Why Paid Ads Can Destroy Your Margins — Transcript

Full transcript

1. 0:00We sell direct response e-commerce
2. 0:02products. We're all paid media.
3. 0:04>> Uh we do about $3 million a year in
4. 0:06revenue.
5. 0:07>> Direct response
6. 0:08>> e-commerce products.
7. 0:09>> Okay. Like drop shipping stuff
8. 0:12>> pretty much. Yeah. It's it's more
9. 0:13branded than that, but essentially is.
10. 0:15>> Yeah. So you have customers for doing
11. 0:16that or you're doing that?
12. 0:17>> We're doing that.
13. 0:18>> Okay. Got it. And so you have a handful.
14. 0:20How many SKs do you have?
15. 0:21>> Uh like four.
16. 0:23>> Okay. Is it all the same brand?
17. 0:25>> No.
18. 0:26>> Okay.
19. 0:27>> Yep. So we have uh we're doing it's like
20. 0:30four months old. So we're doing a run
21. 0:31rate of like uh three million a year. Um
22. 0:34we have you know background in like paid
23. 0:36traffic affiliate. Um so it's not the
24. 0:38first rodeo with that. We're trying to
25. 0:39get to like 15 million a year run rate.
26. 0:42>> Okay.
27. 0:42>> Um what's stopping us right now you know
28. 0:45not entirely sure but um basically like
29. 0:48we have each step for everything that
30. 0:50has to be done. We [snorts] built out
31. 0:51teams and systems for the main
32. 0:54priorities and those things are working
33. 0:56pretty well. I'm happy with uh our
34. 0:58talent and what they're producing. Uh
35. 1:00but so far what I'm experiencing is that
36. 1:02you know I'm left with this you know
37. 1:04list of like random chores that somehow
38. 1:06only I can do.
39. 1:07>> A junk drawer. Yeah.
40. 1:08>> But I'm not sure how to approach hiring
41. 1:11for this because it ends up being like a
42. 1:13very niche specific task. But I may I
43. 1:16might only need them for like you know
44. 1:1820 minutes a week or something. So it
45. 1:19ends up being me but with a million
46. 1:21things you know.
47. 1:23>> And your founder? Uh yeah, co-founder.
48. 1:26>> Okay. Um
49. 1:29so let's start here. You want to get to
50. 1:3215 million. What stops you from spending
51. 1:34more money?
52. 1:38>> Uh nothing right now. I mean, so we just
53. 1:40hired a pretty robust funnel team and an
54. 1:43operations guy, like a strategist. So
55. 1:45kind of just waiting on those things to
56. 1:47kick in really. Okay.
57. 1:48>> Um but I'm I'm fairly confident that we
58. 1:50we should be able to at least do another
59. 1:522x from here.
60. 1:54>> Okay.
61. 1:55So
62. 1:58this is more a complaint
63. 2:01>> than a constraint, right?
64. 2:03>> No, I'm just No, I'm This is me asking
65. 2:05for clarity. So we think we can double
66. 2:08if we just spend more money. I'm not
67. 2:10spending more money because I'm waiting
68. 2:11for this thing to happen. Once this
69. 2:13thing happens, then I'm going to spend
70. 2:15as much money as I can.
71. 2:16>> Sure.
72. 2:17>> Right. Um and in the meantime, I have
73. 2:21stuff I don't feel like doing.
74. 2:23>> Okay. No, I'm I'm like this is me trying
75. 2:25to translate back. Is that true? Is that
76. 2:26like accurate?
77. 2:27>> Yeah, but eventually there's going to be
78. 2:28enough of that stuff that like I will
79. 2:30have to find some way to hire out for
80. 2:31these things.
81. 2:32>> Yeah. And then there'll be more stuff
82. 2:33that you'll still do.
83. 2:35>> You'll just do the more important
84. 2:37valuable stuff and give the other stuff
85. 2:39to somebody else.
86. 2:40>> Yeah. But a lot of it ends up being
87. 2:41fairly tedious. Like it's it doesn't
88. 2:44feel like high leverage or high value at
89. 2:45all.
90. 2:46>> I mean, this is where like VAS and
91. 2:47product project work can come really in
92. 2:49handy.
93. 2:50>> Like I'll give you an example. So, when
94. 2:52we made all the ads for the launch,
95. 2:54right, I don't I didn't need the amount
96. 2:57of editors that I had to spin up in
97. 2:59order to because I'm not going to be
98. 3:01making 300 ads a week, you know,
99. 3:04ongoing. I don't need to. But for the
100. 3:06launch, I did. And I wasn't going to
101. 3:07hire an extra 15 editors full-time
102. 3:10because it's just like I don't need
103. 3:11that. And so we spun up 15 editors that
104. 3:15were contractors who would then just
105. 3:16clip and we had one person just did QA
106. 3:18on it to make sure that it was good and
107. 3:20then we'd ship them. Right. And so if we
108. 3:22have something that's like one timeish
109. 3:24work where it's sporadic then I'm fine
110. 3:27just having a suite or a bench of
111. 3:28contractors that I can turn on and off.
112. 3:30>> Sure.
113. 3:31>> As long as they do decent work.
114. 3:32>> We do similar things like with our with
115. 3:35our video editors as well, but you know
116. 3:37some of the tasks are fairly specialized
117. 3:39like
118. 3:39>> I understand. I was just using as an
119. 3:41example for editors, but I'm saying like
120. 3:42if you have tedious work, like
121. 3:44>> this is where the Fiverrs of the world
122. 3:46like can come in handy
123. 3:47>> and worst case you train a contractor or
124. 3:50a VA on how to do it and then they do
125. 3:51it.
126. 3:52>> Yeah. Just like someone that's high
127. 3:54level enough in like Shopify work, but
128. 3:56we only use them for a few hours.
129. 3:57>> There's tons of Shopify contractors,
130. 3:58like a boatload of them, and they're not
131. 4:01that expensive, and some of them are
132. 4:02really good.
133. 4:03>> Yeah. I like I would just look at my
134. 4:04list. What are the things I'm doing on a
135. 4:06regular basis? Can I ship out most of
136. 4:08these to a contractor who does a peace
137. 4:09meal? Probably. And now you're trading
138. 4:1220 hours for two. And that's just you
139. 4:13just keep making that trade until
140. 4:14eventually you've managing a ton of
141. 4:16people and then it's like great, one
142. 4:17person is managing all of these and you
143. 4:18just trade all that time for you getting
144. 4:20more because hopefully if you're doing
145. 4:21that much work then you should have the
146. 4:22revenue to support um that role.
147. 4:26Have you have you scaled
148. 4:29e-commerce like this before?
149. 4:31>> Yeah.
150. 4:32>> Okay. Are you
151. 4:35are you just running paid ads?
152. 4:38>> Uh yes.
153. 4:40>> Okay. Do you have influencers who are
154. 4:42doing stuff?
155. 4:42>> No influencers who are looking to hire
156. 4:44for that, but we we have three or four
157. 4:47channels for paid at least.
158. 4:48>> Yeah.
159. 4:53I'll say this. How big do you want this
160. 4:56to be?
161. 4:57Uh, I mean ultimately like the goal is
162. 4:59we'd like to have a portfolio of call it
163. 5:02four or five brands that we can then
164. 5:03exit in a couple years.
165. 5:05>> So I have this conversation every week
166. 5:08um with somebody who's doing e-commerce
167. 5:11and it's almost always the same like I
168. 5:13would like to have a portfolio of a
169. 5:14handful of products that I could
170. 5:16eventually sell someday.
171. 5:18I have really yet to see anyone do that.
172. 5:21Um, and it's I think for two reasons.
173. 5:24One is that as you continue to scale,
174. 5:27your CAC will continue to go up and your
175. 5:29gross margins will shrink and that will
176. 5:32get frustrating. You will then also have
177. 5:34supply chain issues which would become a
178. 5:36burden. You also have dupes if you start
179. 5:38becoming really good that will undercut
180. 5:40you in price and list on Amazon and all
181. 5:42that stuff. Um, do you have patent
182. 5:44protection and like for any of these
183. 5:45products and so like you right now run a
184. 5:48media arbitrage business and it works
185. 5:51really well up to about 10 million.
186. 5:52>> Okay. and then it will quickly stop
187. 5:55working very well. Um, and so I think to
188. 5:57your point of like you can see a double,
189. 5:59that's probably true. You might even
190. 6:00have a triple that's sitting there with
191. 6:01a little bit optimization, more email
192. 6:03follow-up, blah blah blah blah blah. Um,
193. 6:06but you'll you'll probably get close to
194. 6:07capping in that neighborhood, 10, maybe
195. 6:0912. Um, and then you're going to be
196. 6:11like, well, we're doing a million a
197. 6:12month, but we have like almost no margin
198. 6:14and our cash flow is Um, and so
199. 6:18the what I think you want is that you
200. 6:21want to build a brand that has a product
201. 6:23that you really believe in that will
202. 6:26allow you to recruit affiliates to your
203. 6:29cause. When I say affiliates, I mean
204. 6:30influencers, not traditional direct
205. 6:32response uh affiliates that are just
206. 6:34mercenaries, but like people who
207. 6:35actually believe in it. Um, and when you
208. 6:38do that, you will actually be able to
209. 6:40build a brand because fundamentally like
210. 6:42any one of the products can be big
211. 6:43enough on their own to sell. And so
212. 6:46rather than saying like why don't we try
213. 6:48and build four totally different
214. 6:50products and totally different brands at
215. 6:52the same time, it's like why don't we
216. 6:53just try to build one that we really
217. 6:55like that we think has a chance at
218. 6:57actually like really helping people for
219. 6:59whatever the problem that the the
220. 7:00product solves. Um,
221. 7:03that's what will build what I think you
222. 7:05want. It's just that most people who
223. 7:06come from the direct response world just
224. 7:09are pure performance marketers. And I
225. 7:10say this being someone who comes from
226. 7:12that world. [snorts] And I had to learn
227. 7:14the hard way that you will run into the
228. 7:17wall that there's a there's a great
229. 7:19article you can read called the direct
230. 7:20response doom loop which you might have
231. 7:21read.
232. 7:22>> But basically you just do this revenue
233. 7:24goes up, margins compressed, margins
234. 7:26compressed until you're eventually here
235. 7:27and then you have to keep selling in
236. 7:28order to maintain your team. And then
237. 7:29you just run a very large very high high
238. 7:30liability nonprofit and it sucks. and
239. 7:34cash flow is a huge constraint and
240. 7:35you've got all the supply chain
241. 7:36and then you're like this sucks and then
242. 7:39you'd have another conversation come
243. 7:40back here and be like hey we're doing 12
244. 7:41million with 7% margins and I would say
245. 7:44okay of the four products you have which
246. 7:45one is the the one that's the the clear
247. 7:47winner that's the one that's carrying
248. 7:48all the other losers and you'd be like
249. 7:49well it's this one and then I'd say okay
250. 7:50cool why don't we just get rid of these
251. 7:52three and then put all of your effort on
252. 7:53this do you think you'd be able to win
253. 7:54that way be like oh my god for sure and
254. 7:56be like great so like why don't we do
255. 7:57that and then actually invest in
256. 7:58building the brand yeah
257. 8:00>> around it
258. 8:00>> we we definitely have uh you
259. 8:03We're we're paid traffic affiliates, so
260. 8:05like we're data people. Like uh but so
261. 8:08one of the things that I've thought
262. 8:09about is like you know our our biggest
263. 8:11skew it's good but it's not like it's
264. 8:13not that good. Like I know a good
265. 8:14campaign when I see it. So like part of
266. 8:16the purpose of building out like uh you
267. 8:18know our research and funnel teams is
268. 8:20like
269. 8:20>> well eventually we're going to find
270. 8:21something where the market is just like
271. 8:2310 times better you know. So it's like
272. 8:25do we keep chugging along with like the
273. 8:27one that's like a six out of 10 or do we
274. 8:29find go find the nine and then go on on
275. 8:30that?
276. 8:37The skill set that you guys are
277. 8:39deficient in is going to be brand
278. 8:42>> and that's what you have to learn how to
279. 8:44do.
280. 8:46And the brand is also completed with the
281. 8:48product,
282. 8:48>> right?
283. 8:49>> So like that's what completes the brand
284. 8:50loop. Like we make this amazing promise,
285. 8:52we have all these great associations.
286. 8:53People then make the purchase and then
287. 8:55the product either reinforces the brand
288. 8:56or destroys the brand. And if it
289. 8:58reinforces the brand, then the loop
290. 9:00continues and becomes a virtuous cycle.
291. 9:01That's how you go from an e-commerce
292. 9:02store that does media arbitrage into a
293. 9:05household name that you can sell for not
294. 9:07just 50 million but maybe 500 million.
295. 9:10And so it's just that like
296. 9:13I have this conversation literally every
297. 9:14week. And so
298. 9:18I know that you're coming at this from a
299. 9:20math perspective. It's just that it will
300. 9:22not work at scale. And so I would rather
301. 9:26you spend as little as you can on all of
302. 9:27these different things to find a product
303. 9:29that you guys really think is legit and
304. 9:31has some level of defensibility if you
305. 9:33can because if you don't have a
306. 9:35defensible product the only thing that
307. 9:36you have is the brand to differentiate
308. 9:37you.
309. 9:39>> Yeah.
310. 9:39>> That's the only differentiator. And so
311. 9:41if you're competing because like just
312. 9:44play it out the next step, right? Like
313. 9:45let's say you find your nine out of 10.
314. 9:47No one's buying that. Like private
315. 9:49equity investor not buying it because
316. 9:51they know the game. They buy brands.
317. 9:53they don't buy products and so you get
318. 9:55your nine out of 10 and then the dupes
319. 9:57flood because they see that you're
320. 9:58killing it and then they undercut you on
321. 10:00all this stuff and then your row goes
322. 10:02down and then you leak everything to
323. 10:03your competitors. So either you have
324. 10:05some sort of patent that you can
325. 10:06actually protect and you have a legal
326. 10:07team that can enforce it or you build a
327. 10:10brand. So like that's the long-term
328. 10:13play. The rest of this is just
329. 10:17making money until you figure that out.
330. 10:20>> I'm being super real with you. Yeah,
331. 10:21>> I just rather save you a couple years.
332. 10:23>> But like that is where this leads.
333. 10:25>> Okay.
334. 10:26I mean, so
335. 10:28>> how do you build a brand?
336. 10:29>> Yeah. Right. [laughter]
337. 10:30Yeah. How do I do that? But um you know,
338. 10:32we are working on like the legal
339. 10:34defensibility of it. You know, I I
340. 10:35didn't mean to say like
341. 10:36>> I would lead with brand rather than
342. 10:38making
343. 10:39>> I would lead with brand rather than
344. 10:40legal.
345. 10:40>> Yeah. Because legal, you have to like
346. 10:44it's still tough to like it's it's
347. 10:46better to be big and then win with legal
348. 10:48than try and be small and win with legal
349. 10:50because you'll just get drowned in fees.
350. 10:52And it's it's it's better to just have
351. 10:54the coolest brand and have the coolest
352. 10:55people promoting the thing and then
353. 10:57people just want to buy from you even
354. 10:59though they see the cheaper knockoffs.
355. 11:01Got it? But that's like that's what you
356. 11:03have to do if you really want to go
357. 11:05where you want to go. Otherwise, you're
358. 11:06just going to be cycling through SKs and
359. 11:08you're going to say you have a portfolio
360. 11:09and it'll sound impressive to people who
361. 11:10don't know what you're talking about.
362. 11:12But like margins will do this, cash flow
363. 11:14get and you have co-founders and
364. 11:16it'll be like this is so much work. This
365. 11:19sucks. [laughter] I wish we just had one
366. 11:21product that we all really believed in
367. 11:22that we could like build a business
368. 11:23around.
369. 11:23>> Yeah.
370. 11:24>> And that's what you want to do.
371. 11:25>> Cool. Thank you.
372. 11:27>> Yeah, you bet. If you're not getting as
373. 11:29many leads as you want and your business
374. 11:30is demand constrained, [music] meaning
375. 11:32you could service more customers than
376. 11:33you currently have, then this is for
377. 11:35you. So, marketing is changing and I
378. 11:37think ACQ tends to be on the bleeding
379. 11:38edge of this stuff. We certainly spend
380. 11:40the money uh to do it, but we also build
381. 11:42custom software and we pay amazing
382. 11:44vendors and very expensive people to
383. 11:46figure out the system that we have right
384. 11:47now. And I want to share it with you
385. 11:48kind of open kimono style. If you're not
386. 11:49getting as many leads as you want, boy,
387. 11:51do I have the thing for you. Click
388. 11:52below, book call, and uh hopefully I'll
389. 11:55see you in Vegas.