Acquisitions Anonymous - #1 for business buying, selling and operating - How to Make Money (or lose a mint) in the E-Commerce Game - Acquisitions Anonymous Episode 105

Episode Date: July 1, 2022

Don't miss part 2! Signup for our weekly newsletter:https://landing-newsletter.acquanon.com/-----Michael Girdley (@Girdley) and Mills Snell (@thegeneralmills) turned the tables on Bill D’Alessandro (@BillDA) for this special eCommerce episode. We talk about the day-to-day operations of eCommerce businesses. Product types, 3PL vs in-house fulfillment, customer acquisition, favorable attributes for products, and much more!-----Thanks to our sponsors!* CloudBookkeeping offers adaptable solutions to businesses that want to focus on growth with a “client service first” approach. They offer a full suite of accounting services, including sophisticated reporting, QuickBooks software solutions, and full-service payroll options.-----* Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel.* Do you enjoy our content? Rate our show!* Follow us on Twitter @acquanon Learnings about small business acquisitions and operations.-----Show Notes:(0:00) - Intro(1:36) - Cloudbookkeeping.com(3:30) - How to operate an eCommerce business?(5:50) - Let’s talk about product size: Must-haves and hell nos!(8:00) - The power of scale: Home run swing models(8:50) - How to pick a great product?(11:17) - Pricepoints breakdown and the sweet spot zone(14:50) - Where does intellectual propriety play a role?(16:30) - Let’s go into dimensions, weight, shipping costs and the evaluations to be made there(18:35) - In-house fulfillment vs 3PL - Where are the breaks along the scale?(20:20) - How unique is your process?(22:01) - What’s the pricing structure like for a 3PL?(23:27) - Negotiation points(25:36) - What about in-house? Advantages & disadvantages(27:20) - What made you switch from a 3PL to your own?(29:46) - The flexibility of in-house logistics(31:23) - How does geography come into play?(34:01) - How do you think about customer relationships?(38:40) - Have you seen any other interesting distribution models? What are the challenges of influencer businesses?(41:29) - One of Bill’s favorite businesses.(45:00) - What is the holy grail of metrics?Additional episodes you might enjoy:#96 From W-2 to Business Owner - Patrick Dichter tells us how to cold reach seller and we discuss 2 Deals#92 WaSubscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

So, kind of anything below that sells below like a $15 price point is just going to be brutally difficult. Even if your gross margins are good, you've got some fixed costs in econ that you can't hide from. The biggest one is the cost of shipping, right? I just physically can't mail you anything. You know, even the smallest, lightest thing in a, you know, a first class mail pat an an envelope is like $3.50.

Right. So if your thing costs $9, you just. spent 35% of revenue on shipping, right, just to get it. And we live in this world where free shipping is expected, right? You're not going to get the customer to pay for that. Welcome back, everybody, to another episode of Acquisitions Anonymous. I'm Mills Snell, one of your co-hosts. I'm joined today by Bill D. Alessandro and Michael Girdley. We have an awesome episode today. I have been personally requesting this one for a long time. We turn the tables and we put Bill DeLessandro, who is the co-founder of Elements Brands and E-commerce Empire that he owns into the hot seat. And we just

pepper in with questions about running an e-commerce business, running e-commerce brands from a day-to-day operations standpoint. How does it work? What breaks? What goes well? And how to handle day-to-day operations. We talk about a myriad of different topics. We talk about customer acquisition strategies, unique distribution models versus the more commoditized one. We talk a lot about 3PL third-party logistics versus in-house fulfillment. Bill has some really good insights there because he's done both. firsthand and he's got some really great really great points there but then we also talk about product type what works what doesn't work where are the sweet spots in terms of average order value what are favorable characteristics and attributes of products that work if you're

interested in e-commerce or you've been curious about it in the past I think that you're really going to find this episode interesting and insightful because bill is just a treasure trove of information. So hope you enjoy this episode and stay tuned after a quick word from our sponsors. Hey, Michael here. Want to talk to you about today's sponsor for the episode, which is cloud bookkeeping.com. So cloud bookkeeping is actually run by my neighbor, Charlie. So I've met him in person and can attest that he's a real human being and a good person. And what cloud bookkeeping does is offer a full suite of bookkeeping services all in the cloud for you around QuickBooks and other technologies that you're using as a small business owner.

So if you're interested in getting the bookkeeping part of running a business off of your plate and focusing on running your business, Charlie and his team are one to call. They can put together a bunch of other stuff in terms of helping you manage and grow your business besides just bookkeeping, sophisticated reporting, definitely helping you get your quickbooks online set up in the right way, and a number of things around pay role as well. So definitely know them and recommend them. If you want to find out more about cloud bookkeeping, you can go to their website at cloudbookkeeping.com, reach out to Charlie. I know many of you have and see if he can help you, make running your business easier and more fun by

letting them help with a lot of the bookkeeping solutions. And when you call, mention this podcast. It would help us and help Charlie know that we're supporting him as well. So thanks bunch and cloudbookkeeping.com as the sponsor for today's episode. Welcome back to another episode of Acquisition Anonymous. Bill D. Alessandro, our co-host, is in the hot seat today. Bill, are you ready for this? I'm ready for this. The tables have been turned. I'm getting interviewed today. We have poked around the fringes of what we like and don't like about e-commerce. And Bill is the resident expert and Ninsum. And so what we wanted to do was put Bill in the hot seat today and talk about e-commerce operations. We'll do a separate episode about

the state of e-commerce and what is going on more broadly there with the Thrasios and the FBA roll-ups and whatnot. But today, we're just going to talk about how to operate an e-commerce business. And I say this a lot, but I believe it wholeheartedly when it comes to Bill. Bill, I know that you have forgotten more about running an e-commerce business than I'll ever know and then most people ever know. And so I just want to be able, we just want to pepper you with questions today about the day-to-day ops of running e-com and buckle up. Sure. Sounds fun. Would it be helpful if you're new to the podcast or don't know me?

Should I give a little bit of a background of how I got here? Yes. Yeah, I love it. Okay. Perfect. So, hey guys, if you knew the podcast, Bill Alessandro, co-founder and CEO of Elements Brands. Elements brands is an e-commerce whole co. We've been around since 2010.

We have owned as many as eight brands. concurrently. We are down to four now. We've kind of moved up market and focused on bigger brands. We can talk a little bit today about why bigger brands are easier. We have about 50 employees here in Charlotte, North Carolina. We insource absolutely everything we can. So, you know, some people kind of take the model in e-commerce of agencies, agencies, agencies, four-hour work week, you know, totally virtual org. We've kind of gone on the other way. We have 50,000 square feet of warehouse sitting here right behind me. We pack all our boxes here in Charlotte, North Carolina. and do some light manufacturing.

We also have all in-house marketing, everything from Facebook ads to Amazon optimization to graphic design, videography, all that stuff in-house. So doing it for over a decade now, which makes me feel super old. And done eight separate businesses, bought them, sold them, grown them, messed them up, all that stuff. So that's what we're going to talk about today. I love it. Bill, let's start with just talking about product type.

So I think, you know, there's certain things that obviously. work well in e-commerce. We've talked in the past about things like average order value, the weight of items, the size. It's easy to talk about in the extreme. I don't know anybody who makes great money selling like kayaks online or something like that because of how cost prohibitive it is to ship. But when you are thinking about or evaluating an e-commerce-related business or product, run down the list of like must-have attributes and hell no. attributes. Like if it's one of these, it's an absolute kill. Okay. Yeah. So when when you, I think it's important to set the stage, e-commerce more and more is just commerce. So some of these

attributes are things that make good industries to be in and sell products in period. And then some of them are unique to e-commerce. So when you're looking at acquiring or or starting an e-commerce business, you got to kind of put the hybrid of the two together and make sure you're in a a broadly good category, but then also a category that is e-commerce compatible is the word we use here at Elements Brands. So I'll start kind of on what makes a good consumer product generally, and then drill down to a subset of those that work really well for E-com. So generally, like, I'll just start the very top end. You want to be selling your own branded product rather than reselling other people's products because generally that leads to my iron rule of ecom, which is that your gross margins

have got to be better than 70%. Got to. I mean, if you are operating on 50% or less gross margins, and here let's just define gross margin as revenue minus the cost of the product, right? I'm not doing like a fully loaded gross margin here with Amazon fees and everything else. But if the cost of your product, if your pure gross margin is not 70% minimum, I mean 80 is better. you're just going to have a hard time. It's going to be a low margin business. And a lot of these reseller businesses are 50% or less gross margin businesses and they're just hard.

So that's number one. Yeah. Well, the question I had there was specifically Chewis. Like, how do I think about Chewis as one of the most successful e-commerce businesses or what is it about the mental model that you're proposing that makes Chewis like such an outlier? Right. Because they're not selling it 70% gross margin dog food, right? sure, they have scale. They have so much more scale than you're ever going to see. I mean,

they're building automated fulfillment centers. I mean, there is, if you want to go for that, like there are venture backable home run swing models, but like Chewy is slugging it out for customers with Amazon. Like if that's the game you want to play, good luck to you. If you're listening to this podcast, Jeff Bezos, my hat's off to you. But I think most of our listeners, you know, probably not in the same league. Bill, run through two products. Like, I know we've talked about lotions and potions, as you call it, and different things that really command a higher gross margin. And we've also talked about, I think I just remember one episode, we talked about like a generic like shower brush for your back, you know, but what are some ones that come to mind where

you would say, hey, this is characteristically a higher margin, less commoditized product, here's kind of the flavor of gross margins, and then give us the same thing on the more, you know, just kind of generic stuff, just for a frame of reference. Sure. So it's hard to talk about that distinction mills with a little bit talking about brand and differentiating. Right. So like if you take any one of those zillions start a e-commerce business courses, they're going to tell you to go to Alibaba, like find the thing that's already, and ask them to silk screen your logo on it and import it and sell it on Amazon, right?

That is a freaking race to the bottom because your product is not differentiated. You don't have a brand. That same factor in Alibaba is selling it to 10 other dudes. Some of them are in China, right? and they're getting a better price because they know the guy at the factory. And it's going to be a race to the bottom and talk about things that destroy your gross margin, race to the bottom on price. The only way you can hold price is if you've got something actually differentiated.

So you will generally see stuff that the more commoditized it is that you will see lower gross margins. The more differentiated it is, you'll likely see higher gross margins. So if you think about things that get commodified, it's sort of if you can pick it up, hold in your hands, and know exactly what it is. And you think about something that kind of have some more Genesequa brand power that can command higher gross margins. You think of things that like a jar of skin cream. Like I can just believe that maybe because of the brand on it, there's some magic in that jar. Right. And I can't necessarily directly compare two brands of skin cream.

Right. The brand carries weight. even, you know, anything like, I mean, even like granola bars, protein powders, like all of these, you know, a lot of these happen to be consumables. And not all consumables are good. And there's some regulatory there so we can get into that. But generally, like a wooden board would be example of something that's bad, right? You can just see that anybody and you can directly as a consumer go, that board's the same as this board and that one's five percent cheaper.

I went by that one. Yeah. So you want something that can be differentiated. Like cell phone. spaces, mouse pads, like just all the stuff that, you know, you get absolutely bombarded when you search, you search on Amazon. What about, Bill, what about average order value and how that comes into play? I've heard you talk about kind of the death zone under a certain dollar amount. Is that the case for Amazon and your own dot com? Yeah. So as I think about price point for

products that work well in e-com, there's kind of three zones. And I'll call them like the death zone, the sweet spot and the considered sale zone of difficulty on the high end. So kind of anything below that sells below like a $15 price point is just going to be brutally difficult. Even if your gross margins are good, you've got some fixed costs in econ that you can't hide from. The biggest one is the cost of shipping. I just physically can't mail you anything. You know, even the smallest, the lightest thing in a, you know, a first class mail padded envelope is like $3.50. Right. So if your thing costs $9, you just spent 35% of revenue on shipping, right, just to get it. And we live in this world where free shipping is expected, right? You're not going to get the customer to pay for that.

I mean, just you've got to sell so many. We had a brand once that sold a sunscreen product, which again, seasonal products also miserable. We can get into that later. But it retailed. It was a retail product. We had to sell it for 499, which means like how many widgets you got to sell a 499 to like pay for somebody's salary, you know, so you're just not getting that much money from each customers. You need so many more customers. So everything, your scale has to be bigger. And if something goes wrong in 0.1% of your orders, more things are going to go wrong if you have more orders, right? So just generally small price points mean your fixed costs hurt you more and you've got to move more units to do the same profit, which increases the chances of pains in the ass. So anything below $15 is freaking brutal.

I like it better in the, you know, 25, 35, 45, 55, 55, 55, like in that range is really good, because you can start making more real dollars per transaction, right? So even your gross margins are good. You got to think about how many dollars did I make on this transaction, which drives the need for fewer customers to have meaningfully deduct. And yet those price points are still not high enough that people are going to think really hard, like need to talk to somebody to buy it, like all that stuff. So once you get kind of over the $100 price point, you know, you get into the high 80s, 90s, you start to get people thinking a lot more.

You're going to have a considered purchase. They're going to need to read more content. They're going to need to compare it. They're much less likely to see an ass. a Facebook ad, click it, come to your page, and transact right there, kind of that immediate last click funnel, which if you can get a product that converts like that, see ad, click buy. Those are the things that can really scale and quickly. Otherwise, you're in this, you know, I had to pay ads to get people to watch this video and then I had to retarget them. It's a longer

funnel. Now, there are great businesses. I know a guy that does huge dollars selling decks, like to attach the back of your house, like wood and screws and like custom and fig and all that stuff online. But like that is a different business. You know, like you got to have some real expertise. There can be moats there, but it's a different business. So there's the bad ones, which are cheap, the ones that are easier to run, which are kind of, you know, 50-ish dollars. And then there's the considered purchase, which are complicated to run, but can still work. Where does, where does intellectual property or kind of custom made or kind of proprietary products, Does that slide the scale in any direction?

Yeah. So the more custom, unique intellectual property you have, the better, right? Because that's a way to differentiate not just on price. The less IP, the more commodified it is, the only lever you got is price. Now, you've got to be also really clear what is actual defensible IP? A lot of people have a trademark. That is like the bare minimum. them, like unless you spent millions of dollars promoting this trademark and there's actual brand

awareness, that trademark ain't worth much. If you got patents, okay, maybe interesting, you better talk to a patent attorney to figure out how easily circumvented those patents are. And further, you better look in the mirror and ask yourself if you're willing to dedicate, you know, half a million, a million dollars a year to defend those patents when people in China definitely infringe on them. You know, a patent's only as good as your willingness to defend it. So you've got to be, you've got to be, you The better modes, the better IP is more something that's actually complicated, right? That's hard to do that you've got a proprietary supply chain or you've got some gina sequa in the brand that customers recognize it and believe it's different and better.

Those are the types of IP that work. If you've just got like a patent on a wooden board and everybody can see that and they start selling wooden boards like, you're going to play a whack-a-mole for the rest of your life and the lawyers are going to get rich. Bill, what about what about dimensions and weight? I know that weight obviously plays a big role in the shipping cost and that's that can eat into your you know into your profit margin pretty significantly but I'm also thinking about odd size packages like a kayak is is heavy and it's big but like a kayak paddle is really big and light and it's probably also cost prohibitive. How does

how does that come into your kind of evaluation and equation? Yep. Great question, Mills. So there's kind of two angles. I mean, when we think about e-commerce compatible, the way I think about it is I say revenue dense. So when you think about kind of like linear inches or ounces, you want a lot of dollars. So to use like a user kayak paddle example, right? That thing might retail for 50 bucks, 100 bucks, something like that. So you might go, oh, it hits the price point game, right? But it's huge. Right. So it's not very dollar dense like per square inch, right? So this kind of falls down the list. Think of something like a diamond, right? Really, really value dense. Think of something like a, and that's expensive and small,

like that's the best, right? Now, think of something like a bottle of Gatorade, right? This is still relatively small, right? But it costs a dollar. It's so cheap that there's not much value density there, even though it's small. So you want to find something that essentially is small. light and expensive. And that would be the best. Anything more than kind of, and specifically on Amazon, they charge you differently based on size. There's certain size breaks. You can probably, if you Google, filling by Amazon size breaks, you'll find them. But it's roughly like larger than a shoebox. They're going to start digging you for oversize. Now, of course, you can build into your pricing. And a lot of time, like I actually, you've been using a kayak example. I know a couple

guys making seven figure a year selling kayaks on the internet it can be done you can price it in but it's harder and it's really specialized what about bill i mean what about the way that the fulfillment happens on this let's talk about in-house fulfillment versus 3PL you guys have made like you said a dedicated decision to fulfill on your own you obviously can't start that overnight it would be very cost prohibitive i would think and that's why a lot of people go the 3PL model. Where are those brakes in terms of scale, where all of a sudden it now makes sense to go in-house and start to handle your own distribution?

And what are the complications associated with doing that? I would think, you know, you have to make the technology be able to talk to each other. You have to have the staff to be able to receive and pick and pack and ship. But I'm making it sound easy from the cheap seats over here. You have the warehouse at your back. What's the difficulty? What's it like? Yeah.

So the choice here really comes down to how simple is your operation? So at a high level, your options are there, these companies called 3PLs or third part of logistics firms who are outsource fulfillment providers, right? You send them their stuff. You send them all your stuff. You send them your orders every day. On a palette. And their employees, putting them in lots of.

Yeah, you send your stuff on the palette. They keep it all. And then every day you send them the orders. Right. And you also send them the, hey, you got to send this much to Amazon and how you got send this much to this retail store, you know, to Walmart or whatever. Right. And they do, they're your outsourced warehouse. So when I say 3PL, that's what I'm talking about. The alternative is, of course, you hire the people, you lease the building, you know, you do it in-house. There are pros and cons to each. And it really comes down to how unique is your process.

if your process is as easy as I've got five skews or 10 skews or 50 skews even, right? And they come in all from the manufacturer in boxes that are labeled what they are and they just need to be racked and then set back out and they go in a brown box and they go, you know, small parcel carrier and they go D to C. That is red meat for a fulfillment provider. They make money on volume, like easy stuff. Simple. Take it off the rack, put it in a box, hand it to FedEx. If that's your supply chain, you're probably a good fit for 3PL. And you can avoid all of the employees, the lease, all that.

However, if you've got to buy 10 things from manufacturer A, 10 things from manufacturer B, get them in, polish the thing for manufacturer A and then screw it into the thing from manufacturer B, your 3PL is not going to want to do that, right? So now you're kind of staring down the barrel of, well, do I have my own facility where I polish the thing from A and screwed it into B, and then I send it to the 3PL. And if I'm doing that, should I just send it out of my facility and not have the 3PL at all? You'll also see that it's really shockingly hard, even in 2022, to find 3PLs who are damn good at resupplying Amazon. And Amazon, you know, resupplying Amazon is a big part of an e-commerce

business, any e-commerce business these days. And there's, you know, the box label's got to be right. Like there's some complexities to that. There are specialty FBI prep fulfillment centers that will do it, but you've got to find one that really can. And then the thing that everybody hates is like if you sell in Walmart, you know, getting that right with a 3PL can be a real pain of the butt. So for us, the reason, well, maybe I'll leave it there. Any question of the kind of the framework? Yeah. What's the pricing structure like for 3PL?

You have receiving fees, you know, per, you know, per palette, you have picking, packing fees, all those different things. Walk us through the 3PL pricing scheme and the in-house pricing scheme because some of those costs you're going to bear either way, some you're going to bear, you know, on your own if you're doing it in-house. Sure. So if I could characterize 3PL pricing, it is like the definition of the phrase death by 1,000 cuts or nickels and dimes or whatever you want to say. a 3PL bill can take you hours to dissect. So here's generally how it works. At the core of it is going to be what they call their fulfillment fee, like their per order fulfillment fee. This will generally consist of like a base fee that includes the first item and then additional pick fees for any further items in the order. As a rough order of magnitude, you'll probably pay about $2.50 per order

as the base fee and then probably like 30 cents per additional item. So in a simple order that has two items, you will pay $2.50 plus 30 cents for the second item, you will pay $2.80 as the fulfillment fee. Sometimes the fulfillment fee will include cardboard and tape and padding and all that stuff. Sometimes that will be priced separately. If it's priced separately, they will typically procure it for you and then just charge you like a 5% margin on top of cost. Then they're also going to charge you, of course, for shipping, right? So FedEx is going to charge them and they're going to charge you. So you might think that, oh, well, you know, whatever the price FedEx charges them is, they'll just charge me. Nope. So it turns out like a huge

portion of the 3PL profit structure is that they negotiate a great discount with FedEx, UPS, post service, et cetera. And they pass some of the digital. discount on to you, but not all of it. And they usually are not transparent in exactly what their base cost is. So while you will pay a price that is probably better than what you would have paid if you had gone to FedEx directly, they're going to make a margin on that. So you may even ask if you're going to 3PL that they be open with how much margin they're making on that. So when their prices go up or when their prices go down with more volume, they bring your price down with it rather than hold your price and just take more margin. So that's a negotiation point.

They're also going to hit you with all kinds of fees. They're typically charge you like a per pallet per month fee, you know, based on how many pallets you have with them. They'll charge you sometimes per bin per month. They'll sometimes charge you a per receipt fee. So if you send them a container, like they'll charge you $100 to unload it. If you send them a small parcel, they'll charge you $50 to just to get it and log it in. They'll charge you if you need any special projects, like if you need them to polish A and screw it in the B, they can quote you and charge you per touch. They'll often charge you a per label fee if things need barcodes, you know, 10 cents here, 20 cents here. So you get a lot of fees with a 3PL. All that being said, their business model is labor arbitrage. So they pay somebody

X per hour and they figure out how to charge you X times 1.5 per hour for that person. They're all just backing into that is really how it works. Yep, yep. What about in-house? I mean, then all of a sudden you turn the labor arbitrage into your own opportunity cost and you employ those folks and you keep them busy and you still have a lot of those same costs. You still have to pay to ship the stuff. You still have to pay somebody to receive it. You still have to, you know, buy the cardboard and the packing paper and all that stuff. Right. But you might be tempted to go, wow, I'm going to save so much money. I'm not going to pay the markup on the cardboard. And I'm not going to pay the 50% markup on the labor. Like, this is going to be freaking great. It's definitely going to be cheaper. Maybe, right?

In general, I don't think it's cheaper because what's baked into that markup is their rent, right? Like, their HR overhead, benefits for those people, all of that stuff. Like, there's more costs than you think. Like to set up your own fulfillment operation, you're going to need a space. You're going to need a lease, right? You're going to have to commit to a long-term lease, right, typically. You may even have to personally guarantee that lease. So there's definitely risk there. Can't be scaled down as easily as a 3BL could. You have to commit to people, which again can't be scaled down as easily, right? And you're also, and this is the big thing for me, you're going to have to worry about it. Like very quickly, like I think we talked about a business on here where like one guy calls in sick

and you're driving the truck. Like one guy calls in sick and you're a pack of boxes because you don't get paid and those orders come in every day and they never stop. It's a never-ending avalanche. And if your guy says, hey, screw you, I quit, boom, you're in the warehouse. Just like that. If you're with a 3PL and their guy quits, they got 10 more. They just slot them in and you don't even know about it. You know, and that's their problem.

So you've got to be really sure that you want that level of critical, that critical function to be in-house and your org will probably not be as deep as the. 3PLs org in that in that area so that to me is often why people pay the 3PL markup they also just don't want to deal with it you know like a whole bunch of employees does it provide some structural advantage for you guys bill with the the products that you sell at elements brands is there is there that kind of we need to put things together component is it quality control is it flexibility autonomy what what made that decision for you guys And has it always been that way?

Yeah. So we actually started with a 3PL way back. And then I wanted to kill myself. So I insource it. Like I don't let me make 3PL sound like all sunshine and rainbows, right? So the couple of the reasons we went away from a 3PL is we had to do some like kidding and manufacturing. Like stuff would come in giant jugs and we had to fill it into eight ounce bottles as an example, right? 3PLs don't like doing that type of stuff.

Like it's too messy. It's too much. Like they'll like, you know, screw things into each other. maybe if they don't need any power tools, but like any more than that, like, they don't like to do that. The other thing, so there's a couple things in the flexibility side was that from a customer service perspective. So with a 3PL, let's say Mills, you order a red widget from our website. Our integration sends to the 3PL. It's in the 3PL system. 15 minutes later, you call our customer service, you go, I didn't want a red one. I want a blue one. Right? And you as the customer,

expect that to be obviously no problem. They're the same price, just switch them out. What would happen with regularity would, I'd have to be like, okay, hang on customer. I'd have to pick up a second phone line, right? Or I'll say, customer, I get back to you. I got to call the 3PL or got to log into their system. I would find that that order had already been packed. Well, good. My 3PL packed the order real fast. Like, they're doing their job, but it's already packed. And because they're a, you know, million square foot facility, they can't go get it off the dock. Like, it is effectively shipped as soon as it's packed. So now I have to ship the customer, the original red one they ordered.

I got to ship them a blue one also. And then I got to either decide the red one is lost and they can keep it or try to issue them an RMA. And the customer, and then I got to call the customer back. And before you know, I've now burned an hour on this whole situation and the customer doesn't understand why they're getting two things and have to return one. Right. So there's a cost to that, right?

The overhead of just the game of literal telephone because these three pails operate at scale. one, right? And the other thing is sort of custom projects. So in our business, you know, we'll want to try, just as a simple example, maybe we want to try a new bundle on Amazon, like one of A and one of B. And for Amazon, they got to be physically attached to each other. So like essentially in a bag, right before you send them. With our warehouse, I just go, hey, like make 10 of them and we'll send them in. And they go out the same day. It's very easy. It's not complicated to tell an employee, make 10 of these bags and send them to Amazon. But if you're not, like,

you have a 3PL, you have to call your account manager. And then you say, hey, account manager, we would like to make a bundle of A and B. We want to do 10 of them. Can you do that for us? And they will go, I don't know. They'll have to price it. A week later, they'll come back. And after running a cost study, they'll tell you, okay, that will be, you know, $7 each. And then you'll go, great, I want to do 10 of them. And they'll go, well, we can't do less than 100. And then you're like, okay. So you do 100. You spend $700 of labor. And then it turns out. out it doesn't work and now you got 90 of them that didn't sell at Amazon, right? Just everything becomes production with them because it's got to be quoted. It's got to be spec and it's got to be

run. Right. So the speed and flexibility with your in-house team, you just will never get with a 3PL, which brings me back to if your operation is simple, scalable and you know how it works, three pils are awesome. What about geography? And you also never want to deviate not either. What about geography and where that comes into play? Like if if you start sending tons of stuff to California, all of a sudden, the kind of relative strength of your distribution in-house, it gets diluted, right? Versus if you could ship a whole pallet or 10 pallets to California and use a 3PL provider there, how does geography come into play? Great point. So this is actually, so we're located in Charlotte, North Carolina, and this is a part

that kills us, right? Because we do 30% of our business to California. So we're shipping a ton of individual packages across country, which is expensive, but worse, it takes a while, right? So the customer, we're competing with Amazon Prime two-day delivery. So if you live in California, you're going, why would I buy from your D2C website? It's going to take six days to get here. It'll be here tomorrow if I buy it on Amazon, right? So it can be very hard running your own fulfillment to compete with both Amazon and also customer expectations, right, which can decrease your conversion rate on your website when people see a five to seven-day quote on free shipping, etc. So we are actually exploring do we open a like contract with a 3PL in Nevada

to take like 80% of our you know the 20 20 20% of skews that are our 80% of our revenue co-locate them out there in Nevada and try to ship California from that one if we can and then if it's an order that we don't have one fall it back to Charlotte. Right. So you can start to do that with we have a little bit of scale because as you mentioned is a hell a lot cheaper to send you know one truck to Nevada and then parcel it out rather than send all of those little widgets individually in a flock via FedEx. The last thing I'll say, I meant Nevada very specifically. Yes. Do not use a 3PL in California. Do not touch freaking California with any of your inventory or you will get sucked into their regulatory morass of everything you don't want.

This is Nexus. So there is just Nexus driven for sales tax? Nexus driven, employee driven. I mean, like they've got a tax like your 3PL. If the truck idols at the dock for too long, there's a fee that they've got up. I mean, unbelievable bureaucracy. Don't go anywhere near California. There's an entire industry of 3PLs that basically sit in Las Vegas and Reno and all these places in Nevada, which is business friendly. And they can ship next day into California. No problem. So I just, I have seen so many people like, sign up with 3 PLs in California that otherwise have no California presence. And it's just like the biggest own goal of all time.

Don't do it. That's amazing. That's good intel. Yeah, it seems like you have, Bill, like there's options where, you know, you can rely upon Amazon's customer acquisition model. You can try to do Amazon and other platforms as your way. Or you can do the third thing, which is, okay, I'm going to have my own Shopify store and I'm going to try to own my customer relationship.

So maybe there's more than that, but those are kind of the thing. the three I see. How do you think about it and what are the tradeoffs between those? Yeah. So this is when I think about the art, science difficulty of e-commerce, it's basically this. Where your customers come from, how do you attract them, how much does it cost you and how much can you make from each one? So your traditional e-com or your classic, let's say, direct consumer e-commerce business has your brand.com, right? And you try to attract customers, come to your website. you'll probably run it on a piece of software called Shopify, which is kind of the gold standard. There's others, Magento, big commerce, many more.

But you'll run your own website, right? And people will check out on it. Everybody's familiar with this concept. Or a rise in the last, you know, five to eight years is the Amazon FBA, fulfillment by Amazon model, where Amazon will do all the fulfillment for you. And you're basically just trying to outrank people on the Amazon search results page for the yoga mats is always the example I use. right? And Bill's yoga mat is going to be right next to Mills yoga mat, which is going to be right

next to Michael's yoga mat, et cetera. And they're probably all, we probably all found them on Alibaba and they're all the same yoga mat with a different silk screen logo on it. And if you were listening early on podcast, you were realizing this is not a product you should be selling. Right? Because you're slugging it out for rank on the search term yoga mat on Amazon. Right. So in that case, if someone buys the Michael Girdley yoga mat on Amazon, Amazon will process of the transaction, they will take a fee for doing so. That fee is about 15%, depends on the category in, but almost always 15%, just right off the top. And then you also pay them a fulfillment fee of a couple bucks in order. And that's kind of analogous to that 3PL pricing structure

we talked about earlier. And they will, and in exchange for that, you get access to their entire network of next day, everything, the drone drops it off, all that stuff. So those are kind of the two big customer acquisition channels. And people might go, uh, screw this Amazon thing. I don't want to be dependent on Amazon to bring me my customers. I want a dot com business, right? Yeah, but what you don't realize is where do those customers come from, right? They come from Google searches and they come from Facebook ads or Instagram ads, right? So there's really no way. And this is sort of one of the things that, you know, if you get me on a soapbox after a couple beers that depresses me about the current state of the consumer internet, right, is you pay the tax man. The platforms own the customers,

right, be it Google and Facebook, which who are essentially your drug dealers for D to C sites, or Amazon, who's your drug dealer for an Amazon FBI business? And most good e-commerce business will do both channels, right? So as an e-com business, you are extremely platform-dependent on Facebook, Google, and Amazon for your customers. Yeah, and I thought there was, there was a, good like interview with Mark Andreessen probably two weeks ago where he said oh everybody says like email is the last bastion of freedom because you just get your email list that you know you pay for it once then you get to resell to those people and his point was do you see how many people are using Google mail like Gmail as their stuff like you have to you have to get blessed by Google to be able to continue to market to your

customers via email so there is not really the free internet that everybody hope there was it's become It's totally controlled by the Fang gatekeepers at this point. It is. And that's why when you see a lot of these businesses transact, a lot of the value ascribed is often in essentially the relationship with the gatekeeper. Right. Like if it's an Amazon FBI business, it's how many reviews does it have? Where does it rank?

Like, is that defensible? We can talk about that, et cetera. And you're basically buying a position on the search results paid for yoga mats. Same thing on the DDC side. Like, does this have really? strong SEO. That's just another way of saying, how good is its relationship with Google? Or like, can this business reliably acquire customers through Facebook ads? Does it have a good marketing engine, but it's just, is it in Facebook's good graces?

Right. So a lot of the value of these businesses and the scalability of these businesses come from being able to attract customers through those channels. Bill, who has or what are some of the unique distribution bottles that you've seen other than those big ones? I mean, I'm thinking about things like, something that's maybe a regional niche or maybe it's just having a massive Instagram following and it's not paid, you know, it's not pay per click or paid customer acquisition, but it's something that's a little bit more organic. And I'm sure there's a lot more. What are some things that you see that work? Yeah. So a couple of ones that can work. So let's talk about like huge Instagram audience. You know, Mills, you and I have talked about a couple

businesses like this offline. These businesses are really interesting because, and I'll call them influencer businesses, right, as a category, right? Somebody or some brand with an audience, right, that you can talk to that audience and sell them stuff. The pros here are that there's a little bit of cult of personality, right? Like they recommend this yoga mat like people are going to buy it, right? They've got essentially free distribution and not just free distribution, but they're very influential with their distribution, right? So you can drive, this is a celebrity brand, essentially, right? We might not be talking about celebrity in the classic sense. This might be in more of the influencer sense. But either way, this is a person that can drive dollars.

This is interesting, right, because it's kind of unique. However, Instagram followers, right? And the trend has been that Facebook has more and more been decreasing your reach on your organic posts and making you pay to reach those folks anyway. So the power of that model, again comes back to how willing is the platform to let you access your followers for free. It has got a huge email list, Michael, like you said, how willing is Gmail to drop your email into the inbox, not at the promotions tab? Are you willing to pay to be in the inbox? Because Google will sell that to you.

So these influencer-based businesses are really critically dependent on actually being able to reach the audience. The other thing about an influencer-based business, though, it's very difficult to sell and very difficult to acquire. because, I mean, I'll just take the classic example of the Kardashians and her brand, which she sold to Cody for $600 million. Fricking crazy, right? But as soon as, like, would you want to be the one that buys a business from a Kardashian who no longer has a financial interest in the business, right?

Like her posting on her Instagram account is what's driving this business. And yeah, even if you get a consulting agreement or whatever, you think she's got to promote it with the same zeal that she did before, right? She's appearing less and less in your marketing, all that stuff. So these things become cult of personality. They're almost never transactable. So it's a double-edged sword on an influencer business. I can talk about one other really interesting distribution model I've seen. This like ultimately, like the one that got away for me is I should have bought this business, if even to, you know, see how it played out. So I saw business for sale, they had a contract with McDonald's. And what they sold was basically

uniforms, uh, sauce, training manuals, like all the stuff that wasn't the food in a McDonald's. Like if you were a McDonald's franchisee, you were told to go to this website and buy the stuff for your store, for your restaurant. And I was like, what an incredible monopoly, like state granted monopoly. And I mean, I don't know if their margins were that good, but captive audience, they have to buy your stuff. No one's coming in to compete with you, right? Those people are coming to you. You're not dependent on a platform.

I mean, McDonald's your platform. You're dependent on. But you're not dependent on a big tech platform. And it's just a license to print money. There's a business like that in Greenville, South Carolina, Ubi. They do Chick-fil-A uniforms. It's not e-commerce. But basically, if you're a Chick-fil-A operator, you've got to use them.

And it's a license to print money. Interesting. Yep. I've seen others that do like distribute. You know, they're regional in this case. Like, so instead of shipping it via FedEx, like they're running trucks for like equipment for firehouses in like a three state area. And all the orders come in via e-commerce and then they just send trucks to the firehouses. You know, they're just like current, just running loops.

So stuff like that is really unique and interesting where you have, it's more offline based on regions than it is like slugging it out on Amazon or Facebook or Google search result page. And I think it's a testament to some of the creative stuff you can do when you have a business that's at scale, like a Chick-fil-A, or actually the anecdote that comes to mind a lot. And I don't know if this is true. But I was told that like when CrossFit was at like its peak brand in order to promote other brands at the CrossFit games and in their media, they would actually insist on ownership stakes and warrants in those companies. So, you know, I don't know how much the original ownership owns of Rogue. I think you guys maybe have. heard of that. It's like an American made equipment manufacturer, become very popular in a great business. But like they rose to prominence on the back of CrossFit. And it's akin to, you know, these these landlords who host like restaurants inside of their buildings and say, okay, great news. Your rent is the greater of this number of dollars or 10% of the gross. Those are the two numbers. So would you like the space? So like it's just an amazing thing when you have a plastic. like that where you can kind of dictate what the pricing power is going to be.

And similarly, these businesses, when you have a platform and you can bolt stuff on it like Chick-fil-A is, you know, double-clicking on it, I'd be curious how many of those uniform businesses have to cut a really special deal to the people behind Chick-Fillet to be able to sell into their employee base. Yeah. It's basically whatever Chick-Fillay asked, the answer is yes, you know. And so they do all kinds of things that aren't uniforms because it's like, well, Chick-Flei asked us to do it. And we're not going to lose their uniform business. So sure, we'll try and, you know, fill in the blank. We'll try and do this for them too. Well, and it's also, you're talking about exactly why like retail chains work

because, you know, you start to be, okay, you know, if you're a target or Walmart, then there's nobody else. Well, the reason they got to be so big is because they can create all this leverage amongst all these small suppliers and just dictate and tell them, okay, this is way it's going to be. So either you're proctor and gamble and you have a brand that provides some leverage over Walmart or you're totally screwed. Those are your two options.

And the business supply at Walmart is, you know, three people in a dingy office in Brooklyn, barely scraping by. And, you know, it creates this really unique dynamic. So, Bill, let's talk before we wrap up about the holy grail, right, of e-commerce, which is lifetime value of customers and how that plays into if you're selling, you know, a consumable product versus a one-time use product and all the different dynamics that surround that. How do you think about those things, especially when maybe you all of a sudden, you've talked about getting in with a customer at Amazon and then trying to migrate them to your own.com or upsell them, additional products. Talk to us about that whole framework, because I feel like that's the secret sauce in a lot of ways. Yes, good points, Mel. So when we just talked about, you know, you slug it out on Amazon or Google or Facebook, whatever, to acquire this customer. You know, Michael, you kind of touched on email, but it really comes back to, okay, so what?

I sold them $50 worth of stuff. Is that the end? Is the end of our interaction? Ideally, in a good business, the answer is no. So it comes back to this metric called lifetime value, which is on average, if somebody buys from you, how much will they spend over the lifetime of their interaction with you? Hopefully, it's more than one purchase, right? So the ways you get them to more than one purchase are you get their email address.

You hopefully then try to sell them more of the same thing or other things. or other things that your brand also sells. So if you're selling them, you know, skin cream, ideally they're consuming it all day every day, right? And a month later, they need more. If you're selling them fireworks, the repeat purchase is a little longer, right? They need it in July, on July 4th,

and then maybe you can convince them they need it for Memorial Day, but probably you're going to have to wait a whole year to get them back, right? So that repeat window of a year, yeah, shots, Michael's wearing his alma fireworks hat today for our podcast. Fourth July, man. Got to react. Got a rep. So, you know, a fireworks business, right, it's harder to get a handle on lifetime value.

Like, let's say someone goes in a fireworks store and spends $100. It's probably a lot higher than that. But let's just go with $100. Right. I could, if I spent $80 to acquire that customer and I had $20 of COGS, I effectively broke even on the first sale. But if they come back every 4th of July, I don't. don't have to spend that $80 in marketing in theory, right, to get them to come back. So I'm

profitable in order two, three, four, five, et cetera. But in the case of fireworks, I got to wait a whole year to get my investment back, right? So that can be pretty hard. So when you're looking at kind of lifetime value, it's not just the gross dollar value. You got to look at how fast those dollars come back. So Taylor Holliday from Common Thread Collective, he said he looks at 90-day LTV, 90-day customer value. So how much will they spend in the first 90 days with me? Right. So if it's skincare and they go through it in a month,

they'll probably order three times. Like that's better than three times taking three years. And this was a business that we actually got hurt in. We owned a larger detergent business. And we've since sold it. But one thing that was tough is people did come back, but it took them nine to 12 months because the bag was too big. Right.

But if we made the bag smaller, we compressed our price point down towards the zone of death. So it was like a catch-22. You didn't want to go too small in the bag because the customers wouldn't pay a huge price for a small bag. But if to make the bag big enough that your price point was high enough out of the zone of death, it took too long to consume it. So that's an example of something that you kind of got pinched between these competing forces when you think about lifetime value. And the last thing I'll say about lifetime value is when you look at your diligence in e-commerce business,

and you could almost look at only one thing. I think, Michael, you had a great tweet thread about that. this. Like if you'd only know one metric about a business and you wanted to know if it was a good business, there were some votes for the CAC to LTV ratio, the customer acquisition cost to lifetime value ratio. So if it costs me 50 bucks to acquire a customer and they spend 500 bucks with me over their lifetime, that's 10 to 1. And that would be really good. The last thing I'll say about cacte LTV is everybody quotes it in terms of revenue, but it's supremely stupid because you can't put revenue in your in your bank you need to think about cact to lTV on a contribution margin basis

how much you actually keep because of your margins are terrible and you go i got a $50 kack and a $500 lTV but you've got a you know 20% gross margin you just lost your ass you know you didn't make any money at all even though you had a lot of revenue flowing through the business so contribution margin cack to lTV is like one of the got metrics for e-commerce that's awesome bill that's really good i have a dozen more questions so we'll do round two and continue to nerd out on this stuff with you. Any closing thoughts on e-commerce ops for people who are listening to this episode with eager ears and say, wow, Bill, you make it sound so easy.

Yep. I mean, e-commerce is a great business because as I've been on this podcast, I don't know how many dozens of orders, hundreds of orders we got, right? Like the money just comes in and it feels automatic. But you, the flip side of that is your semi, you got to learn how to surf the platforms and then you got to handle how do I actually get the people of their stuff. And that's kind of the balancing act of an e-commerce business. That's awesome.

Well, that's a good one. Thanks, Bill, for letting us drill you with questions today and being in the hot seat. Everybody tune in next time for another episode of Acquisitions Anonymous.