Episode Transcript
[00:00:01] This is the Truly Scalable podcast, the inner mind of a paid media executive empowering ecommerce brands to optimize and strengthen the backbones of their brands, companies, teams and themselves to ensure a fast, highly profitable scaling, growth and success. However you define it, victories, failures, scandals, cautionary tales lessons on growth scaling frameworks revelations in marketing and advertising... join me as I break down frameworks, dispel myths and shift paradigms for e commerce brand founders and CMOs to strengthen the makeup of their businesses and layer smart strategies for maximum profitability at scale. I'm Kai Ravariere and I'm here to help you become Truly Scalable.
[00:00:53] You know… they really weren’t kidding when they said the most powerful connections you make are the ones under which there’s no agenda.
Who’s they? Don’t ask me. Them. The people. Folks. You know. The proverbial they.
As I get older I’m finding marketing conferences increasingly tedious.
[00:01:15] Some conferences are a great place to make powerful connections to a degree, but if I’m honest…
Conferences are a great place to meet people, but they aren’t great places to meet people as their full selves, as your full self. I see so many people faking connection at conferences, and it’s not wrong, it’s just the nature of the space and the energy there. This seems to be a universal truth, at least in the realm of business and eCommerce. Everyone’s trying to get something from someone else without it looking like they’re trying to get something from someone else.
So many people spend their time posturing, positioning, and preening, egos inflated, standing at the ready to connect with you by doling out “value” that is rarely genuine, useful, or accurate.
[00:02:04] Now, it’s not to say real, genuine connections can’t be made. That happens all the time, too, usually at the bar.
There is absolutely nothing wrong with mutually beneficial connections; that’s actually really critical to the success of any businessperson. But the way some of these cats do it is just so…draining to me. It’s giving walking infomercials, it’s giving scripted salesman, it’s giving overt manipulation.
…and I’ll keep it a buck, after attending conferences in marketing, advertising, high finance, for small business and corporations alike, for coming up on 15 years now, at this point I really struggle with playing along. As I get older and more seasoned,it’s become harder and harder for me to paste on the smile, wind up the battery, and enter stage right, you know?
And the one thing that conferences don’t seem to churn out successfully for entrepreneurs? Lasting, real relationships. And those, my dear founders, are my jam. Maybe it’s my INTJ nature, maybe it’s my introversion, but vapidity and surface-level relationships are my Achilles Heel.
[00:03:11] And conferences are unfortunately rife with surface-level conversations that rarely peak my interest. I’m always looking for deeper, long-lasting ones that build momentum and that allows us to go into places previously uncharted together. You know, the real stuff. Which I DO find in lobbies or breakout events after hours at conferences, so it’s not to say that attending them is a complete waste of time for those looking to establish more meaningful connections.
But it does take so much longer to build real partnerships and relationships off of conversations you had at a conference. My hypothesis is that it’s the framing that took place in the physical and mental space you were both in. You don’t get to know the person, you only get to know the brand. And it makes it hard to be anything but transactional, and I’ve come to find that those don’t often make for the most fruitful relationships in the long-term.
Yet I see entrepreneurs of all kinds try this, and crash and burn from the fallout, time and time again.
[00:04:10] The number of joint venture partnerships, transactions, and deals that have burst into flames between two people who’d only spoken to each other at length for the first time just a few weeks ago at a conference is insane.
[00:04:24] Now, I’m not saying don’t try to build with people you’ve met at a conference. I am saying, though, that you’ll need to take your time in getting to know the person behind the brand, first. There’s really no rush. You’ll learn a lot about a person, what they really bring to the table, how they move, and whether you two will sincerely be great to work together, just by slowing down and getting to know one another as people.
And some of the worst ones I’ve experienced or witnessed have been born out of conversations that went straight to “here’s how cool I am, lemme hear how cool you are, here’s what I can do for you, what can you do for me?” There’s something about that quid pro quo exchange that tends to leave so many disappointed and underwhelmed.
And if your first conversation is a nose-dive into business, you’ve set the tone for the rest of the relationship, where nearly every interaction thereafter will be tinged with all the sales and persuasion tactics that people don’t think others can spot a mile away but totally can. For most successful people, especially those working for themselves? The persona, the brand, isn’t something that they can easily take off like a hat, or flick off like a light switch. And your relationship will be trapped inside a bubble that, unless you’re both very savvy at nurturing relationships, will end up being wholly contingent on what you can do for them and what they can do for you. That may be totally okay for some, but personally, that’s not my jam.
[00:05:46] And spoiler alert, they rarely ever are that savvy at nurturing relationships. Not at the six figure level, not at the seven figure level, and often not even at eight. It's a skill that is truly rarely mastered, and I don't consider myself a master at that either. Don't get it twisted. So here's what I found instead that really works for me now. I was recently inspired to get into this on this podcast by a very successful acquaintance of mine who recently sold his company, and this is pretty sound. And I've realized that across most of my adult life, this has been my golden ticket when it comes to networking.
[00:06:27] Rather than doing all your strategic networking at conferences, get strategic about entering non-business spaces where your kind of people are, completely outside of work, spaces where they’ve let their hair down and are mentally wired to just have a great time. Spaces where they’re enjoying themselves.
[00:06:45] The energy? You’ll find it’s night and day. And your energy will be different, as well. The energy exchange, and therefore the dynamic that your connections will spring out of, will be so much more pure. And that makes all the difference.
[00:07:01] The strongest partnerships and opportunities I’ve gathered, both for my agency and on behalf of our eCommerce clients, have been on the golf course. At the gala. On a night out, at the cocktail party, art gallery, museum exhibit. At a luau on the beach of a hotel. At the Kentucky Derby, the polo event, an afterparty at EssenceFest, a crab bake while on vacation. A brand activation during the Grammys. Wherever people are laughing, having a good time, and enjoying themselves.
You just meet a different version of a person that way. And you present a different version of yourself that way, too.
The discussions you hold have more meaning, they feel less like posturing and positioning and more like connecting and memory-building, the egos fade away, the quiet cynicism dissipates, the trappings become moot, and the walls come down faster on both sides.
Some of the strongest business partnerships and relationships I’ve built that have yielded multiple six and seven-figure contracts were born out of conversations and interactions that had nothing to do with business, in places that had nothing to do with business. The favors I’ve been granted by people in high places would have never and could have never come out of a quick meet-and-greet in the green room behind a stage
Some would argue that isn’t moving with intention, but they’re wrong. You’re still moving with intention, but your intention shifts - from “how can I get contact info or leads from as many people as possible” to “who am I going to subconsciously connect with on a deeper level today? Whose company will I enjoy today, who will I help have fun today?”
And when your intentions are pure, your energy is right, and then you get subconsciously placed in a rarified room. A room where lasting impressions are made. A room where few people get access to.
That’s the room where the magic happens.
[00:09:08] Speaking of magic, Let's dive into media buying for a minute. Let's get into what's consistently been crushing and more importantly, the mechanisms and logic behind why it works.
[00:09:17] Now, in my 8 years in this work, I’ve come to find that out of the hundreds of problems that eCommerce brands face in the lifetime of the bran, there is no problem more commonly occurring or pervasive than the struggle with first order profitability.
[00:09:32] It’s the thing that keeps folks up at night, the thing that they remain in constant pursuit for, the thing that they hire and fire off of…
…and the thing that most brands seem to truly understand the least. In terms of how to unlock it and how to maintain it, anyway.
[00:09:50] What I and my media planning and buying teams come to find, however, is that what’s often happening is the profitability and health of the business is sacrificed In pursuit of propping up a top line revenue expectation which is too often born out of a lack of clarity on what’s really going on in your first-order data.
In blind pursuit of that top-line revenue goal, most brands are actually spending too much in ad spend, to a point where they’re seriously lacking efficiency. There’s a massive amount of inefficiency taking place, often as a result of an agency, a marketer, or a media buyer trying to do two things: 1) taking what they consider to be the path of least resistance in hitting the brand’s revenue targets by simply bumping up spend and scaling vertically or horizontally in the accounts, and 2) trying to monetize off of their performance-based fee structure, which often based on a percentage of ad spend or a percentage of revenue, to eke out as much agency revenue as possible with little to no consideration for actual profitability.
Often this extra spend is happening on inefficient channels, excessive channels, or more commonly, using an inefficient campaign structure when running traffic on these platforms.
Lower spends inherently force an obligation to efficiency. In other words, you’ve got to eke out as much bang for your buck as possible with tighter budgets. But contrary to popular belief, doing that properly isn’t as straightforward as simply pulling back on spend. Instead, you’ve got to know how to best structure your campaigns. When you nail this, you not only find your margins reaching profitability most of the time, but the overall margin of the business improves, as well, because new customer contribution is no longer cannibalizing the margins of the business.
In other words: you have to find an appropriate balance between your customer acquisition efforts and your retention efforts in order to achieve optimal margin in eCommerce. And while there are many, many steps to this that we’ll get to in future episodes, the first focal point has to be a laser-like focus on first-order profitability in terms of how to measure, how to track, and how to maintain.
And for those who aren’t aware: first order profitability generally refers to: after COGS, shipping, taxes, merchant payment processing fees, fulfillment costs, returns, and any other variable expenses, and after all the dollars on a per order basis that go into acquiring new customers, which is considered your blended CAC… after all that, what are you actually making on that first order, on average? That’s your first order profit, or first order contribution, on average. We’re not including fixed expenses in first order profitability, here, because as you generate more revenue you spend away from fixed expenses.
[00:12:39] In any case, about a month and a half ago we were approached by an eCommerce company in the home decor space who, unsurprisingly, had concerns about the profitability of their advertising. While we are scaling architects, specialists in growing brands holistically across a myriad of different distribution channels, struggles with paid traffic tends to be one of the most common reasons brands come to us.
The founder was weary of receiving the same abysmal reports from his marketing manager and felt it was time to get a second and third set of eyes. We were, of course, happy to oblige.
We first started with inquiring how they reached their CAC targets and arrived at the campaign structure they’d been using in the Meta ad account for Facebook and Instagram paid traffic.
Aaaaand after a series of stutters, hmms, backpedaling, and obfuscating, it became clear they didn’t actually have much of a process at all, outside of what a popular paid traffic guru told them to do.
The problem was they didn’t understand why they were being told to set these specific targets or set up their campaigns in this specific way. And because they didn’t know why they should set it up that way, they didn’t know why this was a terrible way for them to approach media planning and media buying.
You’re going to hear variations on this theme on this podcast, where brands make grave errors because they didn’t know enough to know the whys and wherefores of a strategy and so they didn’t realize this strategy wouldn’t work for them out of the box, or they didn’t realize they’d need to tweak it to make sense for their own business. It’s truly one of the biggest reasons brands fail. But I digress.
We got them from net negative profitability to a 2.75x largely in part due to our ability to do basic math.
[00:14:26] To uproot the problem for this brand, we had to first take a look at the target aMER, or the marketing efficiency ratio on acquisition.
[00:14:37] Now, if you don’t already know - to find out how what your aMER needs to be in order to become first-order profitable, just take your average first order revenue and divide it by the sum of your blended CAC and your margin. So if your average first order revenue is $83, your blended CAC is $18 and your target margin is $25, then your 83 divided by 43, which was the sum of 18 and 25, gets you a 1.93 aMER.
[00:15:06] aMER becomes your guiding light. That floor of 1.93x is what you need to begin media planning against that you can then start breaking down into channel-specific targets for your acquisition efforts.
[00:15:21] Keep this in mind because it's going to become important in a minute.
[00:15:25] Second, we glanced at the brand’s AOV, which was $89. Notice I said glanced, not poured over, studied, scrutinized, or made critical decisions off of. That’s because over the years we’ve also learned that it granularity is critical to achieving consistent success with paid traffic, and it becomes dangerous to merely focus on averages, like AOV for instance, when running marketing and advertising to solve for waning or stagnant first order profitability because AOV considers all the values across the entire distribution curve, not just the ones for new customers. And what you’ll come to find in analysis is that the AOV for new customers is more often higher than the overall average of new and existing customers combined.
The real danger of averages is that the data is often skewed by revenue peaks and high-volume days triggered by certain marketing events, like major influencer campaigns, brand activations, or viral moments on social that encourage higher levels of trust and therefore illicit higher than normal order values. They are even more commonly skewed by heavily weighted higher value orders that arise due to promotions on bundles or tapping into audiences with higher propensities to spend more on the first order than the average customer.
[00:16:41] This is why we like to focus on modal order value, rather than the average order value. That is, what is the most common order value or that customers generally make? Before your eyes glaze over and you start to tune out, just know that when you hear mode, or modal, think “most.” Modal order value can be a magnitude lower than the average order value and gives a more realistic indication of the revenue level that MOST customers are spending with you.
Brands who then use new customer AOV to set a bid cap or a cost control inside Ads Manager, for example, find themselves in dangerous territory because as it turns out, and as was true for this brand as well, for a brand with an $89 AOV most orders that come in aren’t ACTUALLY at $89, for example - you may have 10% of orders coming in at $20 and $30, 45% of orders coming in between $35 and $55 dollars, 20% of orders coming in at $56 to $75, and 15% coming in between $110 and $135, etc etc.
This brand in question actually had a modal order value of $62, even though their AOV was $89. If we’d set up our cost controls and bid caps with that 1.93 aMER in mind, we would have then aimed for a $43 customer acquisition target to achieve a breakeven. And we would have been screwed, because most orders would actually be occurring at $62.
[00:18:06] The danger here is that there often isn’t an actual path in media buying to attaining a $89 order when the only offers are, in this case $55 for a vase or $110 for a vase and a paperweight. So aiming for a $43 target CAC and building campaign structures around cost control and bid cap with that figure in mind will make a brand lose out on a ton of orders.
The culprit behind why most brands who have a hard time with paid traffic tend to struggle so hard with attaining first order profitability lies in the math. And because of bad math, or no math at all, they’re focused on the wrong targets, trying to solve for the wrong variables. And in kind they’re using the right approaches, like bid cap for instance, but applying them in the wrong way.
There are hundreds of opportunities for this sort of misfiring to happen in an ad account because optimizations, calibrations, and calculations are being based on or applied to the wrong datasets aaaandnd the math’s not mathing.
This is also why I’m constantly saying that the quality of execution matters. Any ol’ guru can tell you that you should be leveraging bid cap, but if they’re telling you to do it off of the wrong figures or using the wrong math, you’re not going to get where you want to go. The nuances when it comes to the technicals of media buying almost exclusively lie in the mathematics and logic that stands the test of time. And math in particular seems to be the place so few founders, marketing officers, and teams are willing or able to go.
[00:19:35] In order to get this brand, and every other brand we’ve ever worked with, to first-order profitability, we had to dive deep in order to pull out the authentic reality of what’s going on inside the brand’s funnel that we’re running traffic to, so that we could recalibrate their targets based on what most of their customers were actually doing, rather than running traffic off of what a theoretical average is theoretically doing.
[00:19:57] When it comes to actually rolling up your sleeves and getting into the weeds of running traffic… Practical analysis will trump theoretical analysis. Every. Damn. Time.
This is an exercise that ideally must be done by distribution channel, by platform, based on the funnel or funnels that were being run on each platform, if you’re going to get the level of granularity in the data required to make the smartest decisions on a by-platform basis.
Here’s another place we discovered brands go wrong: and this is where shit really goes left and gets real…they place multiple products with dramatically different margins in the same campaign. I know this sounds finicky on its face, but I swear it comes right back down to granularity and the dangers of theory. I’m going to walk you through you exactly why this does not and cannot achieve peak profitability on advertising.
This same brand has a pillow set that they sell at $92. Their COD, or cost of delivery is $21 and if we’re aiming for a target aMER of 1.93, we can assume our target CAC will need to be $47.60, leaving us with $92 minus minus $21 minus $47.60, which is $23.40 in margin.
They also have a sheet set that they sell at $265, over 2.5 times more than their pillow set. Their COD, or cost of delivery is $27 though, just 6 bucks more than the pillow set, and again if we’re aiming for an aMER of 1.93, their target CAC would be calc’d at $137.30, leaving us with $265 minus $27 minus $137.31, which comes out to $100.69 in margin.
So in short, you have a pillow set that yields $23.40 in margin and a sheet set that yields $100.69 in margin, about 4.3 times more money in your pocket than the sheet set.
But then you or your team or your agency effs around, places both of these products in a campaign, and then tells Facebook to run for lowest cost, which is the default optimization setting. Not highest margin, not highest order value, merely lowest cost.
[00:22:11] Which product do you think Facebook is going to end up getting you more sales for? That’s right - the one that’s the least profitable of the two. Because the target CAC on that one is lower, at $47.60. Based on the optimization setting Facebook has received from your media buyer, you are telling the platform you want more sales resulting in $23.40 in margin and less sales resulting in $100.69 in margin.
[00:22:38] Damn. And more often than not, what’s actually happening for most brands is not that one product is generating less margin than the other, like in the case with this brand - it’s more often that one product is generating negative margin and putting them at a loss, where another product in the same that requires a higher target CAC is generating positive margin but getting bypassed by Facebook various algorithms because of the optimization settings placed in the campaign structure during the launch process are seeking a lower cost per acquisition than that product requires.
[00:23:11] In a nutshell, building out campaign structures by specific target CACs, specific offers, defined order values, and specific margins is one method that will allow you to move WITH the current of the algorithms rather than constantly fighting against them. This is the way first-order profitability begins to materialize.
[00:23:30] As you’re probably guessing by now, granularity is key, and the painful reality is that most eCommerce brands just don’t have access to that level of granularity of data nor expertise of analysis. The landscape of MarTech is changing, but this stuff isn’t often readily available to challenger brands with tech budgets less than $10K a month. And the knowledge isn’t often readily accessible to or implemented by brands doing less than $60K or $70K a month.
[00:23:57] Reason #2,917 why it’s so much harder to win as a small brand than it is as a large one. Someday I really hope I can play a real role in reducing or eliminating these incredibly stark technology and access disparities across the industry. But my little podcast will have to do... for now.
[00:24:19] This has been the truly scalable podcast, the inner mind of a paid media executive empowering ecommerce brands to optimize and strengthen the backbones of their brands, companies and teams to ensure fast, highly profitable scaling and growth in any climate.
[00:24:33] Thanks for listening today. If this has been insightful, entertaining or interesting, subscribe and leave a review. They really do help. Drop some insight into topics you'd like to hear me get into too. I read all suggestions and we'll incorporate them into future episodes. Are you yearning to find better, smarter ways to scale and grow? Does the growing competition in this industry and the ever changing facets of digital advertising have you experiencing stagnant growth, declining revenue, or lack of profitability? Do you feel like you must be missing key pieces to the puzzle that would help you get to where you know your brand could and should be? Has your growth journey felt stressful, tedious, or underwhelming lately?
[00:25:10] Sounds like you could use a GrowthGeek, our free weekly email newsletter that's packed with lessons, insights, perspectives on entrepreneurship, scaling, leadership and all things marketing and advertising for ecommerce. Sign up for free at www.trulyscalable.com/subscribe. Thanks again for joining me on this episode of Truly Scalable.
