Austin Brawner: What's up everybody. Welcome to another episode of the Ecommerce Influence podcast. My name's Austin Brawner.
Andrew Foxwell: And I am Andrew Foxwell.
Austin Brawner: What's going on my dude?
Andrew Foxwell: What is happening? How in the heck are you doing? What's been going on? I saw you've been chasing some bison which was unbelievable. I saw that you have been getting closer to your food sources, which I'm a huge fan of.
Austin Brawner: Yes.
Andrew Foxwell: What's been going on?
Austin Brawner: So this last weekend I went on a bison harvest which was pretty incredible if you ... the founders of EPIC, EPIC Bar, EPIC Provisions, you've seen those meat bars in the grocery stores. They sold their company and then they started a regenerative agriculture farm in central Texas, outside of Austin. And they've been raising bison. And they raise bison, turkeys, chickens, and they've been farming, and this cycle of moving them from kind of field to field to rebuild a ... to regenerate a farm that was basically killed off. And it was basically a dead farm. And now it's coming back, and part of that is they harvest bison.
They invited us out, my wife and I, and it was incredible. We got to be part of a bison harvest, and it was very life-changing, impactful type thing where I was able to ... You know, with 14 people, we processed the entire animal from head to tail and was able to go home with a bunch of meat. Super exciting, interesting type of thing, and definitely something I'm working on this year is just being more mindful about my food sources, where I'm getting my food, and what I'm eating. So that was a lot of fun.
Andrew Foxwell: Yeah, well, that's very, very cool. And eating is a part of the ... How 'bout this for a transition? Eating is a part of how you can scale profitably as a business owner, right? It's a big part of it. So that's what we're talking about today, actually. Transitions.
Austin Brawner: Yeah, so today we are talking about scaling up your business profitably. The reason that we're talking about this ... This was inspired by a couple of conversations, but two specific conversations. One I was having with a business who by all outside vanity metrics seems like an extremely successful business. They'd won some Shopify awards. You know, from the outside in, everyone's looking at them to be like, "Wow. They've really got it figured out." And I was having a conversation with the owner, and they were in the process of raising a bunch of money because they'd run out of money, and hadn't really planned for what they were going to do when they ran out of money. And it was a really, really stressful time in his life 'cause he ran out of money.
And then like two weeks later, there was another conversation from a friend of ours who is talking about actually trying to scale down his business because he got to the point where his growth-at-all-costs mindset had actually led them to probably an entire year of being in the red, or close to being in the red.
So that's kind of what inspired this, and the conversation today is we're going to go through three steps that I've put together that I've observed from working with a lot of scaling, businesses that are scaling, to how you can do it profitably.
Andrew Foxwell: Let's get into it, man. So what's the first part of this? I think you said it was mindset. So let's talk about what that means.
Austin Brawner: Number one by far and away is changing your mindset from a hyper-growth, "growth-at-all-costs" mindset to a "we-want-to-scale-this-business-profitably" mindset. That's by far the number one thing. Until you do that, it's going to be very, very hard to ever scale profitably because, let's be honest, we've got a lot of companies out there that are very visible that are running different businesses than the businesses that we might be running. Or maybe you are involved with one of these businesses, but I generally break them down into a couple different categories.
And the category I'm talking about is very visible, that kind of leads the trend. These are what I call moonshot brands. Companies like Four Sigmatic, Ancient Nutrition, ButcherBox, Tecovas, Casper, Warby Parker. These are all companies that have taken money from outside investors, and these investors need a return. So scaling profitably is sometimes completely off the table for them.
Andrew Foxwell: Exactly. Yeah. That's an interesting point of just understanding one, your mindset of shifting it, of saying, "Gotta grow, grow, grow, grow, grow," to really understanding what the DNA is of what you do, right? So moonshot brand is one, and then the second one is the business or asset to support a lifestyle, right?
Austin Brawner: Yeah. I would say that both your business and my business are in this category. Most businesses, if you're running a business or working for a business, they're going to be in this category where you are building an asset that you want to fund your lifestyle, and at the same time, have an opportunity for an exit.
And if you're in that position where you own a hundred percent of your business or a high percentage of your business, then you don't want to follow a moonshot strategy if you're not a moonshot brand because that's going to lead you to a lot more stress, it's going to lead you to potentially having to take financing when you don't need to take financing, and it's going to be a strategy that leads to the never-ending desire for more which can be not that fulfilling.
Andrew Foxwell: Totally. Totally. Totally.
So then the third one is kind of a niche product, right? So something that's maybe not really a business but is a product that does well, right? Is that another part of one of these types?
Austin Brawner: Exactly. And you've probably had a lot of experience with these types of businesses as well that reach out where if somebody has quite a large Amazon product, like Amazon niche, they got a product that does really well, but it's more of an arbitrage that is a business. And they found an arbitrage, and they are exploiting this on Amazon, and maybe they've even scaled it to $5, $6 million. I've seen that many times. But that's the business that they're running.
Andrew Foxwell: Right.
Austin Brawner: And so each one of those businesses is... they're quite a bit different, and today we're going to talk mostly about people who are running a business and creating an asset ... business to support their lifestyle, at the same time creating an asset. So not following the moonshot brand strategy.
Andrew Foxwell: And once you kinda get into this of understanding, "Okay, look. I want to change my mindset," and let's say you decide, "Look, I do want to grow profitably," then you gotta make some tough choices, right? Then you gotta really commit to it and make those tough choices.
What are some of those choices that you would be making to get into that mindset?
Austin Brawner: Sure. To give you an example, this is very tough, right, because when we first were starting out a business, you're not told to think about profitable growth. You're told ... Our ecosystem is just ... You know, the Gary Vees of the world are blasting, "Grow, grow, grow." The Grant Cardones of the world is blasting, "Grow, grow, grow." And when I first started my business, I was really bad at this. I didn't have any type of financial goals when I first started out. I just wanted to grow.
And a lot of people are in the same situation. The tough choices you're going to have to make often come down to deciding whether or not you can maintain people's ... the salaries that you have on your team are sustainable, the expenses are sustainable, whether or not that office that you're actually renting is an office that you can sustain if you want to have profitable growth.
When I first started, I had years of ... high six figures in sales didn't really make anything out of that because my mindset was "grow", not necessarily grow profitably.
Andrew Foxwell: Very common, by the way. So I think that's okay if you're at that point now where you're like, "Oh man, been there and grown, and now I've gotta really make some adjustments."
So moving from ... So that's the mindset piece of this, right?
Austin Brawner: Yes.
Andrew Foxwell: Of thinking about, all right, what the mindset is and thinking about making this shift into scaling profitably.
The second part of it includes money, right? So you gotta get those finances in order to be able to move into scaling profitably.
Can you talk about the calculation that you go through to help business owners understand the money side of this?
Austin Brawner: Yes. This is something that if you are going to make the transition from hyper-growth to scaling profitably, you need to actually start by setting a profitability goal for your business over the next year. And I personally would recommend between 10 and 15% pre-tax net income.
So what do I actually mean by that? What does that mean? It means that-
Andrew Foxwell: Yeah, right.
Austin Brawner: ... if you did, let's say, if you expect to do $6 million this upcoming year, that's your goal. That's what you expect revenue-wise. Well, then your pre-tax net income goal should be between $600,000 and $900,000. That should be where you want to be in profit, right? The money that you'd be paying taxes on would be that amount.
Andrew Foxwell: So it's a percentage between 10 and 15% pre-tax net profit you're looking at, essentially.
Austin Brawner: Yes. Of revenue. So you look at the revenue. You calculate 10 to 15% of that, and that's what you want to set the goal of profit ... That's where you want the business to be profitable at the end of the year.
Now it's really important to ... We always hear, "I'm running the biz," people talk about running the biz at break-even. Now, they're like, "Oh, you know, we're just putting everything back in the business. We're growing. We're growing at ... basically, we've been break-even the last couple years, but we're growing."
Now the problem with that, and if you're in hyper-growth mode and that's what you're doing, that's your plan, people will go down and continue a break-even strategy. If you want to scale profitably, the problem with going break-even on your business is that if anything happens that changes what you expect, you can end the year very easily in the red, right?
Facebook. Look at the last, in 2018. Facebook algorithm had some serious glitches, whatever you want to call it. Like there's a glitch in the algorithm. It changed. It changed and it made it a little bit more difficult, the expectations that you had around CPAs went a little bit higher than probably even your expectations.
So if you're planning on breaking even and something changes, you can easily end in the red. So that's why I say 10 to 15% pre-tax net profit, net income is where I want you to be.
Andrew Foxwell: Love it. Okay. So you've established that, and then you set that profitability goal. There are the four steps then to get there. Can you talk about the first one, which is around the wages that you're paying yourself and your team? Can you dive into that a little bit?
Austin Brawner: 100%. Number one is you gotta decide on market-based wages for yourself and your team. You don't need to get there right away, but you need to figure out what those are. 'Cause most business owners are paying themselves way too little. Really. It's something that ... This is across our industry, and across the whole small business space, people paying themselves too little if you're a business owner.
The best way to think about this is, think about what you'd have to pay someone to replace you in your own position in the business. That is the market-based wage for your position. So if you need to pay somebody $180,000 to take over your role, yet you are paying yourself $80,000, that is going to be a problem for the business. 'Cause that $100,000 that you should be paid is showing up as profit in the business when it really should be counted as salary.
Andrew Foxwell: Sure.
Austin Brawner: So that makes it really tough because by not paying yourself a market-based wage, you are masking some underlying issues in your business. A business that seems profitable because the owner's taking a small salary might not actually be viable if the owner is actually removed from that business.
So that's a tough thing to think about. And if you're in the position right now, and you don't feel like you can pay yourself a market-based wage without losing money, that's okay. You just have to realize your business is not yet profitable, and your goal has to be to get to yourself to a market-based wage plus 10 to 15% pre-tax net income.
Andrew Foxwell: Got it. So it's essentially deciding on the market-based wages for yourself and your team as a part of this profitability, you know, kind of calculations you're doing.
The second one is getting your business fully capitalized which is understanding how much money do you actually need. Talk about that if you would. What is that ... Kind of go into the rule of thumb there.
Austin Brawner: Sure. This goes back to when I was first working at the company called Blenders Eyewear years ago. I remember there was some advice that they got from their kind of next door mentors, Pura Vida Bracelets. They were building their bank account, and the advice that Griffin gave which I thought was, in hindsight, really good advice. He was like, "Just build your bank account as high as you possibly can." Right? "Fill it up. Try not to take any profit out of the business. Just fill it up over those first couple years." That was his advice.
And I take that advice and that worked out well for them. They were able to scale without taking outside investment because they focused a lot on building that bank account.
Now the real question that ... I take that a little bit further and say, "Well, how much money do you actually need?" And the way that you figure out how much money you need to have in your business to be fully capitalized is you want to figure out during your worst months, how much you'll actually need. And this can be really tough if you are a seasonal business, which a lot of e-commerce businesses are somewhat seasonal.
I think of an example of a planner business, right? There are some very successful planner businesses out there. These planner businesses, they sell most of their inventory during December, January, and a little bit in February. But they're buying all their inventory back in, I don't know, placing the order in October or whenever they're placing that order.
So what you want to do is you want to figure out the difference between your worst months and your best months, and figure out how much you need to pay your team, all the expenses that you've got, how bad it could potentially get, and prepare for that by fully capitalizing your business. Kind of a rule of thumb, I would say two to three months of expenses, entire expenses, so if you made no money you could still pay all vendors, pay all employees, pay everyone. That's how much you need to get fully capitalized.
Andrew Foxwell: Love it. Okay. So you get the business capitalized. A good example from the Pura Vida, Blenders example.
Then getting into the salary cap as well, right? So you want to get to 10% of pre-tax net income as we talked about. And so kind of understanding how much money you need for hiring, I believe, is the theme of this one. Can we get into that?
Austin Brawner: Yes. Another question that you and I get probably all the time is when should I hire, who should I hire, am I able to hire? All these questions around hiring.
Andrew Foxwell: Right.
Austin Brawner: And these are tough questions. To try to figure out if it's the right time to hire, or if you might need to, maybe you need to let somebody go who hasn't performed. These are all tough questions. And your biggest expenses will probably be your marketing budget and salaries. Those are where a lot of, in our space and the e-commerce space, where a lot of the money goes.
So the good news is you can actually calculate a salary cap, which based on your profitability goal will give you a better idea of how much you are able to spend on salaries over an upcoming year.
So I'll give you an idea here. I feel like we just recorded an episode with a little bit of math. This one also has some math in it. It's gonna be simple math, but I'm going to walk you through what this would look like.
If you have a net income goal, and you can estimate your gross margin, and you can model some of your expenses, you'll be able to determine how much you can spend on salaries. So here's an example.
Let's say that your goal, you've been running at break-even, hyper-growth mode, but this next year you have a goal of 10% pre-tax net income. So that's your goal. Your projected revenue for the upcoming year is $6 million. And you got a gross margin of 60% which means that of that $6 million in revenue, your cost of goods sold is $2.4 million, and leaving you with a gross profit of $3.6 million.
So if you want to figure out the amount you can spend on salaries, what you need to do is look at that gross profit number, and you need to remove your pre-tax net income at 10%, which means if you did $6 million in revenue, 10% of that if you have a pre-tax net income goal, would be $600,000. That's how much you want to make in profit. Now the remainder of that is going to be the total that you have for expenses and salaries.
Now, that would mean ... So let's say just to recap it, $6 million in revenue, 60% gross margin, that gives you cost of goods sold at $2.4 million, leaving you with a gross profit of $3.6 million. You take out the pre-tax and income goal of 10%, so you remove $600,000 from that. That would give you $3 million. That's your total that you can spend on expenses and salaries to be able to reach your profitability goal.
If you're running a business, you've been doing it for a couple years, you're gonna have a decent handle on the expenses that your business needs, right? So there's gonna be a lot of fixed expenses in there.
So imagine that to make $6 million in revenue, you're gonna have a million dollars of expenses. And that's fixed expenses plus marketing budget. Well, that will give you a salary cap of $2 million for your business for the upcoming year.
Andrew Foxwell: Got it. Okay.
Sure. Okay. I'm taking notes on this so I'm like, I see it. Hearing it, I'm like, "Whoof!" Here we go. Yeah, but, it makes a lot of sense.
Austin Brawner: Also to make this a little bit easier, in the show notes, if you go to ecommerceinfluence.com, I'm going to have an image with a salary cap breakdown and a tool you can use to calculate this in your own business. Because I found this to be really, really helpful. Again, doing math through a podcast can be a little bit difficult, but if you want to go to ecommerceinfluence.com, look for this episode and I'll have a little tool that can help you with this.
Because ultimately, it's going to be your biggest lever. The amount you pay in salaries and your marketing budget. And I wouldn't recommend typically ramping down on marketing. It's the question of if we can hire or if the hiring we've done is successful, a lot of that's dictated by your profitability goal at the end of the year.
Andrew Foxwell: Yeah, right. So getting into this, that's kind of the salary understanding, and then thinking about the money of paying ... how to think about money, paying taxes, paying back debt, build working capital, then take profits. Can you talk about these just briefly, and what that means?
Austin Brawner: Once you've made some of these calculations, that you've figured out your salary cap, you've kind of got more of an estimation about what your goal of profitability is, then you're going to, in this order, you're going to want to first focus on paying your taxes. That's the number one most important thing, make sure you have enough money to pay your taxes. So that's number one. So you don't want to run break-even and then live off your ... You don't want to spend all the money in advance, and then get to the point where you have to run some sort of promotion in January or February to be able to pay your taxes. That's happened to more business owners that I know that I want to admit.
Then number two, you want to pay off any debt in the business. And number three, after you've paid your taxes, paid off debt, then you want to build up your working capital like I was talking about earlier. So stack that. And then only after that, you want to take profits out of the business.
So that would be the plan. It's pay off things you need to pay off. Build up working capital. And then take profits out of the business because you need that working capital to make sure that in the future, you don't need to raise money or get outside financing in times when you don't actually need it.
Andrew Foxwell: Love it. Love it. Makes a lot of sense. Makes a lot of sense, man.
So then there's the method. That's the final part of this. So we've gone through basically the mindset, the money. So the mindset change, the money, doing the calculations on everything that you're really going off of, which is building on the pre-tax net profit. And then the method.
So talk about the method of scaling profitability and what that means.
Austin Brawner: Sure. Again, a lot of times this is where ... as business owners and as marketers, you want to figure out these cool tactics, and implement the tactics that help grow your business. And that's where you want to start first. But as I started with mindset and money first, now we're moving towards some of the tactics and things you can do to build a more profitable business. But that comes after you have built the strategy and made a plan. So what are the biggest levers that you have to be able to grow a more profitable business?
Well first and foremost, you gotta remember that the key to this, all of this, is your lifetime value has gotta be greater than your cost for acquisition. And that's, overall that's the number one thing. Remember, focusing on lifetime value, increasing lifetime value, because those are going to be more profitable transactions from repeat customers.
With this, the next biggest lever is focusing on better customers. Now there is a huge difference between your average customer and your best customer. And you've seen this being on the front lines, especially the last couple years, right? What was the biggest thing people were promoting for the last couple of years for ecommerce? Not so much this last year, but the previous two years, free plus shipping offers. Right?
Andrew Foxwell: Right.
Austin Brawner: Every conference was like, totally.
You gotta do a free push if you're gonna offer it with ascension, there's an ascension model, and you bring in all these people for cheap, then you upsell them. What's the problem with that?
Andrew Foxwell: You have a lot of low-value customers. And you have a lot of people that aren't that interested. And this goes to the opposite we kinda went through with Peter Fader, right, or I should say Dr. Peter Fader, of how you should be treating your customers differently. And so this is a big part of scaling profitably is focusing on those people that are spending more money and are doing the right thing, that is really investing in your business. So that's a big difference between an average customer and your best ones.
Austin Brawner: And if you guys have ever been in the ... if you've ever been into a Bonobos Guideshop, right? Bonobos' Guideshops are really, really cool if you like the company Bonobos. I'm a big fan. I bought a bunch of their pants. If you go to a Guideshop, they're strategically laid out in a way that you go in, and the first thing you see are these beautiful suits, these beautiful upscale, full, three-piece suits. It's just really the highest of high end is what's being showcased right as you go in.
And that's strategic because they realize that the people that were dropping $5 to $7,000 and overhauling their entire wardrobe were the people that are buying suits. So rather than showcasing the new pairs of swimsuits that they're launching, that someone comes in and buys a $30 pair of swimsuit, they're focused in the Guideshops on getting high-value customers in and overhauling their entire wardrobe. That's how you focus on better customers, with more of a strategic approach to what are they buying, when are they buying it, and where did they come from? That's the focus on that.
Andrew Foxwell: Love it. So building bigger customers, so LTV greater than CPA, you know, more important than CPA, high-margin products, better customers.
The next one, build more recurring revenue, right? What can you do to care for these people, and maybe what you do for some of these best customers is you launch a subscription product. Maybe that's what they want because they're already spending a lot of money with you. I think that's a really big part of it for another part of the method, right?
Austin Brawner: How much happier are you as a Facebook advertiser when you know that you can sell a product that's $20 and on the backend, it's going to re-bill eight times?
Andrew Foxwell: Right. So much happier. Absolutely.
Austin Brawner: It gives you a massive competitive advantage. And this competitive advantage is something that even if you ... So the most simple type of option, right, replenishable products, those very simply can be put into a subscription, right? And you've worked with a ton of brands that you've seen that have subscription options for replenishables. Very, very simple to do. Something that if you're not doing right now you should launch.
But there are also options for non-replenishables that I find to be interesting. You know, interesting subscription modeled that are non-replenishable. There's two that I'm thinking of right now. One of them is a company that does subscription curated essential oils. So they launch a subscription box that they curate essential oils that go out every single month and the value in that ... You can go and buy essential oils pretty much anywhere and choose the ones you want. The idea is they're creating an experience, and a vibe, and a mood for your upcoming month by curating the essential oils so you've got a good combination that you can then use over the upcoming month. Really good idea and it's a typically non-subscription based product moving to a subscription model.
Andrew Foxwell: Right. I love it. Right.
And it feels special to that person, right? So I think that's a huge part of it 'cause it's gonna ... The more that you have of the recurring revenue coming in, the more that you have a subscription business, which many of you have heard this I'm sure, that's gonna help with that profitability. It's gonna help with ... You're not gonna have to do as much acquisition. You're not gonna have to spend as much on bringing in brand new people and you're going to be able to build up relationships over the long term, right.
So the final part of the method part of this increasing the average order value. What can you do? Bundling products is a big one that I love to do on Facebook, and working with clients who are saying, "Look, how can you take these similar products, put them together, and sell this bundle that people are already looking at?" Right? Because the more that we have room in this acceptable CPA, the better off we're going to be in terms of finding new people.
Austin Brawner: I know this is something that you've done and advised people to do a couple of times. I know in the past you shared an example around a deodorant. Do you have any other examples of products that you've been able to bundle that made a big difference on-
Andrew Foxwell: Totally. Totally. One of them is a lot of ... There are two apparel brands we work with. And they were doing outfit lay-down shots of those outfits, or they would have a shot of that outfit on a kid and then they would sell the shirt. Well, why not sell the whole outfit? Right?
Austin Brawner: Yeah.
Andrew Foxwell: And have a landing page for that outfit. And that's something we've done a lot of and has done really well because people want to buy the whole thing. Why not? They see something they like, or maybe sell a sweater and a bandana, or sell a sweater and the shirt under it, right? And you call it the Uptown Combo or something. I don't know, it's just an idea. I just came up with it.
Austin Brawner: I love it.
Andrew Foxwell: The Uptown Combo which is a great jazz trio name. But yeah, that's another one. The deodorant one. You're not going to make money off of one stick of deodorant. You're going to make money off of selling more of them. So you have to bundle them together. Give the product variety. How can somebody that's brand new be introduced to your products, right? And maybe you have, maybe you discount those bundles to brand new people to bring more people in. But their AOVs are higher. And then they get exposed to more of your products. So I think that's a really big one.
There's something you called priority processing. Can you give me an example of what that means?
Austin Brawner: Yeah. So this is interesting and something I've seen now on a couple of different clients I've worked with. They give the option of something called priority processing which it's like an upgrade to shipping, but it happens before the product's even shipped out at all. And so for an additional, for a flat fee of like five bucks or four bucks, what happens is somebody can buy priority processing, and it'll take their item, and they'll move it from the bottom of the pile to the top of the pile so it gets shipped out a little bit quicker. And so it's-
Andrew Foxwell: That's a great idea.
Austin Brawner: Yeah. It's giving people the option to just upgrade their shipping experience a little bit by moving them to the top of the pile, and it doesn't cost very much on your end, but it's a way to increase average order values by a couple dollars. I've seen this in a couple of sites now.
But those are all kinds of ways that you can really increase your lifetime value, average order value, and try to bring in more profitable customers. Again, the biggest key is going to be focusing on better customers and really taking a look and analyze do you have a funnel out there that are bringing in a lot of low-value customers? 'Cause if you do, you might want to look and that and say, "If we're trying to scale profitably this next year, maybe we'll take a little bit less growth, but we are ... a little bit less revenue, but higher value revenue by bringing in higher-quality people."
And that's kind of the main thing to leave you with is just focusing on the quality of customer. That has a big, big impact on overall profitability.
Andrew Foxwell: Well, very interesting on the profitability side. Austin talking about mindset, talking about changing your mindset to get things right in your mind of yes, I want to go from scaling to scaling profitably where I'm making more money, talking about things under that of what type of business you run, what's most important, and understanding committing to that. Getting into money, right? So moving from hyper-growth to getting the finances in order. How much are you gonna pay yourself? How much are you supposed to be paying in salaries, right? Understanding that capitalization for your business. Setting the salary cap and making the hard decisions. And then getting into the method. Understanding how to up the LTVs. How to get your higher-margin products out there. Bundling. Finding better customers, and increasing the average order value.
So hopefully these are things that can help you scale your business more profitable, and we'd love feedback on the episode. So you can always give us feedback on the website, or you can email us, and hopefully, you have found this helpful for your business.
Austin Brawner: Yeah, and make sure if you want some of these tools, go to ecommerceinfluence.com and search for this episode about profitably scaling, and I'm gonna have some tools that you can use to be able to calculate your salary cap and it'll make it a little bit easier. And also I'll go a lot more in-depth in this, in the Brand Growth Experts Membership if you feel like it's something that you want to dive, that you're struggling with and you want to dive in a little bit more, I can work with you one-on-one to help you do that.