we think about the businesses Direct being Shopify and Amazon and There's been a lot of messing around with ad spend allocations on the Amazon side of things, right?

And like, there's no doubt, no doubt, that like, Amazon, that meta is driving, that top of funnel spend is definitely driving demand on Amazon. And there's always been this question mark around like, okay, the PPC advertising on Amazon. Is it actually doing anything? Right? Or is it just all coming from meta and are we just basically like cannibalizing our margin by double spending by spending on the PPC side of things on the Amazon platform.

Bryan and Sam have done a lot of very interesting tests. But I want to talk specifically because this is something I would have never thought of. Um, you brought it up to me many times and I would say that we've had at least a few instances where it appears that this kind of theory you had is true. Um, Is validated.

Talk about the conversion signal. This theory you have about the conversion signal on Meta and how what you do on Amazon from an advertising ad spend standpoint might be messing with that conversion signal. 

[00:41:09] Bryan Cano: Oh, yeah. So, 

[00:41:11] Jon Blair: by the way, I'm gonna cut you off. This was next level to me. I think this is going to be next level to a lot of people.

And again, it's still a theory. We don't have necessarily empirical evidence, but we have data that shows a, a, a direct correlation. And so I believe it to be true. 

[00:41:29] Bryan Cano: So I think we need to start with like the. You know, the, um, things we, we absolutely know there is a market of people that will only buy on Amazon, right?

They are just, they, they just prefer it. They pay for prime. They want to get the most out of prime. They, they like the faster shipping or the, uh, the customer guarantees and protection. And so that group of customers will always be there. And then you have this sort of tranche of customers that exist, and they're kind of like.

Don't buy on Amazon. It's more of a convenience thing, right? But don't also buy from your site. And if you know, it's really wherever the best deal is. And then you have the tranche of customers that are like, eh, I don't really prefer Amazon. I'd rather just buy from the site. I'm comfortable buying from the site.

So those three tranches of customers. So these two on the extreme, the tranche that only buys on Amazon and the tranche that's going to buy on Shopify, they. They're there, they're going to exist. It's the middle crowd that worries me. And what we discovered is that when we play around, and this is almost, I don't even know if this was intentional.

I think it was accidental. We had to do this because of retail partnerships where we had a price match with our retailers. Um, so we're, we're in Best Buy and Target. And they were like, Hey, Your price on Amazon is a lot lower than our price on our website. What's the deal? So we're like, oops, sorry. So we raised the price on Amazon and, uh, that created a price variance.

So we used to have this price match right between Amazon and Shopify. And Amazon was about 30%, 30 to 35 percent of Shopify. Meaning that Amazon as a, and by this time we had already cut our ads on Amazon. So just buying proxy of Halo. Effect from our meta ads and all the awareness. The brand's been driving.

Um, 35 percent of sales would move over into Amazon when we increase the price. That number dropped down from 35 30 to 35 all the way down to like 12 to 15. So it nearly cut in half and the sort of a. A 30 price change will cause that. So then this raises questions like, okay, wait a second. What, what is this relationship between price disparity between the two channels and the percent of sales?

And we started to play around and test it. And this is when I started to sort of. Realize that, uh, whenever we drive more sales volume back into Shopify, you are protecting the conversion signal of your ad auctions and 

[00:44:05] Jon Blair: on meta, your meta ad option. Yes, specifically 

[00:44:07] Bryan Cano: on meta. And I think that's the most important, right?

So you have a business that we know is driving a halo effect from, you know, from meta ads to Amazon. We know that a percentage of those conversions that meta is driving are. Not being given back to the platform. Um, you know, as as conversion signal and I'll, I'll, I'll tap into that in a second. And we know that meta is your, is your primary sales engine.

So we kind of, I kind of came to with this philosophy of we have to protect ourselves engine. We need meta to to realize that the ads that it's serving to all of these people. That they are actual buyers so that it can get better at finding next tranche of buyers. And my concern was, um, because then we, we started to play around with price and they're like, wait, but there's more margin on Amazon or there's less margin on Amazon.

And my concern was that all like this tranche of people that should be buying on Shopify are now buying on Amazon. There's a few concerns there. One, the obvious one is I don't own those customers. Amazon does. Those are Amazon's customers. They keep the. Personal identifiable information, I don't, um, so any email addresses, if I want to do remarketing or anything like that lookalikes, that's all gone.

But more importantly, um, the conversion signal on meta. I have this theory that basically. If meta is serving the ad to the right customer and then that right customer is not buying right in meta's eyes It's because you're buying on amazon not in there because they're buying on amazon It's gonna think that this is not the right customer needs to go and experiment and try to find other pockets of customers instead Again meta operates on an o cpm auction.

It's an optimized cpm auction meaning The price is dynamic. It, each user is a different value based on the propensity of that user, the confidence of that user to actually convert for your, for your site. And so, um, the closest I got to actually measuring this was we basically dropped the price back down to price matching.

This was around December and January, and then we like raised the price back up. And I did see an immediate boost to conversion to Metas conversion rate and Metas ROAS. I think we were, you know. I can't give numbers, but it was like about a 15 to 20 percent improvement in row as week over week from whenever the price was the same and those people were buying on Amazon to when we increased the price, obviously that's because those people are buying.

And so the, the platform believes it's a higher row as, but if you've got different bidding strategies or you're trying to optimize for return on Aspen on metas, Uh, auction having that signal is going to be crucial to to effectively media buy, especially if you have media buyers that aren't close to the business to the financials, right?

Like I had the luxury to look at the business and say, Oh, yeah, this is the impact. But if you've got agencies or you've got people that are a bit more separated from the finance, they're going to legitimately think that the row is that they're seeing is bad. And they're going to make bad decisions, wrong decisions.

I should, I should say on which ads to pause or scale because the signal isn't being fed back into the, uh, into the ad auction, 

[00:47:27] Jon Blair: man, next level advice for the people listening right now. Now, again, this is a theory. Don't, um, spend all of your dollars on feeding the meta beast and then come back and send Bryan really angry emails that, that he was wrong.

But I, I think it's important to share this learning. This might be happening to you if you have both a Shopify and Amazon store. So definitely something to think about. Definitely something to think about. Not all sales are equal and understanding how the, the meta algorithm works is super, super important.

That's one place where Bryan knows a lot. 

[00:48:01] Bryan Cano: I think. Well, you just said there's probably the most important. I think this is that in that next level of progression, right? And continuing to get better, not every cell is equal. That is that's important across all channels of your business. So Amazon versus Shopify, do you have a lower or higher return rate between one or the other?

Right. Keep in mind how that contribution margin formula is calculated. Returns go into that. So if your return rate is higher, On one channel, and it's significantly lower on the other channel, the contribution margin ratio between those two channels is going to be different. One of those channels may just inherently be more profitable to acquire on than the other.

Maybe shipping, if you're in like beverage, shipping on Shopify is going to be, is going to kill your margins versus shipping on Amazon. There is no, you know, it's FBA. So think about those. And then not just that, but Um, also like meta ads versus Google versus TikTok, um, or even email and SMS, right? Like, do you have to send out three emails that have little images that eat into your margin for, uh, or, sorry, uh, text messages that eat into your margin to acquire a customer?

Or can you send a plain text email to acquire that same customer that's gonna have a difference in your margin? And you're in your, uh, your contribution margin ratio. Same with meta ads for TikTok ads, especially if like we have to offer 20 percent off on meta ads, but on TikTok, we can do it through shops and TikTok is subsidizing the discount for us.

So we have a higher margin there. So I think like we've done an exceptional job at looking at a channel holistically and even at channel level between Amazon and Shopify. Um, I am now getting curious and going down to like the chat, my acquisition channels and saying like, okay, meta versus tick tock.

Where can I like squeeze more profitability out of this and how like, How to not get misguided by a higher ROAS number because the ROAS number may be higher over here But the margin may actually be lower versus this one. The ROAS is lower, but the margin is higher So thinking about it that way I think is uh, is is key as well.

[00:50:09] Jon Blair: All right, everyone This was a master class in scaling ad spend again without mentioning specific numbers Bryan over his career, uh, he's managed millions of dollars of ad spend a month himself. Right. Um, not a lot of people can say that. And so these learnings are coming from someone who's been in the trenches.

Mind you not, not all easy. I've had plenty of Bryan has had plenty of sleepless nights and I mean, it takes dedication and you have to roll with the ups and the winds as much as you have to roll with the downs and the valleys and like Um, again, it's not all up into the right, it's stairstep. And I would even say it's probably a little bit more like the stock market.

You got to retreat sometimes and then stairstep back up and then retreat, but you're always retreating hopefully to a new floor that's higher than your previous floor. Right? And so the scaling of ad spend is a journey. If you want to be holding it within the profitability constraints that you have as a business, keep in mind.

Nood is completely bootstrapped. Like they, they, there's a small amount of capital that the founder, Sam started this business with. And other than that, just lines of credit that I've helped the business get, um, that they've scaled to very healthy eight figures. So, um, if you're, if you want to, if the lessons you're learning here are from, you know, Bryan, you're very humble, so it's okay if you don't agree with this, Bryan is a ad spend scaling guru.

Managed millions of dollars of ad spend a month for many years and has helped scale a bootstrap brand to that point. So super, super, Um, again, just like a PhD masterclass here on like some of the do's and don'ts, um, of scaling your ad spend. Before we end, I'd love to just have you share with the audience because I know you personally that you're like a lifelong learner.

What's something you're reading or listening to or learning right now that has just like really really been impactful for you recently? 

[00:52:14] Bryan Cano: Wow, um Hmm,

I think right now the where I'm most interested is in Um, obviously as, as everyone is, but I think really more in terms of how do I productize some of my learnings and ideas and not productize it to sell it, but productize it in a way to like, help me. So I've been playing around with a lot of the, uh, GPTs and watching a lot of YouTube videos and.

I'm putting that to the exercise, so I have all my training manuals from when I was a manager of media buyers and all of these, like, data samples and I'm feeding the GPT and I'm basically looking to train it to, in a way, try to it. Clone my brain, if you will. That's so cool to the point. I've got it to the point now where you can export your data and you can upload it into the GPT and it'll tell you.

Here's what I'm seeing. Here's the optimizations you should make. Um, and basically, it lays out a test and learn for you with, like, next steps based on the data. So you give it, like, creative level data or ad set level data, and it's. It does this. It's not always a hundred percent. I'm still tweaking it, but, uh, that's been kind of this like little hobby or it's becoming a hobby is how do I, uh, train an AI to think like me as a, as a, uh, marketer and media buyer.

[00:53:36] Jon Blair: Dang, I'm going to have to get into that. I'm going to be picking your brain on that outside of this. Um, so lastly, where can people find more info on what you guys are doing over at Nood? 

[00:53:47] Bryan Cano: Yeah, uh, LinkedIn's always the best, uh, it's just my name, Bryan Cano, C A N O, um, is my, is my LinkedIn. I'm also active, pretty active on Twitter, uh, or I should say X now, so that one just, um, it's got my middle initial, my first name, middle initial, E.

And then last name C. A. N. L. So you can find me on Twitter. Um, and Twitter. I don't really talk about Nood specifically. There will be some anecdotes here and there, but it's mostly just like, here's like what I'm seeing some trends. Um, and then, you know, I'll be at the Whaley's in April. I'll be actually be, uh, speaking with.

Uh, Nick and Moyes, um, on the limited supply podcast, so you know, you can, you can catch me there, but, uh, yeah, I'm pretty accessible online. And if there's any questions or, uh, you know, just have 1 perspective on something, I'm always available to help out on over DMS. 

[00:54:43] Jon Blair: Awesome. Well, I know that everyone got a lot about out of today's episode.

I appreciate you joining Bryan and, um, until next time, everyone keep scaling on. It's a journey. There's ups, there's downs. Um, but hopefully this podcast helps you, um, be able to endure through some of the challenges of scaling your ad spend that much better than you're able to do before you listen. So until next time scale on and chat with you guys soon.

How Elite DTC Brands Measure Marketing Performance

Episode Summary

In this episode of the Free to Grow CFO Podcast, host Jon Blair, founder of Free to Grow CFO, engages in a comprehensive discussion with Ryan Rouse, advisor for growing consumer brands and co-founder of Factor and former CEO of Highkey. They dive into strategies for scaling direct-to-consumer (DTC) brands with a focus on balancing marketing efficiency, growth, profitability, and cash flow. Ryan shares insights from his entrepreneurial journey, highlighting the importance of understanding unit economics, contribution margins, and the realities of scaling a business sustainably. With an emphasis on profitability and cash flow, they explore the nuances of business finance, marketing measurement, and the challenges and opportunities of going omnichannel. This episode provides a deep dive into creating value in DTC brands through economic viability, offering a blend of high-level strategy and practical, actionable advice.

Meet Ryan Rouse

Ryan Rouse is a growth advisor to consumer businesses with a focus on every line of the P&L. He was previously, Co-Founder at Factor Meals (acquired) and CEO at Highkey.

Episode Transcript

00:00 Welcome and Introducing Ryan Rouse

02:43 The Entrepreneurial Journey: Challenges and Learnings

05:44 The Transition from Operator to Consultant

13:37 The Importance of Understanding Your Business Model

14:13 Deep Dive into Marketing Performance and Profitability

25:21 The Nuances of Customer Acquisition and LTV

28:43 Decoding LTV and CAC: A Deep Dive

30:51 The Importance of Contribution Margin in Business

33:34 Navigating the Buzzword: Understanding Contribution Margin

34:15 The Significance of Defining Financial Terms in Your Business

42:19 The Transition to Omni-Channel: Strategies and Considerations

49:21 Final Thoughts

[00:00:00] Jon Blair: All right. What's happening, everyone. Welcome back to the Free to Grow CFO podcast, where we talk all things, scaling a DTC brand with a profit focus mindset. I'm your host, Jon Blair, founder of Free to Grow CFO. For those of you that don't know, Free to Grow is an e comm focus, outsourced accounting and finance firm.

We help scaling profit focus DTC brands scale alongside healthy profit cashflow. And confident decision making. And I gotta be honest, the conversation we're going to have today, I've been super excited preparing for we're chatting with Ryan Rouse. Some of you guys might know him as co founder of factor, former CEO of High Key, he's now a consultant for growing consumer brands.

I'm super excited for this conversation. Ryan, welcome. And thanks for joining man. 

[00:00:48] Rya Rouse: Thanks, man. Excited to be here, Jon. This will be fun. 

[00:00:50] Jon Blair: So for today's topic, I mean, here's the thing. I feel like you and I can chat about any number of things when it comes to scaling a consumer brand in the DTC context.

I've kind of got earmarked like for us to chat about this balancing act of marketing efficiency, growth, profitability, but then also cashflow. And the reason why I think you're, um, the reason I consider you an authority on this topic is because. You've got this multi dimensional background of being in the trenches as a co founder of a consumer brand, right?

Um, an operator in that brand, not just a founder, an operator of High Key, and actually you've also held several executive positions. in consumer brands as well, and also had a nice little stint in the investment world, CEO sitting on, um, as an operating partner in a PE firm in the space. And interestingly, a, in my opinion, a super talented marketer, but you can talk shop on the realities of like one, the messiness of scaling a business and two, the, the, the connection back to ultimately what matters the most.

Profitability, cashflow, building a business that actually generates value through generating economic value in the form of cashflow and profitability. And so because of all those reasons, I'm really excited to dive into this topic before we get into the weeds of chatting about some of these things. I just, I really want the audience to understand your background and your entrepreneurial journey and what's brought you to this point.

Uh, cause I think that will really help them understand the diverse perspective that you have on scaling a consumer brand. 

[00:02:43] Rya Rouse: Yeah, for sure. So, um, you know, I spent 13 years in finance. I'm four. I just turned 45 actually two days ago. So when I graduated college, entrepreneurship was not fun and sexy and new, right?

Everyone did consulting and finance and all these things. So, um, so I, I, I grew up in finance and, um, 2012, a friend of mine came to me with an idea for a business, healthy, prepared meals delivered to your door. Fairly ubiquitous. Now, it was not at the time and we certainly didn't know anything about it. So I dove into Entrepreneurship startup operating Through that lens and through that experience, you know him and I he had had the idea for this business he had done a lot of legwork in terms of Figuring out what the business was going to be and doing some branding work on the business But we hadn't launched the business yet.

So he called me bring brought me in and It was trial by fire. You know, we, we did raise a little bit of friends and family money, you know, admittedly, like institutions weren't interested in the space at the time. We could go into why I think I'm grateful for that. It made it much more challenging.

Certainly. Right. We used a lot of our own money and we used Uh, friends and family money, but we had sort of this proverbial two year convertible note open that was, you know, we were just sort of piece mailing money into it and then we were covering the rest ourselves. Um, so, so I spent five years in an operating role in a, in an early stage startup where we were underfunded the entire time and that's relevant because we couldn't really hire experienced people.

Right. So I think again, same point I'll make about. You know, the lack of ability to raise outside institutional capital is we were forced to use our own a lot of our own money. We're always short on money, and so I'm grateful for the experience. I can't tell you confidently that had we. Raised 10 million, 5 million out of the gates that I would have had the same mindset about profitability bootstrappers mentality, I guess, is the best way to put it.

I can't confidently say I would love to sit here and say, yeah, you know, had we raised a bunch of money, I still would have been very diligent and used rigor as a, as it relates to spending money. But I can't say that. I don't know that. And so. It made it more challenging for us. Uh, we were certainly, we're low on money the whole time, but on the flip side, I learned every element of the marketing tech stack myself.

I, at one point was running our ads, Facebook and Google learned SEO, learned email, learned content. Um, and that wasn't fun looking back. It sounds like it was, and I'm grateful for it, but, but you're grinding, you know, you're doing all those things yourself and you're doing it without a lot of money, right?

Um, so, uh, I left that business the day to day that business in 2017, it did go on to be acquired at the end of 2020 for almost 300 million. So an amazing outcome, but it was, it was a grind for the entirety of the five years that I was there. Um, And then since leaving the day to day I have, to your point, I've taken, I've done a lot of consulting with a lot of omnichannel consumer businesses across all different categories.

I have taken three leadership roles. One is the head of growth at a healthy baby food company called Serenity Kids. I was the CMO at a company called High Key, which is a low sugar cookie company, Omni China business, mass retail, as well as e comm, uh, spent a year as an operating partner at a private equity company that was investing in digitally native consumer businesses, helping them scale into retail.

And then most recently was the CEO of the aforementioned High Key. Uh, so I spent seven months as the CEO of High Key. So to your point, like I I'm, it's a, it's an interesting background. Right. If, if you were to go talk to a recruiter and say, Hey, what's, what is Ryan the perfect fit for? I think they might be a bit confused about what I'm the perfect fit for, but I'm grateful.

I do think, you know, at this point, as you're thinking about your career, it's sort of, in my opinion, you're trying to get a. Fully rounded perspective. And I don't think you ever get there, right? It's a dynamic game. The game of business isn't, it's not conducive to saying I know all things from all sides that that's a farce, but I feel like I've got a really good perspective and had looked at it from multiple angles, both from the operating side, the bootstrapper side, the entrepreneur side, the investing side, you know, and then different roles inside businesses.

So I've, I've, I'm. Grateful for the different lenses I've been forced to view businesses by because I just think it helps, you know, in the totality of how you view things. 

[00:07:21] Jon Blair: I love it, man. Um, we, we, you and I certainly don't have the, obviously the exact same background, but coming from the early state, like working in house at early stage, um, startups and being on the founding team and guardian bikes, a lot of very similar stories.

Almost all those companies being very underfunded the whole time and looking back the range of skills that I learned because I was originally trained as an accountant. Um, most people don't know me as an accountant today. I'm much, most people know me as an entrepreneur today, but why? Cause when you're, when you're part of founding teams, You have to have range.

Like, yeah. What did I own the finances of these companies? Absolutely. But did I get involved everywhere? Yeah, we had to, cause we didn't have enough money to hire everybody else. Right. Um, and I actually would agree with you that was it all fun? No, it was not all fun. Am I grateful for it? A million percent, right?

Like I would not have the perspective as a finance professional that I have today. If I didn't have that entrepreneurial experience, the way I like to explain it to people is that like. I was getting a PhD in what it actually takes to scale a business, right? And that's all kinds of things outside of my primary, like what I was primarily trained to do, which originally was accounting.

And so, um, it's really cool, man, because You know, when I think about the consulting world, which you and I are now both in, in this season of our lives, right? The consulting world, you and I know this from being on the operator side, I've been screwed and overcharged by every consultant you can imagine.

Marketing consultant, strategy consultant, supply chain consultant, spent tens of thousands of dollars or more and felt like I got no value. And one thing that I always tell brands that I'm talking to on sales calls is like, Hey, We're a small boutique firm. There's only about seven of us. Everyone has worked on the brand side before.

So we are not out of touch career consultants. We have been in your shoes and we actually know that there's nothing worse than a consultant giving you this plan that like, it sounds so amazing on paper, but on the other side is the operator. You're like, That's not possible. That's not practical. I can't implement that.

Like you don't, you're so out of touch with like the reality of like my actual problems. Like, can you speak into that a little bit from your perspective? Like literally your background is being an operator. How does that position you to be that much more of a valuable person? Consultant given that you know what it's like to be in the shoes of your clients.

[00:09:59] Rya Rouse: Yeah, I think it's really important. I'll take a step back and say, you know, one of the problems, one of the issues we had when we would hire the wrong person, whether that's a consultant contractor agency, full time employee is not being crystal clear on what we were looking for, what we needed in the business at the time, right?

It's very easy. I think in this world of. Of creators and LinkedIn and Twitter to follow people with large audiences and to place a large amount of credibility on them strictly for the size of their audience rather than their body of work. And so you, you go into a conversation, you're sort of so happy to just be on the phone for as, as funny as that sounds.

It's true. I'm on the phone with this person who I looked up to. They have this large audience and I just want your help. So and so. As opposed to being very, very clear on like our needs at this business, in this business at this time are right, this very clear about what we're looking for and then asking, you know, and then seeking out the solution to that.

So I think that's, it's an important takeaway is to just, I, I always, every time I'm on a call with someone is to just. Is to push back on them to make sure they know what they're looking for. Now, to your point, yeah, I think it's really, really important. It's certainly an early stage, right? What a, you know, what a fortune 100 company right now want more of like the Deloitte consultant that's looking at a full blown implementation of an ERP system or me, probably the former, but if you're talking about a sub 150 million.

Company that really wants scrappy tactics and high level strategy combined at the same time. They want that from someone that's been in the weeds in those businesses, because the challenges that have 150 million and below business faces is going to be wildly different than the Nike's of the world.

Right. So, so yeah, I think, I think it's all about the type of business and what their needs are, but certainly, um, certainly putting the reps in, in this situation. Of the company that you're going to help specific to the needs that they're trying to solve is going to be a much better solution than someone that's just never done it before.

[00:12:20] Jon Blair: Totally. I am 100 percent agree. And you know, for me, the space that we sit in, um, at Free to Grow CFO, you know, we help scaling DTC brands between about five. And about 65 million in revenue. And like that, that stage, that lower to middle market, you really need to be in touch with the actual challenges that that brand is experiencing across the business, because it is this, I mean, every stage of business is hard.

There's not a stage of business that isn't super freaking hard. Right. But like that stage of business is especially hard because you're literally The way that I like to think about it is, you know, the concept that the scientific concept of like, you know, uh, cell multiplication, right? And like that multiplying going from like one cell and splitting apart into two and then splitting apart into four.

And then it's painful. It's so painful, right? And all the while, Your business is not running the business. The operation serving your customers. That's not getting any easier. It's not getting any slower, right? And all the while you're literally building the plane while you're flying it. So anyways, I think that's super awesome.

A lot that we relate to on that level. And I think super valuable for brands in that lower to middle market that we serve. I want to turn our attention now to talking a little bit more about marketing performance. Um, as it relates to profitability, it's, um, a spot, it's, it's a con, it's a topic that I've had several interesting conversations with you on.

Um, and it's also, it's obviously front and center in the world of digitally native brands because of the challenges, the increasing challenges of scaling a digitally native brand through digital advertising and other channels. In a manner that's profitable. What are the big mistakes you're, you're seeing out there that brands are making when they're thinking about attribution and or just marketing performance measurement in general, that's maybe leading them in the wrong direction to make wrong decisions as it relates to profitable marketing.

[00:14:33] Rya Rouse: Yeah. I think the first one. You know, and, and, and this is largely changing, but you know, we're, we're on the back end of a, of a consumer bubble where, you know, for a very long time, institutional dollars, certainly venture capital wasn't coming into consumer brands. Right. And then when venture started coming in, and this is not placing blame on anyone.

This is the, the facts are 

[00:14:57] Jon Blair: venture 

[00:14:57] Rya Rouse: capital is not interested in consumer. And so consumer businesses had an, a playbook that was very old school. And I mean, old school in the best way, right? Profit first managing margin profile and understanding that self sustaining business is your path to success.

Towards optionality and optionality is your North stars of business. In my opinion, right options. The only way you have options is if you can say no to something that's presented to you and still thrive and still grow and still make it and still succeed. So for a long time, venture capital wasn't interested than they were.

And when they were, they were very, very interested, right? And so you have a lot of money flood flooding into consumer businesses. And again, I mean, it's very easy to place blame on venture capital or investors, or even on, on the bubble itself or on direct to consumer for that matter. None of those are at fault for anything that happened.

Everything is at fault for everything that happened recently, which is we lost our focus on profitability. Easy to say that obviously, but I think there's, there's a difference between, let's use one specific example. So it's not so vague, one big, big problem that arose because of that was this idea of payback period, right?

You would hear, I remember one of the first people I ever. Started learning marketing from was Ryan Dice from digital marketer when I started when we started factor And I didn't know anything about digital marketing. I found digital marketer comm which is a brilliant URL And he's a brilliant teacher and that company did a very good job of just training people who knew nothing about digital about how to think About digital you have to keep in mind that They were largely not looking at e commerce businesses, consumer businesses, direct to consumer businesses.

They were, they were thinking about services type of businesses, right? And so one thing that I remember him saying was he or she who is able and willing to pay the most to acquire a customer will win. And this is, this is, this is a truism, but it's nuanced like everything else, right? So if you take that as fact blindly without peeling back the layers of the onion, you say, Oh, I should be willing to pay as much as possible for a customer because that's how I grab market share.

The nuances there are that cashflow matters and that profitability matters. And so one huge mistake I certainly saw throughout the bubble was. People and brands and companies and operators taking that as without the nuances that matter, meaning, Oh, I should just pay a lot to acquire a customer, right?

Well, first of all, you have to know what your customer's worth in contribution, margin dollars, and when that money comes, right? So a standard LTV curve, your LTV is 800, but it takes two years to get it. Well, you first of all have to strip out all the variable costs from that. And then you have to understand that that 800 is really only 300 over two years.

Okay. You can't pay even 150 to acquire that customer if you don't get paid back for 12 months. Not in a consumer business, right? Because cash flow, as you very well know, and many who are listening to this will know, the challenge, one of the biggest challenges with consumer businesses is the cash flow element.

You have to buy inventory. You have to buy it ahead of time. You get paid. Paid late from certain customers. Right. And so your cash conversion cycles really, really critical. So, so I say all that to say like you have one of the big mistakes that I, that, that I constantly seeing being made is taking these.

Statements about things that are actually true. Like that's a true statement. He or she who's willing to pay the most to acquire a customer will win. That's how you grab market share, but not applying the nuances to their business. And in a consumer business, that's cashflow, that's inventory, that's understanding your customer unit economics.

So overall point being, you have to understand how much your customer's worth when that money's coming in and whether or not you can handle. From a cashflow perspective, paying X, Y, Z, right? X amount to acquire a customer on paper. If my customer in contribution margin dollars is worth 300, I should be able to be, or be willing to pay 150 in a silo.

But if I don't get paid back for 15 months, it's a dramatically different business model. That's not tenable rather than if I get paid back in three months, that is potentially tenable, right? So all, all of it has to be specific to your business is just take this high level sort of guardrail advice that you get, understand that even if it's true, it may not be true for your business or said differently.

You have to apply it to your business and then you really have to get into the nuances because, you know, a tweet that sounds really good and a bunch of people are, are, are commenting on it about how true that is, is only true if it's true for you. 

[00:20:08] Jon Blair: Totally. And you know what? So one side note, I don't want to get us on a tangent here cause I want to come back to several things you said there that are really important, but one of the issues with short form content is that there are only so many characters, right?

That someone of influence. can make a statement with. And I've even, you know, you know, you and I both have our own LinkedIn content. Um, and one thing I've actually started to say is make one of these general statements because it's true, but I'll say later on in my post, there's nuances here. And like my goal in this post is not to draw out all the nuances.

It's to make a statement about something true that I want to get people talking about. So, But I will be humble enough to let you know there are nuances to this. And if you want to discuss the nuances, let's take it off LinkedIn, right? Because there's just too much nuance to talk about. But I've started to do that because I don't want to mislead people because I have seen influencers out there.

I don't know if they're doing it on purpose or not. I think some of them are. Some of them are not. But I've seen influencers mislead people by making these generally true statements. And not make the a a the sub statement that like, there's nuance here, so be careful about how you use this. But that's not the goal of this short form post.

Right? That's 

[00:21:31] Rya Rouse: right. 

[00:21:31] Jon Blair: That's right. But that aside, I wanna dive into contribution margin a little bit more. Um, 'cause you brought up, you brought up a couple things that are, that I see as a fractional CFO for scaling D two C brands. I see time and time again. One is brands not operating with a financial model, right?

And so, uh, when I say financial model, I mean a projected PNL and balance sheet and cashflow statement, what we in the finance world call a three statement financial model, right? And what's important reason I'm bringing that up is because you brought up several times. Hey, yeah, profit profit, but cash flow, right?

Those things don't ever equal profit never equals cash flow It never does especially in a consumer brand that's capital intensive requires inventory investment, right? Um, but additionally You can't optimize only for unit economic or, well, I won't say unit economic. I'll say marketing tactic decisions.

You can't optimize for a single piece of that just for order level profitability. You have to run it through your model and go, can we float this cashflow wise? Like given our capital structure, how much equity cushion do we have? What debt do we have available to us? And how many days of inventory do we have to hold at any point in time?

And so something new. that I almost most of the brands that we end up encountering in our sales pipeline at Free to Grow CFO, like all 99 percent of them don't have a three statement financial model. And that tool is so foundational in being able to see, I think, I think a lot of brands, at least, If they say they have a forecast, it's usually just the P& L, the ones that we encounter.

And that added dimension of cash flow and balance sheet are like, there, you have to see all three of those dimensions. If you don't, you could optimize for something on the P& L that totally screws you up somewhere on the balance sheet or in your cash flow. And then the other thing that you mentioned, which goes along with this, is like, the timing of, Your LTV coming to reality, right?

That like, what is that period? And the reality is the way that I try to explain it to brands in simple terms is like, look, if the LTV gets paid back over a longer period of time, you need to have the cash reserves to basically operate unprofitably on that customer base for that period of time. Right?

And so if I take some of our more profitable brands. That can that, you know, maybe have 20 to 25% EBITDA margins and they're doing 50 million a year in revenue. Well, at that profitability, they have cash reserves that they can afford to not get paid back fully by a, a customer's LTV for maybe 90 to 120 days.

But if I've got a brand doing 5 million and their EBITDA is 5%, they've got very little cash reserves to operate unprofitably for even 30 days. On on a new customer, right? They literally need to generate their minimum contribution margin dollar target on order number one. Um, you know, what, what, what other, uh, what other nuances do you think about if you're sitting down with a brand?

You've kind of run through your diagnostic, right? Um, what are some of the just other areas that you talk with them about or levers that you talk to them about that they need to consider when they're thinking about how profitable they need to be on a first order versus, you know, getting paid back, um, by LTV over time?

[00:25:20] Rya Rouse: Yeah. Yeah. Let's back up to your LTV. Cause I think there's so much important stuff inside of that. And again, we'll, we'll circle back to this. Sort of very short statement that has truth to it, but is missing nuance LTV to cap, right? This, this thing that largely SaaS businesses sort of made popular and then venture came in and said, Hey, this is, we will judge your business model based on your LTV to cat fair.

Right. And what we're looking for, I literally looked this stuff up when we first started factor, right? You're in this, you're in this like information gathering mode. You're like, I literally don't know. Anything. So where am I going to find this information? Like, Oh, cool. Right. And what am I aiming for?

Three to one. Okay, perfect. Three to one. All right. Well, SAS different than this different than consumer, right? SAS going to have a large upfront fixed cost and then low variable cost over time. So an LTV to cat in general for a SAS business relative to a consumer business is going to be, should be. Is wildly different, but let's just say three to one works and you say, okay, I'm, I'm optimizing for three to one and you've seen a ton of decks in your day.

So have I, and they say our LTV to CAC is three to one. Okay. That doesn't mean anything, right? A non time bound lifetime value. Let's just dig into the mistakes of lifetime value. Cause cause to answer your question, a lot of it is around how they're viewing their business model. Right. Are they viewing it in the appropriate way?

And not that there's one way to view it, but there's certainly wrong ways to do it. So if you say our business model is sound, our LTV to CAC is three to one and period. Like that's not enough. How long does your LTV take to materialize? First of all, how are you defining LTV? LTV in a revenue basis. I view LTV from a revenue perspective as a measure of retention, not as a measure of business model sustainability, right?

If you are seeing your LTV on a per customer basis grow over time, you have good retention. There's certainly other retention metrics, but if you just had one metric and you said, hey, how are you going Judge whether or not this company has retention LTV cohorts are the way to do it to me. If you could only pick one, because you're looking at how much was the average customer in a cohort worth on their first order.

And then what were they worth at three months, six months, nine months, 12 months. And is that growing, right? Because in consumer ALV is not going to move wildly. Yes, you can do a lot of things in order to increase your ALV, but generally speaking, certainly on a consumable. But most consumer businesses, ALV is going to stay within a relatively tight band.

Therefore, you can't have a low percentage of customers making your LTV grow over time, right? There's going to have to be a good subset of customers that are adding orders regularly in order for your LTV to grow. So to me, the LTV on revenue and how much it's growing over time is a retention. Litmus test, not a business model litmus test.

So that's one. So we're talking about how do we judge, like, how are we defining LTV? LTV is a, is a gross margin number at, at worst or at best, however you want it to find that it's not revenue, right? If you're looking at the business model, you're saying our LTV at the fully loaded gross margin. So that's product cogs, fulfillment, delivery for a e com business.

How much is, how much is there are customers bring to us after all the costs associated with getting it to them before marketing. Now you put that number relative to CAC. And then that LTV number has got to be time boxed. So you say our 12 month LTV LTV is defined as lifetime value of a customer on average, from a fully loaded gross margin, gross profit perspective.

This is how much they're worth in 12 months. Over how much we pay to get them. That's a much better, right? So I would say six month LTV to CAC from LTV being gross margin fully loaded. And then our CAC, that is a more of a business model question and answer than just a, a, you know, a non time bound LTV.

That's a revenue based number over your CAC, because that doesn't give you any indication of like your margin profile of the business. You know what I mean?

[00:30:06] Jon Blair: First off. Brand founders and operators listening to this, Ryan just gave you like a mini masterclass on how to think at, in my opinion, a very sophisticated level, um, about thinking about marketing, um, measurement. Now, to be clear, I think you would agree with me, Ryan, these concepts aren't super technical.

They're not super hard to understand. It's just that what, what Ryan's breaking down here. I would say the, the upper echelon of, of marketers are thinking in this way and a lot of other people, I would say that the masses are thinking in the way that Ryan's telling you not to, in terms of like thinking about LTV at just a gross revenue basis.

Additionally, one thing that I've recently started saying, Ryan, and this is actually because it's becoming a closely held belief of mine. is that contribution margin is the real top line, right? And for us, we use slightly different terms in Free to Grow. Um, we have gross margin is just landed product cost.

What we call contribution margin before marketing, which you're calling fully loaded gross margin is basically backing out all. Yeah. Non product cost basically the, the, the variable costs to get the order fulfilled, right? And then we back out marketing and that's our contribution margin after marketing but like Contribution mark, uh contribution margin dollars.

That's your real top line because Generally speaking, top line revenue somewhat means nothing from, from a bottom line profitability standpoint. If you're not charging against it, the per order or per unit costs that get deducted from every dollar of revenue that you generate. So really, contribution margin dollars that are left over to cover your fixed overhead and then contribute to bottom line.

That's really your top line. And I think that interestingly enough, I come, like I told you at the beginning of the show, I come from an accounting background and I was the rebel. I went, I didn't go big for accounting. I went straight into being an entrepreneur and working with startups. And I eventually did get a certification.

In the CMA certification certified management accounting and what most people know the CMA certification for is cost accounting. Um, it's actually turns out to be a lot deeper than that, but that's what it's known for. And this concept of contribution margin used to be when I took the CMA exams 15 years ago.

Um, that was a, that was a concept that was left for the cost accountants in the world at that time. Like you didn't have CEOs and founders of brands and lower to middle market talking about contribution margin. It's become a buzzword since. Yeah. And so, so for us, we're not talking about anything new in the finance world.

Contribution margin has always been a staple, right? Um, in the way that we model and we think about, uh, we think about a brand's margin profile and ability to break even or generate certain profitability, but it has absolutely become a huge buzzword, I think, partially because of the Investment dollars in the space drying up and brands needing it by necessity.

It's a necessity to become profitable and internalizing the concept of contribution margin is a necessity to understanding your profit equation as a consumer brand. But what I want to chat about really fast is like this buzzword, right? It is super, super. important to understand contribution margin, but I'm seeing a lot of people take advantage of this buzzword.

And actually I don't believe they understand what it means. And it goes back to your comment about like making a generally true statement, but worse than the fact that there's nuances. The person saying it doesn't even actually get it. Um, they're just claiming to get it. Are you seeing that? And if so, like where, where, like, where, where are you seeing that?

[00:34:08] Rya Rouse: For sure. I mean, absolutely. You hit on a couple of things that are important to hit on, uh, or, or to discuss. One is There's a lot of different terms for the same numbers. That's, that's an accounting and finance generally thing, but like, certainly as you get into just public discourse about business, uh, there are multiple definitions for the same term.

So it's important to just understand how you internally at your business define certain things. To your point, like. You know, gross margin, one gross margin, two contribution margin. I've seen our head of finance at companies I've been at. That's how they described it. Or, you know, uh, gross margin fully loaded, right.

Or gross margin, direct gross margin, indirect. So, so, so removing all that, just understanding that there's, there's multiple ways to do that. If I'm thinking about a business, the earliest business books I ever read, We're generally not talking about consumer businesses and definitely not talking about e commerce channel consumer businesses because it wasn't available.

And so I think one of the most important things I ever read was, let's just use, let's just define quickly for what we'll talk about here, gross margin, right? So. You have your gross revenue, net out your returns, and your, um, discounts. Then remove your cost of goods sold, the product, right? Then for e commerce, you do have to remove shipping and fulfillment.

That's not gap gross margin, but that's just, if you sell an order, right? What will you take home before marketing before overhead, before anything, what is coming to you and what's coming to you is the revenue. You got less, any returns and discounts, less the product costs, less the shipping and less the fulfillment.

So that's what's coming to you. Let's call that, just for this conversation to make it easy, gross margin. It's not according to GAAP and it's not according to the way a lot of people define their P& L. That's fine. Let's just call it that for now. The best business book, books I read originally, I remember saying all this idea of like, Hey, one million dollars per employee, right?

Is as a framework for how many people should I have on my team? It was like, Oh, a million dollars per employee. That was sort of like a widely used metric. I remember reading a business book very early on that said, we're talking 1 million in gross margin dollars per employee. The money that comes to you, that's a very, very, I'm not saying that should be your metric, but I am saying like, that's an, that what's coming to you is very, very different than what you're being paid for it.

So you have to be conscious to net out all of the things that are not going to get into your bank account before you spent money to acquire these customers. You have to understand what that is. So you have to understand how you and your finance team are defining your P and L and not get. Confused by anything that you're reading online or, or anywhere else about how they're defining certain numbers, you know, how you define certain numbers and then don't get caught up trying to redefine your numbers internally.

Just know what you define them and isn't what they mean, but yes, group contributions. So then if that's gross margin for this conversation, then the only thing you net out of that in my world to get to contribution margin is. Advertising dollars and processing fees. Those are the only two other variable costs that will move up and down according to how many orders you get, especially in an online world and e commerce universe.

So if that's contribution margin dollars, I, to answer your question, yes, it's everywhere now. I'm glad that it is, but with the good comes the bad, which is that some people don't know how they are describing it or what they're defining or describing when they give advice. So the best advice for you as an operator is, Get with your team align as a leadership team and a fine in your head of finance.

What are you calling each line of the P and L? Let your finance team worry about the accounting portion of it and what needs to be submitted. That's gap compliant. You should understand that too, but like we're operating the business under these. This is how we define each line of the P and L and know what's included in each one.

And then know what the percentages of each of those are and what the trend of each of those are, right? What are your returns? And what's the trend? What is your discounting off of gross revenue and what's the trend? What's your product cost and what's the trend? What are your shipping costs and what's the trend?

What are your freight costs and what's the trend? And then what are your, your fulfillment I think is the last one. And then certainly marketing underneath that, but you get the point. It's like you define it, how you do internally at your company. And then you need to understand why they're defined the way they are, what constitutes each definition.

And then what's the trend of each of those? What is the percentage of those costs? And what's the trend of the percentage of those costs over time? And are they getting better or worse? 

[00:39:21] Jon Blair: I love that, man. Um, and honestly, you, you hit the nail on the head in so many ways. And what you were just talking through right now, one of the big things that we do as fractional CFOs for scaling DTC brands is we just go ahead and give the brands our roadmap for the chart of accounts and what should be included in each of those margins.

And then when, when, when the books are done every month, we hand them dashboards that we've built that trend out All of those costs that you're talking about, and so that way they understand if their contribution margin there's getting better or worse every single month, but they can see why which area of their variable cost structure is getting better or worse.

Right? Um, look, one thing I just want to say, man, I love, it's very clear the empathy that you have for founders and operators of scaling brands. Um, there's a lot of people who will latch on, like, there's a lot of people who will talk on these concepts and say, like, this is the way to do it. You are always in, in your content and conversations I have with you outside of this podcast, in this podcast episode, you're always going like, Hey, listen.

There's freedom to define things in a way that work for your business. Understand the underlying absolute concepts so that you know how to apply them in a nuanced manner to your business. You do have to understand that first. But there's nothing, in my opinion, there's nothing absolute in business.

There's all these rules that you have to understand and all these theories and concepts. They're tools in your tool belt. Right. But it actually is very similar to like, I'm a musician and one thing they talk about with jazz musicians, which are considered like in many, many, um, you know, many people consider jazz musicians to be like the creme de la creme of musicians.

What they'll all tell you is learn all the rules, learn all the scales, learn all the keys, learn all the modes and then throw them out the door. Right. And I look at the way that you approach business and that I approach business is very similar, which is, Learn all the rules cause you need the tools, right?

But then when you get in the trenches, throw them out the door and just grab them and nuance them the way that it works for your business. And I think that's, this is, I just want to call that out cause it's an important message for the DTC brand founders and operators listening to this episode. Like, you don't have to feel so constrained and so confined, right?

Like, yes, there's best practices. Know them. Because you want to know when to pull those out, right? Um, but don't feel like you have to do it like everybody else. And don't feel pressured by the prevailing messages in the marketplace that like, we've got to be doing things this way. Seek to understand these things.

Internalize them so you can break them down. Break the rules and build them back up in a way that works for you and your business and your business model. And I just want to call that out. Cause I, I love that about, about chatting with you and about the way that you approach giving advice to people. Um, so look, we only have so much time, so we're not gonna be able to get into everything, but I do want to chat about one more thing that I just think, I know you have a wealth of knowledge on, and it's something that's very top of mind for all the digitally native brands that we're working with a Free to Grow CFO.

Going omni channel, right? Breaking out into retail. There's a number of reasons why brands are considering it right now. There's a lot of brands that I'm seeing consider it, um, much earlier than I've seen in like, you know, previous years of, of the e com space challenge with scaling, uh, digital advertising profitably.

And so there's this allure of getting into retail to basically, you know, lift your blended marketing efficiency. Right. And, and, um, um, you know, find new channels to acquire new customers, but frankly, find new channels to convert customers who find out about you top of funnel on like meta or, you know, Instagram, Facebook, whatever, what, um, what is, when a brand comes to you and it's like, Hey, Ryan, we're thinking about going Omni channel, right?

We really want to break out into retail. We think it's the right thing. I know there's a ton of advice you could get in there with your background. But give me the high level of like how you would begin to advise a brand of the things they need to think about before they decide to venture into expanding into retail.

[00:43:39] Rya Rouse: Yeah. The, the irony is like, um, consumer was only in retail for the entirety of consumer until whatever, 2010, 11, 12. Right. And so, um, What we talked about when Venture came into D2C, D2C turned into a business model and not just a sales channel, right? I come, I learned this game on a D2C only business.

Prepared Meals does not have Omni Channel. It's not an option. So I was one of those people when I left factor, I sort of had this DTC lens. I was very emotional about it, loved it. This is how you grow businesses. But the reality is, if you look at the data, this is growing, but 20 percent of shopping is done online.

And of that. Half is going to Amazon. So you have to consider that if you are going to choose to stay direct to consumer only or direct to consumer plus Amazon, then you are wildly limiting your potential investor or customer base. That's okay. If you realize it, so I would say, okay, if you're going to stay without going into retail, that's fine.

You just have to understand what your top line revenue probably is going to be like where you're going to top out. I see a lot of beautiful 40 million online only businesses, right? I don't see a lot of hundred million dollar online only businesses. None actually, uh, AG one, sure. Like, but don't be the exception.

Don't you don't, you don't strive to become the exception, right? You don't scale businesses by being, we're going to be the exception. Like, that's just not how you do it. So, so that's what I would say. Like, like understanding sometimes your cap table, the way you've raised capital, isn't going to allow you to be a 50 million business because you have a 75 million valuation or 80 million valuation.

So removing that, which is a deep conversation and topic. If you're going to stay online, only understand there's a top that there's a, there's a ceiling to where you're going to grow your revenue and there's an efficiency that's going to start to decline when you get there. If you want to open yourself up to the other 80 percent of people who would prefer to shop in a store for most things.

Cool. Now you have to understand the differences in cost. And supply chain complexity and your finance function that are going to be required in order for you to get into retail, right? For every new customer you get. So you're going to use retailers, right? These, you can go direct, direct to Walmart. They cut a PO, they buy your stuff.

You send it to a distribution center at Walmart, pretty clean, but then you've also got distributors. Right? Some just work through distributors. So you got a UNFI, they're going to collect orders for multiple retailers, they're going to send them to their distribution centers, and then they're going to send it to the customer.

Now you have a relationship with the distributor. And you have a relationship, in our example, with Walmart Direct. Right? You may need to get a broker to get into some retailers, and the retailer that you got a relationship with through the broker only goes through a distributor. Right. And so I'm not going to get into like, try to confuse everyone, but the overall point is this, I would say internally to simplify all that down one, it can get complex and it can get expensive.

You're going to play slotting fees, just to pay to play, to get into some of these retailers. You're going to pay some of those distributors margin. You're going to pay some of those brokers margin. So you cannot probably. Go from having no retail exposure to every retailer. Let's just presume the buyer want from every retailer wants you in their store.

You're not gonna be able to do it probably because the cost is going to be up front and it's going to be hard. And then those retailers will pay you on terms on the back end. But even internally, if your supply chain team and your finance team are not familiar with the retail channel and all those different things that I just described, they need to get.

Trained up on that. And it's very different than how you're going to distribute into, um, e com, right? And your own 3PL. So, so there's a lot there, but I would say, A, if you're going to go online, only understand that you've got a ceiling. And if your cap table, Sets up such that that's okay for you and your margin profile sets up that like, Hey, a 50 million business for us kicks off 5 million at EBITDA and we can handle being a 50 million top line business because of our cap table and our goals and our desires.

That's awesome. That's okay. You don't have to be a hundred, 200 million business. If you want to get to a hundred or 200. You're probably going to need retail. And if you want retail, you're going to have to have a supply chain team, a finance team, and the cash in order to get into retail. 

[00:48:37] Jon Blair: Totally, man. Um, I I've, I've dealt with it before.

I had a, I had a stint before getting into DTC. I actually came from more of the wholesale, um, and manufacturing world. And like, everything is different. The cash conversion cycle is different. Cause you've got receivables. Um, you know, the, your financial model changes. Um, how you, how your operations team has to prepare shipments so that they actually get accepted and not rejected.

Um, there's just, it, it, it's a lot of complexity. I'm not saying don't do it. There's a place for it. And like Ryan said, make sure it ladders up to your overall strategy, right, and your overall goals. Um, so in, I'm going to help us land the plane here. Before we close out with a final personal question, which I always like to ask everyone, tell me a little bit about your consultancy.

What are you doing today, and how are you helping growing consumer brands? 

[00:49:35] Rya Rouse: Yeah, it's, you know, a lot of the stuff that we've talked about today, you know, my, it's funny, I've taken leadership roles on the marketing side of the house in, in a number of cases along the way, I've just never considered myself a marketer.

I've always, I got thrown into an operator role. And to your original point, when we first kicked off, I was forced to learn finance. I mean, I had a background in finance, but like business finance is different than finance, finance, finance, supply chain operations, marketing. And so I don't know, you know, like I, I happen to be very good at marketing.

I happen to have a business. And so I'm working with, you know, like I like to think of myself as like. What I would have loved to have had in when I was operating factor before I sort of know what I know now, which is someone that can speak intelligently on your leadership team across functions. I think the best people you add to your leadership team, everyone on your senior leadership team should have the ability to speak intelligently about every function of the business.

They're not an expert in it. They're not running the function, but if they can't weigh in and a at a minimum understand how their function. Is going to affect all the other functions, but more importantly, and more ideally be able to speak intelligently about those other functions where that leader has an issue and you can collaborate with them on a solution to it.

So that's how I think about it, right? You, you have a lot of complexity that the, the thing that I, my. Clients would probably say I do best is just find the simplicity, find the simple answer, try to reduce the complexity. What's the 80 20. I think it's incredibly hard to find the 80 20 of your own business because you can't read the label from inside the jar and you are totally squarely inside the jar at all times.

And so just an outside perspective from someone who's operated multiple businesses in this space, bootstrapped way. Had to look at profitability from day one and therefore have a lens that says, Hey, I can, you know, I can be helpful across a number of functions. Um, not just marketing because for marketing to work, you need all the other functions to work too.

[00:51:41] Jon Blair: I love that spot on their spot on. Um, Okay, so I always like to end with a personal question. You know that I'm a dad of three little kids. Um, in terms of being a dad, I think I did the math and I'm about four and a half years behind you in terms of the age of my youngest. And I've talked to you several times about like, just, I mean, I mean, I'm completely honest with everyone here.

Like, it's just all out insanity. It's the most amazing thing I've ever done. Raising a small family and scaling a business at the same time. But sometimes I question my own sanity. Like why am I doing these two things at the same time? They're both so exhausting. And so I'm asking for a friend here. How did you pull off raising a young family of three while being an entrepreneur?

[00:52:30] Rya Rouse: Yeah. That, you know, the, the really short answer, which is like not helpful is you just figure it 

[00:52:38] Jon Blair: out. 

[00:52:39] Rya Rouse: You know, it's, it's not unlike anything. I mean, think of all these challenges you take on within your life when, when you can look back and you say, we had no idea what we were doing, but we figured it out.

So there's an element and their strategy to this, right? Of understanding again, what's the 80 20 of like me being a father to me, I determined to ask that question and answer it right to me. I want to be present. I want to be available. I want to be around. Right. Yeah. Okay, cool. So, if, if My kids feel loved by me and I'm around and they see me every day not every day But most days I feel like I'm doing a good job there cool So then I don't have to get so stressed out about stressed out about all the other things as a husband If I'm of it once you have kids very different to be a husband without kids and it is with kids like Totally am I doing 50 percent of the work?

No, I think my wife does more than 50 percent of the work I think most wives do more than 50 percent of the work But, um, am I there when she needs me? Do, am I clear on what she's asking from me on any given week or day? Like, so just asking like, what do you need for me this week or this month or this day?

And if I'm there, most of the, if I can say yes, most of the time I feel like I'm winning, right. As well as spending alone time with her. And then same thing with the business. It's like at some point you 80 twenties overused, but it's overused for a reason. At some point you just have to understand what's important and the rest is just you worrying.

Right. About, about, you know, like, was I not there enough or was I will ask her, right? Like, was I not there for my kids? Ask them once they're old enough, you know, but I think it's just asking yourself and asking the people you care about what they need from you and asking yourself what you need and then trying to show up there as often as you can and let the rest just be what it is.

[00:54:30] Jon Blair: Dude, such sound advice, man. When you posted two days ago about your birthday, I actually read that whole post and it was like, I want to be Ryan Rouse when I'm 45. He's a few years ahead of me. Um, but man, I just, I really look up to your wisdom, man, on the business side. I'm, I truly, truly am someone who, um, holds you in high regard on the balance between, uh, you know, personal and business.

And so, I just, I can't thank you enough for coming on the podcast and sharing some of your wisdom. I might have to have you on again at some point because there's just so much that we didn't get into. Before we break here, um, where can the audience find more about you and your consultancy? 

[00:55:13] Rya Rouse: Yeah, LinkedIn and Twitter, easy enough.

You know, after, after we just spent so much time ragging on those platforms, I'm a believer that there's a lot of good on those platforms. So, so hit me up on one of those if you're interested. 

[00:55:26] Jon Blair: Definitely follow Ryan's content. Um, you know, I, I, um, shamelessly follow it all the time and I'm always like, man, where does he come up with all this wisdom?

Um, but thanks everyone for joining. Um, again, masterclass in so many important concepts, uh, today. So you might need to listen to this one twice. Um, and you know, if you're looking for help on the accounting and finance front, as you're scaling your e com brand, don't forget Free to Grow CFO. We're here to help you scale your brand alongside healthy profits, cashflow and confident decision making find us on a, you can find me on LinkedIn, Jon Blair, or our website, Free to Grow CFO. com until next time scale on.

Leveraging Data Privacy Laws to Increase Profitability: Ian Madigan with Dataships

Episode Summary

This episode of the Free to Grow CFO podcast features host Jon Blair engaging in an insightful conversation with Ian Madigan, Head of Partnerships at Dataships. The discussion highlights the crucial aspect of improving profitability for DTC brands by leveraging data privacy laws to optimize post-purchase email opt-in rates. Ian shares his journey from being a professional rugby player to joining Dataships and sheds light on how the company helps brands navigate the complexities of data privacy laws to increase their marketable audience through compliant email and SMS marketing practices. The conversation also delves into the importance of compliance and how Dataships helps brands navigate the complex landscape of data privacy, thus aiding in scaling with a profit-first mindset.

Meet Ian Madigan

Ian Madigan, Head of Partnerships at Dataships. Ian was previously a professional rugby player, playing 31 times for Ireland. He was an early investor in Dataships and moved into a full-time role in 2023. Having owned and run an eCommerce store, his passion now lies in ensuring that data privacy laws do not hold businesses back, the Dataships mantra of 'Growth Through Compliance' fits in well with his goals.

Episode Transcript

00:00 Introduction and Welcome

00:32 Understanding the Role of Dataships

01:49 The Importance of Maximizing Post-Purchase Email Opt-In Rates

02:15 Ian Madigan's Journey and Background

03:28 The Evolution and Impact of Data Privacy Laws

05:27 The Power of Leveraging Data Privacy Laws for Marketing

06:07 The Knowledge Gap in Brands and the Power of Data Privacy Laws

07:33 The Misconception about Data Collection on Shopify

08:37 The Impact of Data Privacy Laws on Marketing Consent Rate

09:07 The Role of DataShips in Maximizing Marketing Consent Rate

13:44 The Value of DataShips for Different Brands

32:09 The Double Impact of DataShips on Profitability

40:06 Final Thoughts

[00:00:00] Jon Blair: Hey, everyone. Welcome to the Free to Grow CFO podcast, where we talk all things, scaling a DTC brand with a profit first mindset. I'm your host, Jon Blair, founder of Free to Grow CFO for all of those, for all of those, for those of you that don't know Free to Grow as a boutique outsourced accounting and fractional CFO firm.

And what we do is we help scaling profit first DTC brands grow alongside healthy profit cashflow and confident decision making. Today on the show, I'm super excited to be chatting with Ian Madigan, head of partnerships at Dataships. Ian, welcome. 

[00:00:33] Ian Madigan: Jon, great to see you again. Uh, thanks a million for having me on.

Uh, delighted to be on the podcast. 

[00:00:39] Jon Blair: Absolutely. You know, today I'm really excited to talk about today's topic because when I met you in Ireland at that e comm event several weeks ago and learned about what you guys are doing over there at your company, Dataships. A light bulb went off that I think the problem you guys solve is something that a lot of DTC brands in, uh, the States are not zeroing in on.

And so it's, in my opinion, the reason why I wanted to have you come on the show was I think it's kind of a, it's a, it's a goldmine that some of these brands are sitting on. It's going to be more valuable to some brands than others, depending on the product that they sell. You know, uh, do they have subscriptions or not, but like.

Again, this was a problem that I was aware of, but didn't realize the opportunity. Um, for how, um, for how your product could actually, uh, increase profitability of a scaling brand. And so I'm super excited to chat today for everyone, um, in the audience to understand what the heck are we talking about today?

We're talking about increasing profitability by maximizing post purchase email opt in rates. And, um, I think you're going to find today's discussion super, super helpful and hopefully actionable. For you to actually implement some of the things that we talk about today into your DTC brands, marketing mix so that you can improve your profitability as you continue to scale.

So before we dive into the. Um, you know, opt in rate topic in a little more detail, Ian, I'd love for you to just share with the audience a little bit about your background and how you ended up at DataShips. 

[00:02:19] Ian Madigan: Yeah. So before I, uh, took my, took the role of, of head of partnerships in DataShips last May, um, I was previously a professional rugby player.

Uh, so I played for. The top teams in, in, in Europe, in, uh, in Ireland, in, in Ster and Ulster. And then I also played in the top league in, in France, uh, with a team called Bordeaux Bag and in England with, uh, Bristol Bears. So I'd, uh, played over 300, pre 300 professional games, 31 times for Ireland. Um. But during that time, Michael, who's the CEO of Dataships alongside our co CEO, Ryan, he approached me back in 2013 with an idea for fantasy rugby, similar to some of the fantasy products that there are in the States.

We tried to replicate that in Europe with rugby, with a more kind of detailed stats based game. And we had good success with it. We built the game out. Um, at its height, you know, with 200,000 people playing it in, in Europe, which, um, for less populous countries, uh, isn't bad going. Yeah. Um, and then we, we, we subsequently sold it, sold a game, and it was really then in, in, in 2017 and 2018, that we pivoted into the data privacy space.

So in Europe, um. The GDPR was, was coming in, um, and we looked at building a one stop shop solution for SMEs, um, to ensure that they were going to be fully compliant with the GDPR. So at the time it was all, you know, privacy policies, cookies, tools, the big change we thought would happen with the GDPR in Europe was around, um, data access requests.

So customers making a request for their data. The merchant having to send it out in machine readable format, um, and we, we built a solution for that, but as, as, as it transpired, not many customers actually make these data access requests. And that wasn't really the change that the GDPR had, um, what we found that the GDPR, what a change was how data is collected.

And that's where we pivoted, uh, two years ago into really more growth space. And, and as you touched on at the start of the podcast profitability, so, you know, our slogan is growth through compliance. So, um, you know, as we all know that the cost of acquisition is going up with the, with meta ads being more expensive, Google ads being more expensive.

Um, you know, cokie tracking being nothing as effective, especially in Europe, and we can see that coming into the, into the States and Canada now, too. So, what we want to ensure is that, um, our, our, our clients can, uh, email and SMS market to as many of their customers as possible, and that's what we call the marketing consent rate.

So, the marketing consent rate is the percentage of your customers or the people. Um, traveling through your website that you're able to email an SMS market to. Um, and in effect, what we're doing is we're presenting the most optimal data privacy laws, um, to the benefit of our clients to ensure as many of their customers are opting in for marketing.

[00:05:35] Jon Blair: Awesome. I love that. So there's a ton to dive in there. I think you gave a really solid overview of like. What the problem is out in the marketplace from a data compliance standpoint or data privacy standpoint and how that provides a roadblock potentially to maximizing, I'm going to say it in simple terms, effectively, how many people you can email, right?

Or send SMS, uh, marketing text messages to and. Yeah, before we can touch on pretty much every aspect of that overview that you just gave us, but I want to dive in first to chatting a little bit about what you have seen as you guys have been growing data ships, um, what you have seen as the, um, kind of biggest knowledge gap out there.

Within the brands that you guys talk to and to be more specific when, when, when I sat down with you and really understood, um, what data ships does a light bulb went out off. Like I said earlier that like, man, I don't think a lot of my clients are even thinking about what data privacy laws are doing. To actually, um, keep them from growing their email lists and SMS lists to as large as possible.

And so I think that a lot of brands are thinking, they're thinking about buying paid ads. They're thinking about just emailing their existing email list, but they're not sitting there thinking about how do we get more people to subscribe through something as seemingly simple as. You know, uh, leveraging the data privacy laws, but the issue is there's a lot to know there, right?

And it's different from country to country. And so when you talk to brands that could potentially use data shift, what do you see is the biggest gap in knowledge of, of what these brand founders and operators just don't understand about, about the data privacy laws? 

[00:07:26] Ian Madigan: Yeah, great question. And the biggest knowledge gap for me is the misconception, um, around data privacy and how data is collected on Shopify itself.

So everyone thinks that for, you know, a big platform like Shopify, that they'll present all the different options that data privacy laws around the world will allow. Um, and it was really only when we were asked, you know, probably for, I'd say the 50th, 50th or 60th. Uh, time by our, our current, uh, clients, you know, how can we gather more data on our customers compliantly that we dove deeper into the different platforms and Shopify specifically, and we wanted to see, you know, from our own knowledge of the data privacy laws.

Is Shopify presenting the most optimal options? And what we found is that Shopify gives you two options. You can either have a pre ticked box, which is, is fully compliant in, in, in the States and Canada, or you can have an unticked box, which is fully compliant in across Europe. Um, now the two differences with those two options is an unticked box where the customer would have to take the box to opt in for marketing converts at between 20 and 25 percent and that's compliant across the world.

Um, and then the pre ticked option, which is compliant in the States and Canada converts at between 40 and 50%. The odd time is high as a 60%, but you're still missing out on. On, you know, potentially another 40 percent in the States and Canada with a pre tick box. So, what we, what we do is we present the most optimal data privacy law.

Um, and where, where we see the knowledge gap is that in the States and Canada, for example, you can rely on implied consent, especially in Canada, where. And once the customer is purchasing a product, they're effectively opting in for email marketing in the States. The legal requirement is no consent required, which is effectively the same as Canada in the sense that once a customer purchases.

You're able to email market to them so we can get an uplift in the States and Canada from 650 or 60 percent all the way up to generally 98 99%. Um, and then in Europe, you know, you've got countries like, um, the United Kingdom, France. Ireland, Netherlands, um, where you can rely on soft opt in or legitimate interest, where the difference there would be, as opposed to a customer having to tick the box to opt in, they would have to tick the box to opt out.

Um, and that's where across our portfolio of, of, of, um, 450 clients, we, we increase the marketing consent rate. Up to 88% on average, but for our American and Canadian customers, it would be above 95%. 

[00:10:25] Jon Blair: Wow. So this is fascinating. So let, let's break this down a little bit, uh, a little bit here and kind of summarize it for our listeners.

So we're talking about an, uh, post-purchase, um, or, or as part of the, the, the checkout process. an unticked box, right? Um, uh, in terms of like opting in to email marketing, that's converting at 20 to 40%. You said? 

[00:10:51] Ian Madigan: Yeah. Yeah. And I don't take box in Europe. We'll convert a generally between 20 and 30%. 20 and 

[00:10:56] Jon Blair: 30%.

Okay. And then at pre ticked box, Did you say 40 to 60%? 

[00:11:02] Ian Madigan: Yeah. 

[00:11:02] Jon Blair: Yeah. 60 to 60%. Yeah, exactly. But then, but then, um, leveraging implied consent, which means in the U S and Canada, it is compliant that if the, uh, customer executed a purchase, they're implying their consent to opt into email marketing that's upwards of 90 percent conversion in terms of, of, is it, am I correct there?

[00:11:27] Ian Madigan: Exactly that. It'd be even upwards of, of 97, 98 percent where, where you wouldn't have that, that total 100%, 100 percent would be if an American or Canadian customer, which was purchasing from Europe, but it was being shipped to the States, it would default to the safest data privacy law. So that customer might be asked to opt in or double opt in if they happen to be in Germany at the time.

And, but it will be close to a hundred percent, exactly that. 

[00:11:52] Jon Blair: Okay. Okay. So we're talking Shopify only offers the unticked box or the pre ticked box. So let's say you go with your Shopify site, you know, to the, you know, maybe a little bit more, um, aggressive pre ticked, pre ticked box, right? Forty to sixty percent.

opt in rate versus 97, 98 with using data ships. We're basically talking close to double the opt in rate, right? Um, so if you think about, um, if you think about increasing the profitability of your marketing efforts, you know, like Ian mentioned earlier. In the post iOS 14 world and you know, seeing CPMs get more and more expensive on Facebook and you know, Google advertising costs are going up more and more brands that I'm working with as a fractional CFO, they're turning to their retention, right?

And they're saying like, look, we still need to use, we still need to use pay per click advertising or top of funnel. Advertising channels like Facebook to drive awareness and acquire new customers. But we're going to really make our profit or at least the bulk of our profit. We're going to make on repeat purchases and we're leveraging our email lists and our SMS, um, lists in order to do that.

So thinking within that kind of like view of the world that we live in, in, in trying to, to scale a profit first DTC brand, if you're converting on your Shopify site, Double or close to double. The number of people that are opting in post purchase to email marketing. That is, that can be for the right brand, that can be massive for driving your, um, driving your marketing efficiency and ultimately your contribution margin through the roof.

So walk me through a little bit of what are the types of brands or maybe the types of products or, um, I don't know if it's subscription versus non subscription, like what are some of the core key characteristics that you see? In a brand that really, really benefits financially from using a product like Dataships.

[00:14:01] Ian Madigan: Yeah, like, so for us, it is wide ranging, um, you know, the, the cosmetic space in particular would be one that would work well, you know, repeat purchase products, um, not necessarily high AOV, but we would have some, some clients that are high AOV. Um, and then, you know, a wide, wide range of products. But you know, across our, our portfolio we would see the most in, in supplements, cosmetics, footwear, um, clothing, um, pet supplements is a, is a really popular one.

And when you were talking about subscription there, where, where we would be popular would be in trying to, uh, in, in ensuring that for one off purchasers. That they can be marketed to, and then with the goal of turning them into subscribers, as opposed to, you know, maybe one in five or two and five of those one off purchasers, um, being marketable and maybe only 50 percent of them turning into subscribers, we'd be increasing that to four or five out of five and ensuring them that they're, they're moving on to subscription.

Um, but yeah, for, for really high average order value products, um. It's not as good a fit because generally that the repeat purchases aren't going to be there, um, or it could take, you know, maybe 3 to 6 months or 12 months for those repeat purchases to happen. Um, but, yeah, in those other sectors, it's, it's really powerful and, you know, ultimately, Jon, if you've 1000 customers coming through your checkout, and, you know, even with a pre tick box, if you can market to 500 of those.

And you're converting what we generally see with email marketing. It's kind of between 5 and 15 percent will be kind of the market average we'd see. But if you can, if you can maintain that 5 or 15 percent would increase the number of people you're marketing to, to close to a thousand. Then you're looking at a significant return.

[00:15:52] Jon Blair: Yeah. So I think there's a couple of interesting points that we can dive into on that. One is, and you know, we talked about this when, when I met you in person in Ireland, walk me through what you tend, what you were seeing with these brands. They, they get on, they start using data ships. Um, let's say they've doubled their email opt in rate, um, from 45 to 90%.

Right. They were using the pre tick box before. What do you guys tend to see in terms of two, two key components? Cause I'm sure every brand founder operator listening to this podcast is going to have these questions. Okay. Well, what, what is that, what are you seeing is happening to the conversion rate on email, right?

Cause the, the, a big risk is conversion rate dropping so much that it offsets the additional subscribers and two, what do you see in terms of unsubscribes over time, or is that 90 percent that's retained post purchase? Or opted in for post purchase, are they sticking? What are you guys seeing with the clients that you're serving?

[00:16:55] Ian Madigan: Yeah, I think, you know, brands are very wary of the unsubscribes. And I think when you, you know, you, you promote through a competition or a giveaway, you're going to get people who will sign up for the competition giveaway. But then once the competition passes and they don't win, they will then unsubscribe.

And they're not necessarily valuable, um, data to have. But what's different with, with our list is because they're actual paying customers, they've gone through the checkout, they're more vested in the brand itself. Um, that when they do get marketed to it generally sticks and they're happy to see marketing content to, uh, from the brand.

Obviously it's, it's over to the, the, the brand itself to ensure that, you know, they're segmenting while the timing of their offers is good. Um, if you're sending out, you know, poor quality emails. Not necessarily good offers are relevant to the person. You will still see a drop off, but what we see is the actual unsubscribed percentage will stay the same as it was pre data ships.

Um, but because you're having more of your customers actually subscribing to emails. The actual number will go up, but the percentage will stay the same. So if it's 5 percent of 500, you're looking at, you know, 25, um, unsubscribes 5 percent of a thousand, you're looking at 50 unsubscribes, but, um, yeah, we'd keep a very close eye on that.

Um, and ultimately what we've seen is that, that, um, customers are still happy to receive marketing information from, from the brands that they've actually purchased from. 

[00:18:29] Jon Blair: Yeah, that that's huge. And I, I think you, you're bringing up a couple, like just. Regardless of whether or not you're using a tool like data ships, there are just some core tenants of good email marketing, right?

That like you're going to want to adhere to, like you said, segmenting so that you have some sort of personalization in the email journey. Right? Um, which is hopefully driving relevant information going to each of each of your email segments, the right offers at the right time. If you're just, if you've got poor email, um, marketing strategy or, um, you know, tactics, that's going to drive unsubscribes, whether you use data ships or not.

Right? And so, um, I do really love how this is tied into. Post purchase because like you're talking about they've already voted with their dollars that customer right for a product From this brand and so this is not about some sort of a gimmicky way To drive email subscribes like you brought up the giveaway or you know something something of free value This is about deepening a relationship with a customer that has already transacted with the brand, right?

And so it's like, uh, it's in my opinion from an email marketing standpoint. It's like a high leverage moment, right? Or, or like you can either kind of lose that customer, um, in terms of like lose their attention, right? And the ability to talk directly to them post purchase. Or you can capture that customer by getting them to, to opt in.

You already have a relationship with them. And so you actually have something already preexisting to leverage. You're not trying to leverage something from zero to something. Right. And so, um, I love that. I want to talk a little bit more. About data ships itself, just so that, um, the, the audience can kind of wrap their mind around like, okay, I think we've been pretty clear about Shopify currently offers these, these two options for, um, you know, marketing opt in post purchase it's pre tick box on tick box, right?

One's got a 20 to 30 percent conversion rate, the other 40 to 60, um, data ships has proven to. You'd be able to increase it to, you know, 90, as high as 97, 98%, but like from a practical standpoint, what, how, how exactly does this look to the brand when they want to go get data ships turned on, how easy or how, how hard is it to do?

[00:21:02] Ian Madigan: Yeah, great question. So I think first off, what we've, what we've kind of explained is, is for brands that are only selling into one region where data ship still works, you know, particularly well, if you're. Selling solely into the UK or Ireland or, or, or America or Canada, but also for brands that are selling internationally.

So they could could be selling into multiple different regions and each of those regions can have different data privacy laws. So, for example, Germany is particularly strict. So. Because our, our, our widget is, is geo located from the IP address, uh, backed up by the shipping address and billing address. Um, and off the back of that, then we're then presenting the most optimal data privacy laws.

So for example, in Germany, it's really strict. You have to do use double opt in. So the customer, if they're purchasing from Berlin and Germany would have to tick the box to opt in, and then they would have to double opt in via the first email that they'd be sent. Uh, in Klaviyo, so we would have a separate list in Klaviyo for, for, for, um, for any German customers.

Um, they're purchasing from the UK or Ireland or France, then they're being presented with a box where they would have to tick the box to opt out. Um, if they're purchasing from Canada or, or the States, then they're being presented with the marketing preferences. And a link to the privacy policy, which is still really important for, for, for the, uh, data privacy regulations, but they will be going straight into a marketable list within within Klaviyo.

Um, so, yeah, the actual, uh, dev side of what we do, we're in the Shopify app store, the installation. Um, only takes three minutes. Um, it's as simple as giving some access in, in Klaviyo and copying some script into the, um, the checkout page on, on Shopify where we're obviously altering what we're doing around the, the subscribe box.

Um, and then for SMS, it's, it's slightly different because the laws vary from, from state to state. In, in the States itself. Um, so yeah, the implementation on the SMS is maybe about 10 or 15 minutes, but the, um, the initial implementation of email is, is only three minutes to get up and running. 

[00:23:14] Jon Blair: You know, what's interesting about this.

And I think we chatted about this a little bit when I was, um, Hanging out with you guys in Ireland. Um, you know, in, in one respect, what you guys are doing is not all that different, um, conceptually from the way that we view in the e commerce world, uh, these sit outsource sales tax, um, offerings. And here's why, because so like back in the day, in the heyday of, of like early days of e com, when I ran, um, accounting and finance departments.

You know, we have these sales tax liabilities all over the country and it's just this huge pain in the ass. So as you, as you scale, you get, you hit nexus and more and more states in the U S and you've got to go set up a corporate tax account and a sales tax account and, and you, and every, every government agency has a different website or some of them, you still have to mail in the application.

It's crazy. Right. And, and there's 52 states in the U S and so like. Part of you, you know, you're, you're pulling your hair out trying to manage this admin nightmare and this compliance nightmare and like, eventually you're like, man, is there some way to just like apply for all 52 states and just like get set up so that this can be done?

But then what's the problem? Once you get set up, you have to file the returns all the time, but then even worse, you have to keep up with all the different sales tax law changes in all of those 52 states, which is basically impossible to do if you're a, you know, small to mid size, scrappy, profit first, scaling DTC brand.

I look at data ships and like, yes, the tool that you guys have built from a software standpoint is Is slick in terms of how, like you can just get it set up in the Shopify app store super easily. Right. And it will automatically detect based on the IP address where the purchaser is located. And it will default to what you guys have deemed to be the, um, the email opt in rate that's compliant, but would most maximize, um, you know, consent.

But then here's the, the flip side of that coin. The laws are changing. Right. The law and as a brand, so like the point that I'm making is like, as a brand, you could go set this up on your store if you wanted to, to start in the US, but then are you going to have a team that's going to go keep up with how these laws and compliance requirements are changing?

Absolutely not. You're super crazy busy trying to scale a brand and then in comes data shifts. And we talked about this a little bit, um, you know, before the show, like you guys have this team who's keeping up to date on the data privacy laws and the different countries that you, that the tool works within.

Um, and that's where I liken it back to those sales tax agencies. We now, instead of managing sales tax ourselves, we're using XAMPP or numeral or Abilara, and you're just plugging into them usually oftentimes through some sort of a software plugin. Sometimes it is a Shopify app and they're handling all the sales tax backend for you, right?

Um, talk me through a little bit what you guys do at data ships. To unbeknownst to your clients, they don't have to deal with it. They don't just get this nifty little app that's maximizing opt ins, but you've got this team that's keeping up on the compliance requirements and if needed, tweaking your app to make sure that it, it stays compliant.

Walk me through what you guys are doing in the background there. Cause that's a huge, huge lift that you're taking off of these brands. 

[00:26:47] Ian Madigan: Yeah. So like, first off, like on that point, like my, my passion doesn't necessarily lie in data privacy, you know, but where my passion lies is very much in ensuring that it doesn't hold businesses back and that's where like our slogan of growth through compliance, ensuring that the, you know, if, if there's a more optimal data privacy law that can be relied on.

Let's make sure that, that, you know, e commerce merchants are, are, are using it because they've, they've, they've so many different things to, to, to worry about. We don't want compliance to be holding them back and we've had so many merchants over the years come to us and they're just so afraid of these data privacy laws that they'll default.

To the strictest, but they might only convert a 10 or 15 percent or even on the high side, you know, maybe 50%, but they're still leaving 40, 50 percent on the table. And, you know, in my view, that's unfair because the e commerce merchants are doing an incredible job and getting, you know, potential customers to their website.

Then their website themselves itself is doing a brilliant job in converting these potential customers into paying customers. We want to ensure that those paying customers that as many of those are being marketed to, because there's been so much money spent and driving them to your website in converting them on the website.

It's, it's only fair that you can market to as many of those as legally possible. Um, so yeah, from, from a compliance standpoint, we have our own in house compliance team and we've, we've built out a rules engine for, um, 88 countries. So we have, um, the rules built. If we have a client come on and we don't have the rules built for that country, we will ensure that, um, we'll be up to date on the, on the data privacy laws.

It usually takes about two weeks for a new country to be added. And then we're staying on top of all the new data privacy laws that are that are coming out. So, for example, in the States at the moment, from state to state, we're seeing different regulations around SMS. So we're ensuring that we're, we're staying on top of those, ensuring compliance, whether it's.

Texting at a certain time in the day may be allowed in one state, but could be prohibited in another. We didn't share that. That isn't happening. And then similar with with the data privacy laws within Europe and the states, we're seeing that changing, you know, month to month and we're ensuring that. That, um, that our solution is, is keeping our merchants, um, up to date and ensuring that, that they're being compliant.

[00:29:19] Jon Blair: Yeah. So, you know, what's interesting about that, the fact that you guys have a compliance team that's staying on top of changes, right. To, um, whether you're talking about state level changes in the U S or you're talking about, you know, national, um, changes in the U S or, or, or in other countries. When we tie this back to how a tool like Dataships can help optimize your profitability as you're scaling, there's the obvious subject that we've been talking about, which is, hey, you're doubling your marketing opt in rates post purchase.

You know, and you keep your conversion rates and unsubscribe rates about the same, but you've got double the subscribers. Obviously, that can, that can really make a dent in marketing efficiency and profitability for your brand. But, additionally, you don't have to pay the overhead of the internal compliance team that you would need to do this on your own, right?

Dataships has that handled, right? They've got the compliance experts internally, so you're improving your marketing efficiency through that. The, the, uh, marketing opt in rate. Maximization, but you're also just removing, you're outsourcing the compliance efforts. To a company who is an expert at it, right.

And like, that's one theme that I see super common, uh, that really elite scaling seven, eight, and even nine figure DTC brands do really, really well is they figure out what their brand and their team is really good at, what their core competency is. And they just stay laser focused on that. And what I tend to see is that the brands, you know, elite brands, core competencies, product development, right.

Um, marketing. Customer experience or customer service. Maybe they're very operationally excellent, but, but you don't find a DTC brand who's crushing it because their compliance. Experts, right? Whether you're talking about tax compliance or data privacy compliance or other compliance, that stuff's usually outsourced as it should be because they're absolutely super important things that you have to adhere to as you're scaling, but they are not the core things.

That really set your brand apart in the marketplace, right? Like market, marketing and product development and customer experience. And so the point that I'm making here is that when it comes to scaling a profit first D2C brand, knowing what overhead activities and costs you should outsource. To experts in the field.

In this case, we're talking about data privacy, which is super important for a DTC brand. Absolutely. Make sure that your brand is good at that if you want to optimize profitability over time. So it's kind of like a, I wasn't even really thinking about this as we're preparing for the show, but you guys kind of have a double whammy in terms of how you can improve profitability, marketing efficiency should go up.

But then at the same time, you're removing this overhead burden of, of staying compliant. And I think that that's, that's really, really cool. Um, so I want to actually, um, I want to actually, before, before we move on to a slightly different topic, is there anything that we haven't covered in terms of like GDPR compliance in the U.

S. that you just think might be a knowledge gap for the listeners of, of this podcast? Anything else that you just, you know, I think that a DTC brand founder operator in the U S should know that they probably don't know about data privacy laws in the U S. 

[00:32:53] Ian Madigan: Yeah, I think that the biggest one is that, you know, that a lot of the merchants in the States and Canada, they don't realize how preferential the laws are there.

If they're selling on a platform like Shopify, it doesn't allow them to utilize those different laws. Um, and that's where that's ultimately where, where we come in. Um, and yeah, one, one, one area that I didn't touch on is, is that the actual emails that we unlock, we, we actually track those emails and we see who, who has repurchased, um, and to the value of those repurchases.

So that's. That's a key way for us to ensure that we're showing the value of, of, of our, our application. Whereas if, if, if, if the, those emails weren't deemed valuable and weren't making the repurchases, then our, you know, our solution, you know, falls on its face. So, um, and, and, and tied in with that as well, Jon, is we ensure that we, we do, um, a, a two week free trial, um, to, to.

Show a dashboard within that dashboard, we'll be able to do a 12 month look back and show what our merch, what the merchants previous or pre data ships marketing consent rate was and then what we've grown it to in that 2 week period. And then we can also show the emails that we've unlocked and the value of those, um, repeat purchases and then depending on what, what sector they're in.

We can dive into them and show, and show, for example, if they're in cosmetics, we can show them cosmetic examples of the results that you can expect after a month, after three months, after six months. Um, so yeah, it's, it's, it's a kind of risk free way of, of, of trialing the app and ensuring that they see the value in it.

[00:34:35] Jon Blair: I love that the risk free trial is super important. And you showed me the dashboard when we sat down together in Ireland and, um, it's super helpful for understanding what the impact. Of turning the app on is and, um, that way, you know, when I think about, you know, some of the brands that we work with potentially considering using data ships, like, um, it's really easy for me to bring it up to them because it's not a huge lift first off to get it implemented and it's not a huge risk.

To test it out and, and get some analytics from, from your dashboard on, on really what is the app doing to improve the opt in rate and then ultimately the, the value of those additional opt ins, um, over time. So before we close up here. I like to end every episode getting a little bit personal with the guests that are on, on, and, and, you know, you mentioned earlier that you're a rugby player, which, um, I was actually on the plane coming home from Ireland and a guy sitting next to me on his way to Dallas, I'm in Austin, Texas, he had an Irish accent, and we were on the connecting flight from Dallas to Austin, and I said, Hey, man, are you, are you traveling to Austin from Ireland?

He goes, And he's like, I'm, I'm, I'm traveling to Austin for my first time for, uh, uh, uh, a show like with, uh, for work, uh, a trade show. It's like, that's funny. I'm coming back from Ireland, kind of from a trade show, my first time to Ireland. And so anyways, we started talking. And he was asking what some of the brands were, or some of the companies were that I met with.

And I was telling him, I said, Oh, and I met with this one guy. He was a rugby player, Ian Madigan. He's like, Oh, I know Ian Madigan. Um, and so anyway, so we actually talked about you on the flight home, but all that being said, you know, post, you know, your, your pro rugby career. Um, what does your personal life look like these days?

[00:36:31] Ian Madigan: Yeah, so I've, I've been finished really playing since, since May and, uh, full-time with, with data shift. So that, that, that certainly keeps me busy. And then I do, um, national television for the, the rugby when there's, um, either Irish matches on or the, the club games, um, which is the U or C or the, the European championship.

Um, and then I'm actually a promoter as well for, uh, American college football. So, oh, really? 

[00:36:59] Jon Blair: I love it. 

[00:37:00] Ian Madigan: Yeah. So I was over in, in, in Florida state, uh, back in October for, for, uh, again, there against the Gators and then I was back down in Dublin this weekend with the Georgia tech, uh, teams. So Georgia tech are hosting Florida state in Dublin in August.

And, uh, I'm happy. Promote that game to ensure that, um, I think there's 30, 000 Americans coming over and it's my job to ensure that there's plenty of Irish people there watching as well. Um, so yeah, there's, there's a good, good American connection there. Um, and yeah, then we've, uh, have two, two Labradors, Black Lab, Benji and, uh, Fox Red Labrador, Freddy.

So they're one and three and they keep me busy. So in my spare time, love going on hikes with them. Um, We've just bought a hay, so I can't afford to do anything else other than just walking up the mountain. 

[00:37:54] Jon Blair: I love it. I love it. That's cool. I didn't realize your connection to American football. I'm a huge, um, American football fan, college specifically, my huge USC Trojan fam, uh, family.

And so we're huge. I've been going to USC Trojan games my whole life. Um, what's something that you're, uh, reading or listening to that's really impacted you, um, recently? 

[00:38:18] Ian Madigan: Um, I, being honest with you, I don't, don't read a whole lot and I, I used to listen to more podcasts than, um, than I have done recently.

Part of it is just being busier and when I find now and I'm in the car, I like to just chill out and listen to some music. Um, but I got to see Bob Marley's movie there, um, last week, One Love. Um, you know, obviously it was very sad that he passed away at like 35, 36, I'm 34 now. And I think the movie itself just gave me a really good appreciation for life and, you know, how lucky I am to be fit and healthy and, you know, appreciate the smaller things in life.

And, uh, yeah, I've been listening to his album Exodus flat out since and certainly helped him chill me out and, and enjoy the moment more. 

[00:39:06] Jon Blair: I love that. I love that. Um, yeah, I mean, look at, at Free to Grow CFO, I say this a lot in our content, but you know, business is much bigger than, um, than just making money for our business, actually our, our purpose.

The reason we exist is to build a profitable business that cares for people. And the reason that's our purpose is because. To me, business, yeah, yeah. We need to be profitable. Profitable is in there in service of caring for people, making a difference, right? Like a business should make a difference in the world one way or another.

Um, and so that I, I love the. It all comes back to this heart that like, Hey, we've got one life to live. It's short and we're here to enjoy it and make an impact. And so I really, really love that. Um, so before we close here, where can people find some more info on you and data ships? 

[00:39:59] Ian Madigan: Uh, so I'm on, uh, Ian, IAN at Dataships, D A T A S H I P S dot IO, or our website, Dataships.

io will have, um, plenty of information from, you know, implementation, the app store itself, pricing, um, and, you know, more information really around what we do. Um, and yeah, if you want to, if you want to reach out and have a chat, I'd love to show you the product in more detail. And, um, if not, Jon, obviously has my, uh, my details too.

And it's been an absolute pleasure coming on, Jon. I've really enjoyed meeting you in person in, in Ireland and, um, big fan of what you're doing and Free to Grow. And you've already made some, some brilliant introductions, um, to me, which is much appreciated. 

[00:40:45] Jon Blair: Of course. No, it's, uh, It's an honor to have you on as well.

I mean, we're here talking because what you guys are doing is very interesting. And I think it's kind of a little known fact that really can move the needle for, for a brand that's trying to scale and, and also shepherd, shepherd their profitability. So I really appreciate you coming on. This is super helpful.

Chalk full of nuggets that, um, the brand founders we're talking to can use to improve their profitability. So, you know, for, um, all that being said, You know, that's the Free to Grow CFO podcast for today, where we talk about all things, scaling a DTC brand with a profit first mindset. And don't forget, you know, if you need help, uh, with scaling your brand while also maintaining healthy profitability, cashflow, and confident decision making.

Reach, reach out to me regarding Free to Grow CFO. We're a boutique accounting. Um, sorry. We're a boutique outsource accounting and fractional CFO firm. And we work specifically with scaling DTC brands day in and day out. It's all we do. That's all for today, everyone. Let me stop here.

Leading a DTC Brand to $50M in 3 Years: Dean Brennan from Heart & Soil

Episode Summary

In this episode of the Free to Grow CFO podcast, host Jon Blair chats with guest Dean Brennan, CEO of Heart Soil, about the challenges of scaling a direct-to-consumer (DTC) brand.

Touching on everything from leadership to strategic decision-making, Dean shares his insights on the unique challenges and opportunities faced when scaling a brand. He emphasizes the significance of being consistent and proactive and maintaining a strong alignment with the brand's purpose. He also highlights his leadership philosophy which includes principles like trust, relationships, humility, prioritization, and high-value activities. Dean's journey, from his entrepreneurial influences as a child to his rise as a CEO, provides valuable lessons for growing a successful DTC brand.

Meet Dean Brennan

Dean Brennan, CEO of Heart & Soil Supplements, leads a pioneering brand in nutrition and health, with a focus on premium organ supplements. Under his helm, Heart & Soil has served over 200k+ customers and scaled to 50M in revenue in just three years, a testament to his vision and steadfast dedication to servant leadership with purpose. This commitment drives the company's mission to provide unmatched nutrition and lead a movement toward profound health and vitality.

Episode Links

Books or courses mentioned in the episode:

Traction: Get a Grip on Your Business by Gino Wickman

The Culture Code by Daniel Coyle

Coach Wooden's Pyramid of Success by John Wooden and Jay Carty

Decision by Design - FS Course by Shane Parrish

Episode Transcript

[00:00:00] Jon Blair: Okay. Welcome to the Free to Grow CFO podcast, where we talk about all things growing and scaling a DTC brand with a profit first mindset, I'm your host, Jon Blair. And today I'm super excited to be chatting with one of our Free to Grow CFO clients. It's Dean Brennan, CEO of Heart & Soil. Dean, welcome. And thanks for coming on.

[00:00:19] Dean Brennan: Happy to be here, Jon. Thanks for having me. 

[00:00:22] Jon Blair: So, as you know, at Free to Grow CFO, we're fractional CFOs and accountants for growing profit first DTC brands. And given where we sit in the space, you know, we're uniquely positioned to spot common challenges and opportunities across dozens of brands that we work with.

And the challenge that I want to zero in today and for the next couple of weeks on, on the pod is. The common constraints to scaling. And here, here's why, because every DTC brand that we talk to, like, they all say that they want to scale, but it's what I've found. Is that only the elite brands have like a solid, well thought out scaling strategy.

And I think a lot of brands think that, hey, spend a bunch of money on advertising, that's how you scale. They don't think about the fact that there are specific constraints to scaling along the way, right? And, and your constraints that going from say zero to five million are not the same as going from five to ten, aren't the same as going 10 to 20, 20 to 50.

And beyond, and so what, what I want to talk about is I'm a big fan. I'm a big reader. I'm a fan of several different books related to scaling one traction about EOS and the other one scaling up by Vern Harnish. And, and Vern lays it out really nicely in scaling up in terms of the constraints to scaling.

And he puts them in this order saying that you have to tackle these constraints in this order. Cause if you don't tackle them. In priority order, the ones that come afterwards just don't matter. And, and the constraints in order of priority are marketing because marketing is the engine that drives the plane.

And if, if you don't have solid marketing, you're not going to scale, but once marketing is working, you better have solid leadership because your organization is going to be growing and you need to, you need to build a machine that's led well to keep up with the marketing. And then third is cash and profitability.

And so you have a huge passion for sharing your leadership journey. I love following your content on LinkedIn. And so I thought who better to talk to about the leadership side of scaling constraint than, than you. So to get things kicked off so that the audience knows a little bit about you and, and why, in my opinion, you're, you're an authority.

On this subject. Tell me just a bit about your personal journey and how you ended up as the CEO at Heart and Soil. 

[00:02:43] Dean Brennan: Yeah. Happy to what's funny about the leadership constraint is I kind of realized throughout my journey that that's what was holding me back. And we can get into that more, but you know, I had a pretty normal childhood, grew up in Michigan, small town, lived outside of the city, which was kind of nice.

There were a number of, I think, formative Experiences and people in my life that helped me get to where I'm at today when I look back at it, and I didn't know it at the time, but had a really amazing grandfather for one who was very close with, you know, for example, playing sports growing up. I'd look into the stands every single game from being a child all the way through high school.

He was always there. And, and that when I look back at it now, is kind of centered in my why and, and why I do what I do at heart and Soil because I want, I want people to have healthy and happy grandparents. You know, you, you want people in your life to, to be that way because it, it only, it only helps.

One interesting thing I, I think growing up there is my father at a young age faced a pretty tough decision when I, when I was young. Mm-Hmm. . He was laid off from his job and he had another job offer in pocket that, you know, it was a better, a better offer than where he had, he had previously worked and like his dad did.

And like his brothers did, he decided, you know, I'm going to start my own business. So, you know, most of my childhood into. My teen years were kind of working alongside my my dad, you know, not every day, but he started out of our garage He had a trade. He was an appliance technician and he literally started from nothing from scratch and When I look back at that now, I'm like, okay I think I formed some kind of self identity around this because you know my dad was one of the heroes of my life and You know, I saw, I saw how he navigated the business.

I saw how he treated people. I went on service calls with him and I would learn the technical aspects of like how to fix things and, how to mark up products, essentially parts. I would look up parts, answer the phone call, phone calls from customers. So I was doing like sales, administrative work, all kinds of stuff growing up, even mowing the grass.

So, so I think that that, you know, it was really cool. opportunity growing up, like being surrounded by that. And it kind of instilled in me this desire to want to understand business and to want to do it and be like my dad. The other thing that I'll mention is that I was always an athlete and there's a lot I learned through through sports.

You kind of learn to be a teammate. You learn the importance of being a teammate. And, you know, not selfishly trying to get all the accolades yourself. There's one moment when I was young, I didn't understand why we kept having to do these drills. I was a running back and, and they're like, you know, here's a ball, run through this thing with all these little paddles that are gonna like try to knock the ball out of your hand.

And then we're gonna come over here and the coach is gonna try to punch it out of your hand. And I never understood. I always just wanted to play, like, just let me play. And sure enough. He was like, I don't know, our third or fourth game in the season. We're on the end zone or close to the end zone. Time's running out and I get, I get the call and I made it to the end zone.

However, I fumbled the ball before and I lost a game for the team. And that, that feeling of. Knowing that it was on you and that you let everybody down, that's kind of when it sunk in for me that, and this is at a pretty young age too, but I kind of realized, okay, I gotta, I have to practice these fundamentals and, and try to get better and better.

So one, so that doesn't happen again. That's not a good feeling when, when you let everyone down. But the other side of that is. There's always the next game. And so you, you can't let that get in your head for too long and you have to move on and you have to learn from it. So anyways, long story short, you know, those were some good moments in my life.

And then I think those kind of helped me out in my college career, my first job, which was up in Michigan. And I reached a point of being comfortable. And I kind of knew, you know, when I get comfortable, I don't like it. I'm like, that's usually when growth stalls and when it stops. So I moved across the country down to Austin, Texas for a job, didn't know anybody and just thought, Hey, I need this kind of pressure to help me grow and take it to the next step so we can get into my career now, but that's, that's kind of where I'm from and where some of my mindset was formed, I think from, from an early age.

[00:07:41] Jon Blair: Man, I love that. There's. So much that we could dive into there, but don't have all the time in the world to do so, but a couple of things that I hear just going on my own personal leadership journey for the last 15 years and kind of pulling out some things that are noticeable about your upbringing, like one, the focus on important people.

Right in your life and like the focus on people first from my perspective Is just it's it's non negotiable in being a leader like there's no such thing there is no such thing as being a selfish leader and there's no such thing as leading purely for your own benefit, it, it, that just doesn't exist that, that can, that can produce results for a certain season and a certain period of time.

But eventually all the, you know, no one's really going to be following you right at the end of the day. And and then the other thing is the entrepreneurial spirit in your family. And like, you know, funny enough, my, my dad is, he's a dentist, but owned his own business my whole life. Right. And, and my mom was the hygienist in the, And so like a small business is what is what our family lived off of my whole life.

And like, it's very formative watching your parents deal with the ups and the downs of running a small business and even more so a service business, right. Where like at the end of the day, you're not selling a widget. Or some product that some manufacturer makes for you and, and you're, you're just really good at the marketing and delivering it like your business is your service, right?

And so it's like very personal in terms of like taking care of your clients and then scaling a service business. I talk about leadership, leadership challenge. Like you have to scale on the back of people, right? And so you have to have people who are really willing to follow you and put their heart. And so into delivering the service as well as you, the founder have.

So like, I love all of that. What I want to talk about next, take this last question to kind of the, the, the next stage of your life, which is you have scaled or been a part of leading scaling heart and soil from zero to 50 million in three years. Walk me through that journey, some of the highlights and maybe even some of the low points in the learnings.

[00:10:06] Dean Brennan: Absolutely. Trying to figure out where to start on this one because a lot of like when the company started, I was kind of in a unique position to add some value in certain places. And that was from a couple stops before where, you know, I started my career in higher education and. I had a really great time, but it was also a very tough time in my career journey.

I heard I learned a lot of lessons the hard way and just the system of government. And bureaucracy, I was paying attention and I learned a lot of like what not to do. And my next stop after that was in a mission oriented FinTech company where it was like just complete opposite of the bureaucratic system.

So I got a pretty good education there. So what originally brought me to heart and soil, the other aspect here, that's very important when it comes down to. Our ethos as a company and our brand is that I in my twenties had ulcerative colitis, and I was able to essentially get off the medications that doctors told me I was going to be on for the rest of my life.

And I did that through eating essentially real food and cutting back almost completely on, on processed food. And when I went through that experience, I started thinking like, why, you know, why didn't my doctor ask me about my diet? Why, you know, we put so much into our bodies every single day, three times a day for a lot of people, six times a day.

Why wouldn't we consider that as maybe a first place to look when we're dealing with, with issues. So, you know, I wanted to scream this from the rooftops and. So I started a health coaching practice and started doing that. And then I eventually met Paul Saladino, our founder in Asana with two other guys, Dylan and Doug, our chief operating officer and Dylan, our chief research officer, and I could tell just pretty much from the first meeting that, they wanted to start a business, but it wasn't just the precipice for like why they wanted to start the business wasn't just to create a business. It was because they saw a problem in the world that they wanted to contribute to that they wanted to fix. And in my opinion, that's where some of the best.

Businesses come from. They come from solving an actual problem and not necessarily just wanting to make a business very important there. So when we started, you know, the passion was was high and that that's only going to get you so far, right? We had the opposite issue that some businesses have in that.

Well, I'm not even going to call it an issue. It was a challenge and I'm very fortunate for it. But our founder had. You know, very large audience with high trust before the business started. So, you know, when you open the doors, we've got, you know, hundreds, if not thousands of people emailing us about the product and.

There's three of us, well, there's more than three, but three of us kind of like working on, on the business with zero e commerce experience. So if you can imagine, not knowing what you're doing at all, thousands of messages coming in, supply chain issues. I mean, you name it issues with the platform, with the website, everything.

So we had to, we had to very quickly learn how to navigate that. And so we started. With a lot of those issues, a lot of process issues. So we started with customer experience, which is a little bit different, too, I think, than some businesses we because we had so many people emailing us. We're like, let's make sure we take care of these people that we answer their questions that we guide them in the right way.

So we came up with a framework for that and use some of our technology to to help us Recall information quickly, those types of things, SOPs, you name it. And we had a lot of issues on the supply chain to iron out. And that's where Doug comes into play. And Doug is a godsend. He was able to really take the chaos of chaos of our supply system.

And, You know, and again, it starts with people, you know, he spent a lot of time calling, talking with building relationships with folks, and kind of leading them towards a solution, you know, we sometimes I talked to people and they're having issues with vendors and they're like, Oh, you know, the first thing they say is like, I'm going to switch vendors.

And it's like, well, what are you doing? proactively to try to work on that relationship to try to proactively raise the issues and work together on a solution. I think some businesses move too quick to move on and the opportunity cost there is pretty great. So we had those issues at first, ironed them out for sure.

It doesn't help podcast, which also It was bad timing because we were out of stock of almost everything.

I mean, pretty much, I think the story of story for us in the beginning was we did, we tried to do everything and that, you know, isn't a good move. So you want to really scale back and figure out like, what is it first and foremost that we can do that's going to add the most value. And then let's build a great foundation of system process.

Marketing, understand your brand story, everything else. And then as time goes, you can build onto that. So we tried, we tried everything at first. I mean, we were shipping to every country. We were on Amazon. We were on Shopify. We were in a little bit over our heads. We had to tame all that chaos. 

[00:16:04] Jon Blair: So there's a, there's a few interesting notes that I took here that I think are, are interesting things to, to dive into a little bit further, at least call out one is going back to kind of my intro talking about how, you know, Vern Harnish scaling up.

He says, marketing is the first constraint then leadership, right? Marketing was working. Cause you're. you know, your founder, who's getting all of this huge exposure for the business that's driving demand that's working, but then there's things internally that are, you know, breaking or not, you know, fully polished.

But then you mentioned something, Doug, your COO, a godsend, right? So again, going back to this framework of scaling constraints. First, marketing as a constraint needs to be removed when that's opened up, then you need really solid leadership in the business, right? And you mentioned, not just you, but other functional leaders, and specifically you called out Doug, your COO, right?

That are able to really proactively get their mind wrapped around Challenges in the business and then themselves go execute or put together the plan to remove those constraints. So talk to me a little bit about like, when you, when we're talking about leadership as a constraint, as you guys were dealing with all this demand, what were some of the other key leaders?

that you had to get put in place other than just Doug, the COO? 

[00:17:33] Dean Brennan: Yeah, it's a good question. So it was really the three, it was myself Doug and, and Dylan who does all of our product development, he's our chief research officer. And our founder, Paul was in the same room with us at that time as well. I think what it really boils down to in those early days is.

And even important later as you get more, more, more people is that you have to, you have to show up and lead by example. So. We were proactively trying to support each other and the problems that each of us was trying to deal with. We also had to be very clear about whose responsibility was what, because, you know, you only have so many people and you have probably each person like 80 to 100 hours of work to do per week with, with more.

So prioritization is also key. So I think that was the biggest thing for us is that we all knew that each other. We're there to support each other and to make the business successful. And we were willing to do just about anything to make that happen. So at the end of the day, that's like the number one key there in the beginning when there's only a few of you is like, you can't be in a position where you're starting a business.

And, and you're just going to bark orders at people. So like you have to actively be involved, you have to be willing to admit when you don't know anything. And you have to be proactive and you have to move quickly. And sometimes you have to be okay with making the wrong decision, but being able to pivot from that fast.

So I'd say that there was a level of trust through. Going up for each other. And that really helped us in those very tiring and trying moments because they were, I mean, I think we worked like a year and a half, maybe two years without like a day off working weekends, working nights, working mornings, and, it was a grind.

It's a grind to start a business. And it's another reason why I think. For me anyway, my passion in health and wanting to spread this message. If it wasn't for that, I don't know if I could have put in those hours. I don't know if I could have done that work. And I know the same is true also for Dylan and Doug and the rest of the team that was there in the beginning.

[00:19:56] Jon Blair: I love that. So there's a couple other notes I took. Here you, you keep coming back to these, I, I would say very critical tenets of leadership, which like one purpose, purpose is fueling everything. Right. You, you, you mentioned this in a couple of different words, like one, why, what's your, why, right?

The other one, you know, when you and and Doug and Dylan were kind of like, talking about starting this business, that the passion that was behind it. So there's kind of passion and purpose. Then there's prioritization, another P word, right? Where first you guys are trying to do everything, but then you had to say.

It took the leaders to step in and say, what's the focus, right. Because, it, it, that has to start at the top, the focus and the prioritization of, of the, of the organization always has to start at the top and like the number of times that I've heard about a scaling business, whether it's a DTC brand or not, basically, you know, buckle under its own weight because they're trying to do everything right.

I mean, it's just, it's just so. Common. And so really quick on the purpose front, it's funny that you mentioned this. Cause like when we, when I started Free to Grow CFO, I, before I ever even, I didn't even know that this was going to be a fractional CFO business. I sat down, I'm an, I was an EOS coach. And so I'm, I'm a big fan of the EOS VTO, Vision Traction Organizer.

I printed one out and I sat down and I was like, what do I really care about solving? Right. And I wrote down DTC brand founders are so stressed out. It's overwhelming. They're overworked. Right. And, and everyone's always asking for a handout. No one's ever asking to help, right. Maybe being a little bit overly generalized, but that was my experience being on the brand side at guardian bikes.

So it was like, I want to help bring some more confidence and reduce some of the stress of being a brand founder. Cause I've been in their shoes and it, it's just this overwhelming feeling. And then what's our purpose. We're going to be a business that's profitable, but that exists to care for people.

Right. And the reason why I'm saying that is because. Growing Free to Grow CFO is like really hard. At times we're, we're still only two years into this. So we're still at that, like, we're, we're starting to, we're starting to scale beyond the founders, me and Jeff. Right. And those are like the hardest years in my opinion, because it's like, you used to do everything.

You can't keep doing everything at scale, but that, like the growing pain of like building a team and delegating and building the systems is really, really hard. And it's, it's almost like you have to have two jobs for a period of time, right? Before you can go to having the one job, which is the elevated executive of your company.

And, and what gets me through that every Monday, I read our businesses, VTO. It's where I read our core values, our reason for existing. And our mission and I'm like, okay, everything's going to be okay now because this is why I'm doing this. It's not because of all the emails that are in my inbox or all the slack messages I haven't gotten back to or all the things I need to get back to clients about.

It's about that we are here to fight back against the stress and overwhelm. Of scaling an econ brand and we exist to care for people. And so, how do you as the CEO of heart and soil champion to yourself and across the business, the purpose and the mission that you guys are on to keep everybody going through the hard times.

[00:23:35] Dean Brennan: Good question. And one working with you guys, I would, I wouldn't know that you're overwhelmed to have a lot of work as you guys show up all the time for us and shout out to Jeff because he's amazing. Amazing. So appreciate it guys. Yeah, you know, I started feeling that probably, you know, we've scaled to 50 million and it was probably around the 10.

10 to 25 million mark where so in the beginning, I was very in the weeds in on the marketing realm because my background is in storytelling and creative. So I naturally, you know, kind of fit in that realm. Anyways, when I started pulling out, you're right. I was doing like two, two jobs trying to facilitate that transition.

And working very closely with the folks on the team who are kind of taking over those responsibilities in certain areas of, of marketing. But to answer your question about keeping like the purpose front and center is. I think structurally in your business, you can, you can put some certain things in place and design it around it.

For example, the hiring process, the way we do it at heart and soil is that, I just, I will not hire someone. In a full time capacity that's coming into our HQ every single day, who is not intrinsically motivated to want to pour into this mission. And so what that means is I recruit from our community, I recruit from friends of friends of people that work here that live an animal based lifestyle that already take our products and, you know, there's challenges to that, on one side.

But. At the end of the day, what we're doing is like extremely important and I don't want to deal with the mess that will be if you bring in somebody who doesn't really fully, you know, believe in this and want to contribute to it. So we have a number of things that we do there on the hiring side from like the conversations that we have with candidates.

We have them out to HQ or we have even deeper conversations and experiences with them. And so. I really want to know that the people that we're hiring are very much into this and, and that there's no question there. So that, that is a, that's a non negotiable in our hiring process. And that is, you know, essentially lined up and guided towards our purpose and our mission.

So we did the traction thing too. And our purpose is to live the animal based lifestyle and spread it to others. So it's another important point in leadership when you, when you do have values. When you do have passions, if you say you are one thing, you better not do the other thing. You better do the thing that you're saying.

And this goes down to brand and storytelling, right? If you tell your customers, Hey, we're this, and then you're not that in their experience, whether it's through their email conversation with a support rep or whether it's through the product, then you have what's called a brand gap. And in a brand gap is where you diminish trust.

And the same thing goes for if you're a leader at a company, or if you're an employee at a company, right? If you say one thing and do the other, you're going to have problems. So, the key there, if you are a leader, is audit what you're saying, figure out what you want, figure out who you want to be, write it down, think on it, and do that.

And. And it sounds easy. It sounds easy, but it's, it's, it's very difficult to do, especially if you're, if you're in this environment, let's say you're working somewhere, you're leading a team and it feels kind of chaotic and you're not quite moving and flow. You'd be good not to point your finger at other people and to ask yourself, what can I do about that?

How did I contribute and figure out who you are, who you want to be, and then be non relenting in your decision making towards that. And don't feel bad for it. Don't right. Have a little courage, make the hard decisions and move towards that. Cause at the end of the day, if all that's in alignment and your team's working in flow, your bottom line is going to be affected in a very positive way.

[00:27:52] Jon Blair: I love all of that. I love all that. There's, there's so much there. I I'm, you know, it's funny. One of the questions that we talked about discussing, I'm not even going to ask, cause we've just. We've just kind of, we've, we've hit it multiple times, but you know, the core tenets of your philosophy on leadership, I'm pulling out trust and relationships, purpose fueled, being humble and consistent, being, you know, driving prioritization and, and high value activities within the business.

One thing that you mentioned. That really hits home with me on the consistency front. One of the reasons that I decided to start Free to Grow CFO besides like the purpose in the marketplace or like the problem we're trying to solve in the marketplace and the passion behind that is because I've worked at other places where leadership was inconsistent.

Say one thing, do another. And when you're an employee or even for me, even harder, like I was on a, on a founding, on the founding teams or on the executive team, right? And when you have the organization saying one thing and you're trying to adhere to that, but other people on the executive team are not.

It's really frustrating because you have your group of people who are loyal to you and you're trying to do right by the company's purpose, but then the rest of the org or maybe other functions are going in a different direction. And so one thing that I set out, I, I mapped out all of our guiding principles before the business started and wrote them down and read them once a week, sometimes more than once a week.

Because I don't want to be a hypocrite. Now, I, I've, I've, we screw up and when we, when I screw up, I know the best thing to do is just say, guys, I messed this up. I own this, you know, I'm one of the top leaders in the business. We made the wrong choice. I led us down the wrong path. We shouldn't have acted in this way.

Right. And so I, I always tell my team, like we're humans. And I always tell our, I always tell my clients too, like, Hey, we know what we're doing, we know what we're doing, but we're humans. And, and, and one other thing too, that I want to point out, and I think this is really awesome that you're doing this.

I first started posting on LinkedIn to just be helpful, right? My, my goal was to just be helpful, put out helpful tips cause I'm a huge content consumer and it's helped my leadership and my ability to scale a business. And I always want to try to give back what I've learned right in, in my content, but I've noticed a new thing that comes back to a very powerful.

Force of sharing your ideologies in social media and it's accountability to myself that I'm sharing with everyone on LinkedIn that this is what Free to Grow stands for. This is what Jon Blair stands for. And I actually will go post things sometimes. This might sound crazy. But I've been in this season recently like leaving and it's something that I want this company to adhere to but it's scary to say it and I'm gonna force myself to say it on LinkedIn because It's out in the open and, and, and if I don't adhere to it, everyone's going to call me out.

And so that might sound a little extreme, but that's something I've been doing recently because I feel like it's so necessary. And I, I think I even see, whether that's your heart behind it or not, I definitely see you out there sharing your philosophy. And I'm sure people on your team see some of your content.

And so it doesn't get more vulnerable than that. You know, 

[00:31:18] Dean Brennan: yeah, no, it's a really good accountability tool. I think the other thing that I think is really useful for is, you know, we just talked a little bit ago about why it's important to know who you are and what you stand for as a business. And as a leader, I realized at some point where, you know, we kind of have this, like this information problem.

You can read a million leadership books. They're all slightly the same. They all have like. Some different twists to them and everything. Well, in this journey of scale, I realized that I couldn't fully articulate my leadership philosophy and what I wanted for the company and figured that that was probably, it's a bit of a knowledge gap, right?

Cause there's like. When you are a master of your domain, you can easily articulate something. And so the LinkedIn content and the Twitter for me, partly, I hope it's useful for people, but it was me sitting down every morning for 30, 40 minutes and challenging my thoughts. And writing about it, putting it to paper, because when you write something, it, it makes different connections other than thinking about it.

And you see things that you don't see when you're talking about it. So, I'm still going through that exercise, still trying to figure all of that out. But I'd encourage anyone who's In a leadership position to do that, to sit down and write out what is your philosophy on leadership? Why do you think that?

Why could that be wrong? And and kind of go through those segments of thinking. And trust me, when you're when you're done with it, you're gonna have a much tighter grasp on what that actually means and how to apply it at your workplace. 

[00:33:04] Jon Blair: I love that. I love that. So what? You know, we've got we've got a few minutes left here, and I want to give you an opportunity.

Was there anything else That you want to make sure the audience hears in terms of like, we've talked about a lot of different core tenants of, of leadership. We've talked about how some of the ways that that helped you guys scale heart and soil, but is there anything that we haven't touched on that you're just like, this is a key part of my leadership philosophy and I want other DTC brand founders to hear this.

[00:33:33] Dean Brennan: That's a good question. I did think of one thing. Another application to keep the purpose and the why top of mind. Our company takes an hour out every single week on Wednesday and we have what's called a win meeting. And it's a very informal meeting where we all get together as a whole team. And there's like 30 of us now.

And. We share, we share our wins and every so often we'll, we'll talk about our whys and we like, that's an ongoing conversation. So it's not like you come on one day and you have your onboarding and you know, you talk about your why, well, it's revisited often and then we read customer stories and we share them and we, and we talk about them as a group.

So we keep. That connection to who we're serving and why we're doing it. It's been a really great thing because you'll hear conversations going on, like outside of that meeting about these things. And I just love seeing it. Have you ever come across a good definition of, of culture? I'm curious. 

[00:34:40] Jon Blair: So have you ever read the book culture code?

I believe his name is Daniel Coyle. 

[00:34:47] Dean Brennan: I've, I've heard of it, but no, I haven't read it. 

[00:34:49] Jon Blair: I can't remember the definition of, of culture that he used, but it's a, reading that book is very formative for me and for him. Culture was more about safety than anything else, meaning that like you as the leader build an environment of safety where no one feels like they have to hold anything back, right?

They can be their true self and that when you have this culture that feels safe, right? And then you layer on top of it, like whatever your mission and purposes, it's this incredibly powerful thing. 

[00:35:26] Dean Brennan: I like that. Yeah, I think that's important to like, allowing people to make mistakes and you know, you have to be very intentional to your reaction to just about anything.

If you're in a authority figure, you know, at a company like for us, I admittedly open my mistakes, you know, to the whole team often because I screw up. All the time. Sometimes it's a lack of preparation, which can cause so many issues down the road. So I always try to be prepared, but there's times in the phase of scale where sometimes things get really overwhelming and you're looking intended for different directions.

You need to take a step back and really, try to figure out what is it that you need to be prepared for. And sometimes you don't get it right. Yeah. So preparations. I think key, but admitting mistakes in front of your team and then not, you know, a lot of people I've been in environments where people get berated, you know, for a mistake and then nobody wants to.

Actually speak up when there's an actual issue and that's a problem because you miss things you miss opportunity That's never a good thing. 

[00:36:34] Jon Blair: So with our last little bit of time here I want to switch to just talking about your personal life because As you mentioned before and as I've seen in your content, it's incredibly Important to your overall holistic health and being just what is Dean Brennan's personal life look like these days?

[00:36:54] Dean Brennan: Yeah, good question. It's, it's changed a lot over the last couple of years. I just had my first child in April. So I'm still kind of getting used to that transition of, of being a father. It's the greatest, I think, life gift that I've ever been given. But from a scheduling standpoint, it's been tough to kind of figure out how to prioritize everything, you know, you go from, you know, we're like getting work done on the weekends to not doing that anymore to working into the evening to not doing that anymore.

And I don't want to sound like a workaholic. It's just like, I love, I love my job. And I think that's important is finding like a work life. Integration rather than balance. So finding something that you are so motivated about intrinsically that it doesn't feel like work to you. And that's how, that's how hard soil feels to me.

So I get excited. You know, in the morning when I get to go to work and solve problems and, be with my team and yeah, with the child, it's like, okay, the clock stops at five now. Cause I, you know, I try to schedule my family priorities first on my calendar and then. My, my work obligations. And then if I have any time after that, it's like, okay, I might play basketball.

I might play guitar. You know, I try to find little spots, you know, for hobbies, but yeah, adjusting, adjusting to the, to the schedule. That's been, that's been a big, big, tough one for me. 

[00:38:28] Jon Blair: Good for you for prioritizing your family, man. As you know, I have three little kids we were talking about before we hit record hardest thing I've ever done in my life is.

Be a CEO of a family and the CEO leader and founder of a business at the same time. And it's a, whew, it's, it's a great joy, but it is, it is hard. Last thing before we, before we run here, what's something you're reading or listening to that you recommend to the audience? 

[00:38:53] Dean Brennan: I love this question. You'll always find me reading or listening to something.

But I do have a New Year's resolution to create more than I consume because again, it's that problem of information. If you're not creating, then you get too distracted with everything that you're learning. But I'm taking a decision course right now by Shane Paris. Parish. It's the Fs blog. I don't know if you've heard of it.

He does an excellent job. He talks about thinking and mental models, and he has a really great course on decision making. So I'm going through that right now with our COO. One key takeaway there, I think for the audiences. Separate your problems from your solutions and define your problem first. So don't have a meeting where you're doing both have a meeting and get on the same page with your team about what the root problem is and then work on the solutions.

That that's one good takeaway from the first couple chapters of that. And then a book wise, I'm revisiting John Wooden's pyramid of success. I don't know if you've read it. But, yeah, all time. Great leader. What I, what I like about his philosophy is that he wouldn't even call himself a basketball coach.

You know, he was a teacher. And I think that is a lot of what leadership is. It's, it's guiding and teaching. And he focused on the, on, on the fundamentals, similar to my football story about, learning how to hang onto the ball and doing that over and over again. I think greatness comes through sometimes boring repetition.

So yeah, I'm revisiting John Wooden's pyramid of success and loving every bit of it. 

[00:40:33] Jon Blair: Awesome. Awesome. Well, thanks for sharing that with us, Dean. Thanks for chatting. You know, DTC brand founders out there. Dean just gave us a laundry list of really solid leadership philosophies to consider as you're scaling your brand.

Don't forget once you get marketing figured out, leadership will become a constraint. So you need to be proactive on thinking through what leadership your brand needs as you start to scale. And you know, until next time thank you all for joining. Again, Free to Grow CFO podcast, talking all things growing and scaling a DTC brand.

We'll see you next week. Thanks,Jon