STOP Losing Money: How to Implement Profit First — Karl O'Brien | How To Find Your Hidden Cash Cows, What “Profit First” Means, How To Use Contribution Margin, Why Discounting Harms LTV, And Why Acquiring Customers For Retention Is Key (#450)

In this archive episode, we dive into the concept of “Profit First” E-commerce and why focusing solely on revenue can lead to big surprises. 

Karl O'Brien, Co-Founder of Store Hero, an e-commerce analytics tool, shares how their system helps store owners avoid common financial pitfalls by shifting their focus from top-line sales to bottom-line profitability. 

He explains how to gain a clear view of true profit and what to do with that information to drive business forward.

Topics discussed in this episode:  

• Why many merchants get a profit shock at month's end. 
• Why revenue-based decisions can hurt profits in e-commerce. 
• How contribution margin bridges the gap between marketing and finance. 
• What products are hidden cash cows or are actually unprofitable. 
• How to calculate break-even point ROAS for individual products. 
• Why Q4 strategy should be based on profit, not just sales.
• What Store Hero is: a profit-first e-commerce analytics tool. 

Links & Resources 

Website: https://storehero.ai/
LinkedIn: https://www.linkedin.com/company/storehero/
Twitter: https://twitter.com/StoreHeroApp

Get access to more free resources by visiting the show notes at https://tinyurl.com/dsay245p

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Transcript

00;00;00;10 - 00;00;25;23
Speaker 1
Hello and welcome to another episode of the E-commerce Coffee Break podcast. Today we want to talk about profit first e-commerce and what that is. Now, a lot of promotions out there working on a revenue basis and then they get a big shock at the end of the month when the accountant sends over the reports and then they see what the real profit is, the one that a little bit deeper into that and how to avoid pitfalls and mistakes along the way.

00;00;25;25 - 00;00;44;01
Speaker 1
With me on the show today, I have Kyle O'Brien. He's the co-founder of Store Hero at Store. He wrote today a profit focused analytics tool for e-commerce store owners. Previously founded Effective Up, a digital marketing agency based in Dublin in Ireland. Let's say hello to Kyle High. Karl, how are you today?

00;00;44;04 - 00;00;48;23
Speaker 2
That is for you. Thanks a lot for taking the time. Delighted to be here today.

00;00;48;25 - 00;01;10;14
Speaker 1
Are you coming from the side of running a web and digital marketing agency? So you have worked with a lot of brands and probably saw a lot of pitfalls that they were running in when it came to profitability, to revenue, to reports, analytics and all of that. I think from there you started with the idea of store or give me a bit of an idea, how did store heroes started?

00;01;10;16 - 00;01;32;22
Speaker 2
Sure. So yeah, as you said, it kind of really built a lot of experience on the agency side. I started a effector, a digital marketing agency out of college, let's suppose with us, we worked with ecommerce brands in the in the context of web and ongoing kind of web development, but also ongoing digital marketing, paid social and advertising more broadly.

00;01;32;24 - 00;01;54;07
Speaker 2
So it was a great learning curve for me personally, and I know for our team as it gives you an opportunity in order to get experience in numerous different industries and disciplines, I suppose within ecommerce. So it allowed us to kind of capacity to understand what the differences are, what the nuances are between different businesses, but also to certainly the universality in eCommerce as well.

00;01;54;10 - 00;02;26;10
Speaker 2
We're all typically operating on a relatively similar tech stock with maybe some similar problems, but also similar opportunities. So as you said, that's really where the idea of Store Hero came, both personally in the agency with the intention of maximizing the efficiency of our own team and and growing our own business. I was always looking to try to find, you know, you know, tech enabled solutions to increase or improve our own service and marketing reporting and, you know, efficiency of actually getting that data in one place was always a big part of that.

00;02;26;12 - 00;02;48;11
Speaker 2
Now, ultimately having kind of tried each the various tools that was available at the time and it was very focused on marketing data itself and but there was a couple of pitfalls there. So the platforms weren't necessarily e-commerce specific. So it was ultimately giving, you know, a sea of numbers, but not necessarily helping understand which ones were most important.

00;02;48;14 - 00;03;23;24
Speaker 2
And it also told us what happened, but not necessarily what to do about it. And so we definitely saw a gap there whereby it still involved interpretation there and didn't really set out a methodology as to what, you know, growth looks like in the context of ecommerce. One of our big portion we saw with clients was ultimately those reports were formatted in such a way that there would be a PDF export to a client that we would work with was waiting for an agency or or somebody with some more expertise in order to interpret that provide that maybe on a on a weekly or fortnightly basis.

00;03;23;27 - 00;03;49;16
Speaker 2
And that's one of the same challenge a lot of ecommerce teams have. They maybe center their work around the Monday marketing meeting. Let's say the time is spent in terms of aggregating the data. And I suppose that the key challenge I saw on the agency side was it missed a critical step in the process, which was profitability. As an agency, we were only getting a certain portion of the of the puzzle I suppose, and with that we're making decisions with revenue in mind instead of profit.

00;03;49;18 - 00;04;11;21
Speaker 2
It's the same thing. My colleague and co-founder Thomas, almost from Story Hero, also saw working directly with brands in Shopify and Masa as a marketing success manager or consultant for those plus brands. So ultimately it's the same challenging in a lot of individual marketing teams would have. They're operating through the lens of revenue, but at the end of the day, it's ultimately the profit.

00;04;11;21 - 00;04;20;25
Speaker 2
The standard of profitability is the is the standard by which the, you know, business owners and shareholders are holding them to account.

00;04;20;28 - 00;04;42;08
Speaker 1
Hmm. It makes perfect sense. I mean, you see always all over the Internet, the seven, eight, nine figure business e-commerce store, but they're all talking about revenue and what they're really making on money at the end is really the big question Now you said was store hero. You have developed a system that not only shows you the data but also points you in the right direction.

00;04;42;08 - 00;04;43;16
Speaker 1
How does that work?

00;04;43;18 - 00;05;06;29
Speaker 2
There are so really what it is is, you know, from our perspective, we wanted to be very clear in defining a methodology around profit first e-commerce. So really not just giving brands a C of numbers, but giving them a reference point or a blueprint, not to the extent where you're waving a magic wand, but a practical, beneficial tool in order to, you know, help brands run the day to day more effectively.

00;05;07;01 - 00;05;37;29
Speaker 2
And with us, you know, is really building on top of some of the challenges maybe that some of those other reporting tools that we saw hard. So they'd have different formats of aggregating maybe the sales and marketing data, but it was missing that crucial element of profitability. So ultimately, what store euro is, is a profit first e-commerce analytics too, which not only includes sales and marketing data in real time, connects directly into those channels, but also allows you to impose those product level costs like, you know, your core product costs, parking, shipping, fulfillment.

00;05;38;01 - 00;06;00;12
Speaker 2
Is there things like taxes and transaction fees we can pull directly from each channel? You might want to add in things like agencies, software expenses, operational expenses, staff costs and what that allows you to do is get a view of your profitability and across any profit metric you want to use, whether it's net profit or contribution margin on a store level, on a product level, or also on an order level as well.

00;06;00;14 - 00;06;07;19
Speaker 2
So really understanding what's working in order to do more of it and ultimately pull back and do less of what isn't.

00;06;07;22 - 00;06;23;06
Speaker 1
How do you address to different departments within a business? Profitability might look different to a marketer who is interested obviously in profitability of I don't know. That's that spend and all of that. Then someone who is on the accounting side of things, how does that work?

00;06;23;08 - 00;06;45;02
Speaker 2
Yeah, definitely. And it's an interesting point because it's something we've seen consistently around where the different stakeholders within in organizations where a store here has really gravitated, you know, they've got a gravitated towards still here and it's we see ourselves kind of sitting in the middle between the that of marketing function and the finance function, ultimately marketing in reality in the context of e-commerce.

00;06;45;05 - 00;07;06;09
Speaker 2
And, you know, e-commerce is predicated on those marketing metrics and that's what they're using, you know, and then teams are using on a day to day basis in order to give themselves an indicator of success. And often times that doesn't necessarily much the same kind of metrics, success metrics that the finance team are maybe using in order to give themselves an indicator indicator of success.

00;07;06;12 - 00;07;41;29
Speaker 2
So what we've done with Store Hero is allowed a user to really go from that kind of top line going a total sales metric right away down to bottom line, net profit and really contribution margin is the area that we see as a metric that helps balance those two areas of the business. The marketing team, for example, doesn't necessarily have control or context on the operational expense of the business, but as compared to driving revenue, if they can use contribution margin, which again, for for the benefit of anyone watching, you know, it's with a lot of these metrics that can be different definitions by different teams and different people in e-commerce.

00;07;41;29 - 00;08;07;20
Speaker 2
So really what we're looking to define there with contribution margin is gross profit after not only our product cost, but any of those variable expenses, you know, shipping, packing, fulfillment, no taxes, transaction fees, critically. Also factoring in that marketing cost, both direct advertising spend, but also any other associated marketing costs like agency fees. And I suppose you can be as direct as possible in terms of what you actually include in that metric.

00;08;07;22 - 00;08;34;25
Speaker 2
But in reality it's going to give you a much better indication of how much are we actually generating in the form of of a margin or a profit, you know, off the back of every order. And even in businesses where there's a really solid set of unit economics there, there's solid gross margins, there's low product costs, Realistically, that CPA that sits in the center is going to be a massive variable that can really dictate whether a brand is profitable or not.

00;08;34;28 - 00;08;54;02
Speaker 2
And I suppose that's something we've seen over the last number of years as the cost per acquisition and cost to acquire customers has risen. It's ultimately meant as a lot of businesses there who don't understand or don't have the capacity to see, and that maybe they might be unprofitable on an order level, especially for, you know, a good chunk of their orders.

00;08;54;05 - 00;09;15;20
Speaker 2
And you know, it's easily torn by nature. The fact that it's so difficult to get an understanding of that order level profitability from all those different variable expenses that I mentioned. So, you know, direct to your question, ultimately, if that kind of contribution margin can be the the centerpiece and the Holy grail that we use as a reference point, it can help bridge the gap between marketing and finance.

00;09;15;27 - 00;09;23;14
Speaker 2
And also it's still a proactive metric that both teams can use in order to drive the business forward.

00;09;23;17 - 00;09;38;13
Speaker 1
A lot of shops, online stores carry a lot of SKUs, a lot of products around, and there might be products that are sort of hidden, hidden cash costs and there might be some that are just unprofitable. How does your system help in finding these?

00;09;38;16 - 00;09;55;10
Speaker 2
Sure. So ultimately, as well as seeing that overarching store overview piece, we also have brands and businesses to dive in on both a product or an order level on a product basis. This can be really important not only to see an extended version of maybe a unit sales report that you might be familiar with seeing and in Shopify.

00;09;55;10 - 00;10;18;20
Speaker 2
But again, the critical challenge there is that it's only representing your land, the product cost in the form of a gross profit. It's not including any of those other random variable expenses and particularly not your advertising spend. So the intention there is on our product screen can understand the profitability of each product, how much each of those products are contributing towards your kind of overall contribution margin or gross profit and put as well.

00;10;18;20 - 00;10;52;13
Speaker 2
We can also determine what your break even point for us is for each of those products. So again, as a not only, you know, it's often a sliding scale or a and, you know, a moving, you know, target in terms of understanding what success looks like in terms of race. But on the product level, because those margins are different, we can understand not only what's what's actually driving profitability when it comes to what's contributing towards contribution margin, but also then as well, you know, what products are best set up to support digital advertising.

00;10;52;16 - 00;11;14;27
Speaker 2
They have solid margins there. You know, could average order value there in order to mean that we have an opportunity for success on the same concept also applies there in the context of our order screen. So on an order level, we can also not only understand the unit economics of each product within that order, but any of those order level expenses like taxes, fulfillment, transaction fees.

00;11;14;29 - 00;11;42;26
Speaker 2
So by understanding those, we're not only able to see what are the orders that are best contributing towards an gross profit, which are the orders with the largest margins, but often maybe more importantly, what are the situations in which we're leaking margin? So there might be a perfect storm there. Particular orders that may have a free shipping threshold in which that maybe customer isn't covering the cost about shipping, maybe it's a single product purchase, maybe it for a low margin product, maybe it's as a welcome ten discount.

00;11;43;02 - 00;12;02;10
Speaker 2
There's an advertising cost associated with it. So all these components can add up together and you can really, I suppose, which story or identify what are the situations that I want to kind of elicit more says from or generate more sales. I'm one of those edge cases that, you know, in reality are taking away from my hard work and driving profitability in my business.

00;12;02;13 - 00;12;23;02
Speaker 1
And I think there's a lot of moving elements in every business, and it's easy to fall into the trap to just oversee something. Now we're going slowly into Q4. Obviously, that's the biggest quarter in the year when people sell the most. If you want to look into your numbers now and you start using store here or how does the process work?

00;12;23;09 - 00;12;28;13
Speaker 1
Can I import my data that I already have or what's the process there?

00;12;28;14 - 00;12;49;02
Speaker 2
So it's still here. I once you sign up, you go through a simple onboarding process, connect your marketing channels, your sales channels, and with that, set your kind of product level costs with that, we can get a historic report on your store today and understand your profitability for last year, let's say. So comparing any particular time period against the previous period or the previous year.

00;12;49;04 - 00;13;10;09
Speaker 2
So that's again particularly beneficial for kind of seasonal peaks like Q4. And ultimately, you know, that approach is going to be slightly different for different types of businesses depending on what their overarching goals are. And one thing we consistently see there is that, you know, Q4 and naturally with so many different things happening in the business, can be a real time of kind of heads down.

00;13;10;17 - 00;13;33;26
Speaker 2
We get to work and it's only really in January and February sometimes where we can come up for air and understand what actually happened, that our work, that our efforts actually contribute towards profitability. So getting ahead of that and being very disciplined in terms of defining your strategies, not based on sales but based on profit is ultimately going to mean that you're not getting any surprises in Q1 2024.

00;13;33;29 - 00;13;59;05
Speaker 2
So maybe to touch on some of the specific pitfalls we often see with that, one is maybe not having a clear goal as to what you want out of Q4. And as I mentioned, that's going to be different for different types of businesses. For some, it's going to be a case of maximizing customer acquisition. And on that basis, we might be willing to accept a higher CPA with the knowledge that we're growing our customer base and we can recoup that margin in the form of repeat purchases.

00;13;59;06 - 00;14;21;03
Speaker 2
Now, realistically, that's not a given. It's important to make sure we're acquiring customers that are likely to come back again and again. And discounting is one strategy there that can be a there can be pros and cons associated with that. Not only are we eating into our profitability margin in the short term, but the types of customers that are maybe purchasing on a discount may not necessarily be the customers who come back to us.

00;14;21;05 - 00;14;42;11
Speaker 2
So there's also some other, you know, types of strategies you might have. You may be focusing on kind of clearing inventory, for example. So again, that's a situation in which whatever we look at in the form of our cost per requisition, if a perishable goods or you have a certain level of stock that you need to get out there by a certain time period, and in reality, that needs to kind of dictate the process to a certain extent.

00;14;42;13 - 00;15;04;23
Speaker 2
Or alternatively, you may be, again, you know, maximizing contribution margin or net profit margin may be the immediate goal and therefore you want to be a lot more may be conservative in terms of or limited in terms of what you're looking to spend when it comes to cost per acquisition. And so understanding what that goal is and making decisions on that basis will be one thing from there.

00;15;04;23 - 00;15;22;27
Speaker 2
And once you define what that overarching objective should be, it should be really a case of setting some guardrails. So again, what am I willing to spend in order to acquire a new customer as compared to my broader CPA? So which store here are we? Look at this on a kind of an overarching basis, not just what the platform is reporting.

00;15;22;29 - 00;15;43;29
Speaker 2
So how many new customers are you acquiring and what was the cost to acquire them and what was your overarching CPA for the business, not just your, you know, your core advertising channels. So again, that's going to really include not only your core outspend, but any other marketing costs, software subscriptions and a real and much better indication of what that is from there as well.

00;15;44;01 - 00;16;05;05
Speaker 2
You might want to set a contribution margin go. So ultimately, what's the level of kind of margin you want to generate on a, you know, on a per order basis or, you know, you want to generate overall from orders? And I suppose the main thing you need to keep in mind there is as long as that contribution margin is above your operational expenses, then you're in profit.

00;16;05;07 - 00;16;24;10
Speaker 2
So having a clear idea of those two numbers can be a big benefit. And one metric that as part of the store here, a platform that we often recommend users pinpoint to their dashboard, and by doing that, they also get access to it in their daily, weekly or monthly email reports. That metric is and new customer contribution margin.

00;16;24;13 - 00;16;48;08
Speaker 2
So understanding what was the margin we earned on the on any orders from new customers, even after we factor in our advertising spend on all those various marketing costs. So again, if that number is positive where you know, really comprehensively first order profitable and as long as we can focus on retention and we we acquire the right customers, we're in a good place to kind of add to to grow that relationship over time.

00;16;48;10 - 00;17;23;00
Speaker 1
O'Connell You just gave us a masterclass on things that a lot of merchants are missing out. I just want to highlight a few, and I would recommend to our listeners to listen to this twice because there's so much good stuff in there. Obviously, the first thing is don't do too much discounting. I know you highlighted that is that you train customers and probably you attract of wrong customers in coming was discounts and that on the customer lifetime experience they're normally not returning customers so that's a golden nugget really really good And then also knowing what your net profit is, I think that's very important.

00;17;23;01 - 00;17;50;23
Speaker 1
A lot of people are just looking to too much on the specifically marketeers, and I'm a marketer, so I'm sort of victim of that myself. But you just look on Google ads or Facebook ads and then you do your calculation and your head is completely wrong because all the other costs should be in the calculation. What I like is that you get that you provide email reports because it's easy to forget to go into a system and check if you get an email report.

00;17;50;23 - 00;17;58;01
Speaker 1
I mean, obviously it's right into your into your face and you have to read it. Now, how does the onboarding process work there?

00;17;58;01 - 00;18;22;01
Speaker 2
So ultimately that that's really where you know, it's going to differentiate, you know, the, you know, getting set up, getting all your data in there as easy as possible. That all happens within that onboarding process. So typically what will happen there is you connect your marketing channels, those marketing channels, again, whether it's SEO analytics, paid advertising, email will sync through and you can see that data straight away or pulling that in real time from all your various marketing channels.

00;18;22;04 - 00;18;58;20
Speaker 2
Your store data will then cinch through within a couple of hours, depending on the size of your store. And with that, again, we're going to automatically input any of those key expenses. So your product cost offset within Shopify and it'll automatically pull through. We also support WooCommerce, BigCommerce Magento as well and then from there and it will also pull in a couple of other automated expenses, whether it's your advertising spend, whether it's your taxes, whether it's your transaction fees, whether it's for shipping charged, how much shipping you've charged customers from there as part of the onboarding process which open a quick call and really try to support merchant signing up to make sure they're actually

00;18;58;20 - 00;19;21;16
Speaker 2
getting full value of the platform by making a couple of initial changes that will really help the experience long term. So again, you know, not only are shipping costs charged to the customer, but what's that cost incurred? Is there a delta there? And we're a free shipping threshold in which we need to take our situation into account. Again, maybe it's your kind of key staff costs, agency fees, stuff like that, that's going to really drive that contribution margin.

00;19;21;16 - 00;19;42;00
Speaker 2
So, you know, typically that onboarding process, you know, takes place over, you know, 20 to 30 minutes on a call. And it may be a case where, you know, it's really what what you know, what you put in, you get back from there. So, you know, while it's, you know, extremely straightforward to get through your contribution point, you may have to put in maybe an hour or two in terms of getting your operational expenses in there.

00;19;42;07 - 00;19;59;07
Speaker 2
Now, we've ultimately designed the platform in a way that contribution margin is our goal. So some some users decide not to actually go to the operational expense level, but the ones that do really see the benefit of it, this is part of our point of view. You're getting a real comprehensive look at the health of the business.

00;19;59;10 - 00;20;03;09
Speaker 1
Who's your perfect customer, what kind of size or industry vertical.

00;20;03;11 - 00;20;24;29
Speaker 2
Sure. So we actually have been lucky enough to have onboarded quite a range of variety of customers, I think. And it both in terms of size, geography and kind of channels. Ultimately, as I mentioned before, you know, even globally, we've we've grown users across both, you know, UK and Ireland, the US, Australia, everyone's kind of operating on a relatively similar tech stock, has the same underlying challenges.

00;20;25;01 - 00;20;45;24
Speaker 2
So with that, you know, anything over in a 200 K and anywhere revenue up to, you know, maybe 10 to 15 million, we've seen benefits, you know that the platform is it's beneficial in that regard are kind of sweet spot for runs is anywhere between maybe 300 K to 3 million. With that there's a certain level of complexity that's been introduced within the business.

00;20;46;01 - 00;21;10;10
Speaker 2
And as those additional costs have moved past, maybe a one person operator does even more of a need in order to double down. Especially we've seen interesting businesses direct to consumer businesses have actually reached even higher levels of scale. But a relatively, you know, you know, simple or, you know, less complex stack. So that's the situation in which we're you know, we're really serving brands a bit bigger, but that would definitely be our sweet spot.

00;21;10;13 - 00;21;14;07
Speaker 1
Okay. What's your pricing structure? How does that work?

00;21;14;10 - 00;21;36;07
Speaker 2
Sure. So I'm still here was based on and tiered based on the annual store revenue. So those made up might range from $129 a month and up to 1299 per month, depending on each of those kind of a number of different pricing bands, though ultimately because we're holding ourselves to the standard of profitability, we ultimately, you know, are in the firing line to make sure we're proving our value and we're happy with that.

00;21;36;07 - 00;22;00;02
Speaker 2
So ultimately, the way we, you know, and actually ensure we bring people through the process is we're giving that level of expertise and, you know, and, you know, education that sits on top of the platform not only to make the most of the platform, but actually help achieve those kind of profitability goals. So that's definitely one piece we we make sure to include within the within the, you know, the, you know, ongoing subscription.

00;22;00;04 - 00;22;21;15
Speaker 2
And I suppose ultimately by holding ourselves at our profitability standard, we want to make it a no brainer for brands. So in most situations, a couple of additional orders and whereby they can get to utilize their advertising, spend a lot more efficiently or understand those situations in which we have kind of margin leaking is a very quick indication that we are, you know, playing for the platform.

00;22;21;17 - 00;22;24;12
Speaker 2
You know, in the in the first, you know, couple of weeks.

00;22;24;15 - 00;22;41;28
Speaker 1
Yeah, I think it's a bit of a no brainer. I'm sure there's pretty much every business out there has some leads that can be filled and will contribute to more being, more profitable immediately before we come to the end of our coffee break today Call. What's the one final thoughts that you would leave our listeners with here?

00;22;41;29 - 00;23;13;08
Speaker 2
I think as any kind of, you know, merchant retail or agency that's maybe supporting e-commerce, businesses should really look at defining what our contribution margin goal is. Everyone's busy and again, as we said, there's plenty of vanity metrics that can be used in order to indicate the health of your business. But in reality, setting a clear goal as to what's what's it actually worth, you know, to put in the long days and long nights and defining that number and really building your plan off the back of that would be something that we would really stress, you know, moving into Q4.

00;23;13;08 - 00;23;20;03
Speaker 2
So, Tony, brands that are looking to do that and we'd be more than happy to talk to them and hopefully show them have a story or could help.

00;23;20;05 - 00;23;23;08
Speaker 1
Okay. On that note, where can people find out more about you guys?

00;23;23;11 - 00;23;30;13
Speaker 2
Sure. So if you log on to store Hero Dot, I am or email us. Hello store here as well.

00;23;30;15 - 00;23;43;00
Speaker 1
Okay. I would put the links in the show notes and you're just one click away column. Obviously profit first makes merchants sleep much better than revenue first. And I think story is a good tool to help with that. Thanks so much for your time today.

00;23;43;02 - 00;23;44;01
Speaker 2
Thanks a lot of great to be here.