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196: The Ugly Truth About Why Your Business Isn’t Scaling

Posted by Austin Brawner on April 23, 2019

 

We know how frustrating it is when your business isn’t growing at the rate you think it should.

Andrew and I have gone under the hood of dozens of different companies over the years and now when a company approaches us, it’s easy to spot the ones that will be able to scale up, and the ones that will struggle.

Today, we share seven reasons why your business might not be scaling and what you can do to fix it. We’ll talk about market size, margins, LTV, and product diversification, and how all of these things impact your ability to scale. This episode will help you identify potential issues and give you solutions for the most common reasons why your business isn’t scaling.

Enjoy!

Episode Highlights

  • 4:32 Reason #1 why your business isn’t scaling: Your market is too small or too cheap.
  • 6:25 What to do if your market is too cheap.
  • 7:50 One solution for scaling up if your market is too small.
  • 8:43 Reason #2 why your business isn’t scaling: Your contribution margin isn’t large enough.
  • 10:29 How to solve your contribution margin issue.
  • 11:26 Reason #3: Your AOV or LTV is too low to advertise profitably.
  • 13:13 The workaround for increasing LTV if you have a low AOV.
  • 15:02 Reason #4: You don’t have any repeat customers.
  • 16:08 How to build a product system that will get you repeat customers.
  • 18:21 Reason #5: You don’t have complementary products.
  • 20:20 Reason #6 why your business isn’t scaling: You’re too cheap to hire quality people.
  • 22:25 Reason #7: You have a product that you sell, not a business.
  • 23:48 If you’re just selling a product, here’s what you need to do to build a business.
  • 25:39 You don’t always have to scale to be successful.

Links And Resources

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Transcript

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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. How are you doing over there?

Austin Brawner: Dude, I'm doing very, very well. I'm just, I'm standing today. I got a standing desk. I don't always stand, but I stood all day today, and it's one of the things I've been trying to be better at. Got this little, nice little mat, feels good. I feel like I've got more energy, and feels good, man.

Andrew Foxwell: You know, my buddy is like the mat king of Amazon, so huge business, just making mats in the U.S. killing it on standing mats. 

Austin Brawner: It's a crazy business. I might have his mat. I actually might have his mat.

Andrew Foxwell: It's Sky Mat. Is it the Sky Mat?

Austin Brawner: I don't know. It may be. I'm not sure.

Andrew Foxwell: Yeah, they just released a new one actually, a new model, that has a rolling fascia cruncher in the middle, like a little rolling ball you can roll your foot around on.

Austin Brawner: I like that.

Andrew Foxwell: Yeah, yeah, yeah, yeah. Pretty cool.

Austin Brawner: What a crazy business, just being in the Amazon world, having a product that kills like that. I was talking to a client who is selling basically a fitness product and was doing really well, pretty much no competition. And then one of these kinds of "Get Rich on Amazon" FBA courses used her product in all their marketing as an example of a good product to rip off.

Andrew Foxwell: Oh, my gosh.

Austin Brawner: So went from almost no competition to drones of people, thousands of them coming in and ripping off her exact product because they didn't have very much creativity around it. So it's just a wild niche, and it was just something I thought was quite interesting. Now she's kinda dealing with that, but it can happen for sure.

Andrew Foxwell: Well, that's absolutely true. Well, you know, there's a lot of threats that businesses face, right? I mean, that's one, that's an interesting story. But today we're talking about businesses that are scaling, and those that aren't, and really why. Those that aren't scaling, what's going on, and how you can probably fix that, and give you some solutions.

Austin Brawner: Yeah. We want to talk about it today because both Andrew and I, we get to see a lot of different companies doing audits and working with a lot of different clients. And both of us are approached by companies who want to work with us all the time. And you know, it's interesting because we can spot the companies who we feel like are going to be able to scale up, and the ones who are not going to be able to scale. And we were kind of thinking about the different reasons why we might be excited to work with a company, or other ones we feel like, "Oh, it's not that good of a fit." So today we're gonna walk you through kind of seven different reasons that your business might not be scaling, and talk about what you can do to fix it.

Andrew Foxwell: Absolutely. Absolutely. So the first one, let's just go ahead and get started. We have seven of these babies. The first one, your market is too small or too cheap. Okay. So go into that. We came up with a couple of examples.

Austin Brawner: Yeah. So what we mean by your market is too small or too cheap, there's kind of two different things. One, your market's too small, meaning that it's never going to be large enough to really scale up, and that means you could have the world's best butterfly catcher, but it's still a very small market for that. And that's tough. If you have a very small market, it's not gonna be able to scale the way that other companies in a much larger market will be able to scale.

Andrew Foxwell: Right. Right. There's a guy that I know well, and he sells youth hockey gear, and that's his market. And not to say that's not a big market, but it's not a massive market. Another guy I talked to, I really worked with him a little bit a couple of years ago, and he sold stock car wrenches for stock car racing cars. So not a bad business, but super, super specific to the very small market.

Austin Brawner: Exactly. And many of these businesses aren't bad businesses. You don't need a huge market. In fact, you can niche down and have a really good lifestyle business for yourself in these markets, but it's not going to scale the way that a product in the hair loss space or a product in the weight loss space is going to scale. The reason I say those two is because those are some of the hungriest markets out there, and you see companies grow really, really fast, or let's say energy market, massive, and can grow really quickly.

The other side of this is potentially the market is too cheap. And I say it's different than too small because what I mean by that is that a lot of your buyers are making decisions based on price, and it's highly commoditized. So maybe that's microfiber towels, or ...

Andrew Foxwell: Plush toys for a dog, at that point, right? It's too cheap. It's everybody's going on price at that point mostly because the consumer choice is so large. So that's really where going too cheap can be an issue. So some solutions to these are, go upmarket, for the first one, right? 

Austin Brawner: Yeah. And that plush toy example, a really good example would be, become the best. Make the best plush toy, right? Go upmarket because that's actually a big enough market, dog toys. If you have the best version of that, there's people getting wealthier than ever, but the middle class is being hollowed out, and so there's always room at the top of the market in these smaller niches, and it's often more profitable.

Andrew Foxwell: I didn't know I was doing this podcast with Bernie Sanders over here talking about the middle class being hollowed out, but no, I agree. I completely agree with you. There's always going to be room there, so going upmarket is really, really big one. You wrote "or knock yourself off." Can you explain what that means?

Austin Brawner: So what that means is that if you are in a certain industry, and you are the market leader in it, maybe you've got the highest up top of the market product, and you're looking to expand, well, one way you could do that is to knock yourself off and bring another line in. That's it, a smaller ... So say you've got the top of the line vending machine, then you would knock yourself off and bring a middle of the line vending machine that takes a different part of the market.

Andrew Foxwell: Ah, I got it. Okay.

Austin Brawner: That's what you'd do. If you have plush toys for dogs, the absolute best ones, you could knock yourself off, make a value line. And that would be a way to expand a little bit there.

Andrew Foxwell: Love it. Okay. So then the second one of the reasons why your business might not be scaling is your contribution margin is not large enough. So what's an example of a contribution margin not being large enough?

Austin Brawner: So example of contribution not being large enough happens a lot when people grow a drop-shipping business, and they have a very low margin on the product that they're actually shipping out. And so that'll happen when you've got pick and pack fees, your cost of goods sold is relatively high, and maybe you end up with like a 20-30% margin on your product. That's really hard to be able to scale up because you don't have any room to spend on advertising, which is going to grow your business.

Andrew Foxwell: Right. Right.

Austin Brawner: So when we see that, that's kind of a red flag. It's like, well, there may be a market for it, but it's going to be more demand capture then demand generation, and it makes it really hard to scale.

Andrew Foxwell: Right. Right, exactly. You need to have numbers there. This is really born out of that thing that we talked about before on this podcast, that actually I got five or six emails about when I said it, which is it's really hard in the U.S. today to do Facebook advertising if your product is under $30. It's very, very difficult. And if you've made that work, that's awesome. But you're taking that $30 AOV, that all goes into that contribution margin, and if you don't have any room to work with, it's gonna really make that really, really hard. It's gonna make that tough. So that's number two, a contribution not being large enough.

Austin Brawner: Well, first of all, before we move on, I want to say that the way to solve that is if you have a drop-shipping company, and you have a low contribution margin, you need to think about creating your own products. We have a company we both worked with who started out drop-shipping, and then realized that it was gonna be very hard to scale, and they started creating their own products. That gave them a better margin. So if you're in that position and you feel like you got a really low margin, think about moving from drop-shipping to creating your own products.

Andrew Foxwell: Yeah, that's very true. And that's a really good solution, and it's doing really well for them. People are very excited about it because they have built a brand at this point that was dependent upon drop-shipping before, as you said. But the brand is strong and people trust the curated brands that they brought to them. So then they create their own product, and the market's already ready for it. They have their own people that are excited to see what they've created since they've been recommending these other products for so long. So that's really, really, really a good example.

Now number three, your AOV or your LTV is too low to advertise profitably, which is kind of what I just said. It goes into this a little bit. But you have an example specifically around Juul. Can you talk about that and kind of where they're at?

Austin Brawner: Yeah, so the example is, the idea is, if your lifetime value is not high enough, you're not gonna be able to advertise profitably. Juul is one of the fastest growing companies in the world. They're little vape pods. I think they retail for like $50 to get started, and they're like $15 after that. Or maybe it's even cheaper than that, but they are paying their affiliates somewhere between $80-$90 per sale. So they're actually losing like $40-$50 on that first sale because they know that their lifetime value, once they actually hook someone on a Juul, is so much higher that they can comfortably spend that amount to acquire a customer.

Now the biggest problem with companies that don't have a lifetime value that's high enough is that they can't spend the money like Andrew was talking about, to be able to advertise and grow. And that makes it very difficult. If you have a low average order value and a high LTV, you might be able to advertise, but you might run into cashflow concerns because typically you need to have that cash up front to advertise to get people to buy initially. It takes a long time for lifetime value to increase. So you could run into some cash flow issues if your AOV is low but your LTV is high.

Andrew Foxwell: Absolutely. So let's think about this for an example. So there's a deodorant company that we mentioned I think a couple of podcasts ago potentially, which is, they have a low AOV, right? However, what they've done is they now have forced you basically into buying a bundle to create a higher value product. So you have to buy more than one. Well, we've talked about Native Deodorant, which is not actually the company I was thinking of, but it does this really well too. You have to buy more than one thing.

I worked with a company a month ago or so, and they are a reading glasses company. And their reading glasses are not that expensive because you can get reading glasses anywhere really, but they bundled them, and they have sets depending on like what matches with your outfit. And they do really, really big discounts on repeat purchase. So that's another way. So again, you may not be scaling ... If we look at this and people say, "Hey, we have an AOV, it's $25, and our LTV is $31," that's just going to be almost impossible to do at this point in time on Facebook and Instagram because it's just not big enough.

Austin Brawner: That's why you look at companies like Quip, the electric toothbrush company. Their AOV is $40, but they put people automatically on a refill plan where every three months they get paid. Yeah, it's like $10 every three months. And they even give people an option to prepay. But the idea is they get people in. Even it's a low AOV, they have the lifetime value to be able to back up the spend, and continue to scale quickly because they can get sales on the back end.

Andrew Foxwell: Absolutely. Absolutely. So on to number four, issues we've seen, you don't have any repeat customers, right? An example of this, of course, you have one product that doesn't really give you any reason for reordering. What would be an example you think of a product, like a one buy, and why would somebody buy again from you?

Austin Brawner: So a good example I can think of is a company that had reached out at one point. They had like the world's best windshield scraper. So you needed to buy it one time, and that was it. Like maybe you had multiple cars, but really this thing was like indestructible. It was the best. There's no reason to get another one. And they had no other products as well with that. So it's like either you're buying that for yourself, and the only other way you'd buy anything else from them would be buying gifts. But it's a one piece per person type deal, and they didn't have any other products.

Andrew Foxwell: Yeah. Right. One thing, that's it. So really the solution if you don't have repeat customers, is building a product system that allows for complimentary products. So an example is, let's say you start an ice scraper business. The second one clearly that you're going to come out with is the model that I had growing up in my 96 Honda, which was a thermal mitten ice scraper. So you put your hand in this thing, you're hand is just as toasty as all get out, and that's the one that I had. So that's thing you could have.

Austin Brawner: But I would say once you buy that one, you don't need another one. Right?

Andrew Foxwell: I know, that's true. Damn.

Austin Brawner: So it's more thinking about, okay, if you don't have repeat customers, and not thinking like product solution, thinking about the customer and what else the customer use. So if someone's buying an ice scraper, well, they might not need another ice scraper, but they're still gonna have to deal with snow and all those issues. So maybe you roll out the world's best driveway shoveler, something like that, to combine and add an additional complimentary product to that initial one. So it's like keep figuring out what do these people actually want, versus ... or the equivalent of ... I've talked about this a bunch.

It's like you take and you curate stuff for people. So if you don't have a lot of repeat customers, you can curate items and turn it into something that people would want to buy on subscription. The equivalent of like jewelry, Pura Vida bracelets, you can buy jewelry, or you can get their subscription box. And that's not a great example. Really more of what I'm talking about is like trying to figure out what do people actually ... If they're scraping snow, there's other problems they're dealing with that you might be able to try to help solve that problem.

Andrew Foxwell: Totally. Totally. And that really kind of leads into ... Don't have any repeat customers, it leads into ... All of these things are intertwined. It leads into spending more money, it leads into the contribution margin not being large enough, the market's too small or too cheap. It's all within that. So the next one is also really a part of this, which is number five, you don't have complementary products, right? It attached to exactly what we just said.

Let's say you have a shirt company, and that's all that you do, but you don't do something else. You don't do shorts, pants, long sleeves, hats. You have one thing that you do, there's no complimentary pieces to it. So thinking about what that audience would want instead is the solution. Right? You talk a lot about, Austin, Jeff Bezos selling books. You want to talk about that?

Austin Brawner: Yeah. So Jeff Bezos was interviewed and talked about why he started Amazon the way that he did by selling books. The reason he started Amazon and he sold books initially was because books were something that primarily affluent people bought. So he was focusing not on the fact that people needed books. He was focusing on the fact that he was acquiring affluent customers every time he sold books to them. And then he could sell other products to those people.

A good example of a company ... I used to see these ads all the time. It was like, "The world's most comfortable sweatshirt." I remember seeing this. It was like one of those first Taboola ads I used to see all the time. And the obvious choice for that company is, okay, you do that really, really well.

Well, if people are buying the world's most comfortable and sturdy sweatshirt, they might be interested in the world's most comfortable and sturdy sweat pants, something like that. You know what I mean? It's like you've got an audience here, trying to figure out what the audience wants rather than ... Being customer-centric versus being product-centric, and thinking, "What does the audience want, and how can I create that, versus what products can we build?

Andrew Foxwell: Absolutely. Absolutely. Now, number six goes into something you've spent a lot of time thinking about, which is centering on people. And number six, why I might not be scaling is you're too cheap to hire quality people, or you've made the choice not to hire quality people. And an example, really, you're trying to outsource everything, like your email, let's say you outsource your Facebook ads to people in India on Upwork, and it gets overwhelming.

I've seen this happen more often than maybe I'd like to talk about, where people think that they can just hire someone, and then they contact me and say, "Things aren't going well." Well yeah, because the person you're working with isn't quality, right?

So the solution for this, of course, is hiring people that are quality people, ideally that you could meet with in person, or you could meet with on video that is in your time zone. That might make things a little easier, like quality people that maybe have a track record and have done the work, instead of trying to cut the corner.

Austin Brawner: Yeah. And I think there's a good description of those two types of businesses out there. There's businesses that are entrepreneurs who are trying to continually add additional arms to their body, right? So rather than having a bunch of other people working in their business and helping the business grow, they just keep adding arms. They had like an additional arm who's going to be taking care of Facebook, a couple of VAs here, and they try to be like the brain that leads everything, versus the other type of business that tries to hire the best people, and then get out of those people's way.

And that usually is the difference between a company that really has an opportunity to scale up and grow. It's getting the smart, smart people in, giving those people an opportunity to take the lead and take the business to the next level.

Andrew Foxwell: No, that's very interesting, very interesting, and I'm glad that you said that. So number seven, the final one, you have a product you sell, not a business. There's a company that contacted me six months ago, last year sometime, and their product was one type of towel. That was it. That's what they sold.

Austin Brawner: That's it.

Andrew Foxwell: Now I'm not saying that it's bad. Again, this can work and it was working decently well, but there was no product selection other than that one thing. So it's not a business at that point. It's a product. Right?

Austin Brawner: It's a product.

Andrew Foxwell: And if people feel that they can get that product somewhere else, then that's going to be an issue for you. 

Austin Brawner: Oftentimes it's an arbitrage too. And it's like when I had people reach out during the skincare craze with like selling these charcoal skin masks. They had found a product they could sell on Shopify and promote via Facebook ads. And they could make some money, but it wasn't a business. It was just a product that they had sourced, and it was an arbitrage opportunity that other people could pour into. It wasn't defensible at all, and that's a problem right there.

If you find yourself in that position, and you know you've got a business; sometimes these things are really profitable, you can make a lot of money. I'm not saying it's a losing deal. Sometimes you can make a lot of money with just an arbitrage product. But if you've got that, if you're there, the solution is to go to work on product development, and try to figure out what else your customers might want, because, again, you can acquire a ton of customers with one product, but you don't really build a business until you have multiple things to potentially sell to those people, and you're catering to your customers.

Andrew Foxwell: Yeah. I think that this podcast raises a lot of interesting points. It's made my mind go through, even when we were planning for this and talking about it, it's really, it's so true. And I think a lot of this is, this isn't Austin and I saying, "Don't come to us if you ... We don't want to hear if you have one of these issues." Okay? That's not true. And I think that a lot of times, or one of the reasons that we're in this business is to be able to help people try to develop more products, or try to develop a complementary product line, or think about ways that you can raise LTV or AOV. So that's why we're here.

So if maybe things are tough, and as one of our friends says "tough sledding" all the time, then this can be a roadmap too, to know where you need to start. But these are the most common things that we see about why they're not scaling. It's usually a fundamental thing because this is getting away from your website. It's getting away from your Facebook ads. You can have the best Facebook ads and website in the world, but it's not going to do much if these issues aren't solved. So hopefully this has been a helpful thing for you.

Austin Brawner: One last thing I want to go to talk about too is that you don't have to just ... I mentioned at the beginning, you don't have to scale to be successful. You can run a really successful business. And again, success is 100% defined by how you define success, by nobody else. And so this conversation today is more specifically around scaling than it is around success because a lot of these small niche type businesses can lead to an incredible lifestyle. And I'm not saying it's not a good way to build a business. It can be a really good way to build a lifestyle for yourself, but it can just be hard to try to enlist the help of others if you have a niche style business that doesn't lead to providing opportunities for other people to basically ride the wave and help you on your journey to scale up.

Andrew Foxwell: I completely agree. Well, thank you for joining us. Thank you for downloading this episode, and hopefully, you found it helpful. If you have, of course, you can always leave us a review, or shoot us a note and we would absolutely love to hear from you wherever you are in the world, and wherever you are in this journey. So seven things, and Austin, anything else before we wrap it up?

Austin Brawner: That's it. Thank you, guys, so much for listening, for your time and attention, and we will talk to you guys very soon.

 

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. How are you doing over there?

Austin Brawner: Dude, I'm doing very, very well. I'm just, I'm standing today. I go...

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