How to Design Your Ecommerce Forecast (3 Rules)

[00:00:00] Welcome back everybody to the Ecommerce Playbook podcast. I am playing host here in substitute for Richard, who is taking today off to create some space for some very special guests.

[00:00:10] And we're gonna dive into a topic that we've discussed before around my personal deep passion for forecasting in the e-commerce space, and thinking about how we can connect marketing efforts to financial outcomes. Over the last year and a half, especially as we've gone through this whiplash in covid back and forth between really variable environments, I've come to believe that maybe the most underdeveloped process inside of large e-commerce organizations is the forecasting and planning process and the methodology and data that goes into that.

[00:00:44] And so I'm always on the hunt for one, continuing to improve our own process around this. It's one of our core responsibilities for a lot of our customera. And so it's something that Dave Rekuc at Bamboo Earth and I talk about all the time, and Andrew Faris, we spent many hours thinking about this issue.

[00:00:58] And so anytime I see even a hint of somebody out there in the world talking about this, I run to it as fast as I can to try and absorb the knowledge like an ameba. So the other day I saw a tweet from Conor Lane who many of us follow VP of Growth or head of Growth over at Hex Clad. And he said this, he said, I bet nobody in ecomm. has their unit economics and forecasting more dialed than Richie Mako. And one that is a personal challenge that I had to respond to

[00:01:26] And two, I had to go find out what Richie was up to. So today we got them both. And I'm excited to spend time talking about this topic with both Connor Lane and Richie Mak. Gents, welcome to the podcast. 

[00:01:39] Thanks for having me. I appreciate it. Yeah. So for those of you that don't know you guys and follow, you can give us a brief intro of who you are and what you do, and then we'll dive into where this tweet came from.

[00:01:51] Yeah. Richie, wanna? Yeah, sure. You wanna lead us off? Yeah. 

So, yeah, my name's Richie. I'm the head of growth at a company that's called She’s Birdie. We sell personal safety alarms for women. And we're an eight figure business. And quick story I think this Taylor might get a kick out of this.

[00:02:08] When we started the, our brand back in 2019, you know, we saw a spike launched to friends and family, then kind of nothing happened, right? You know, you kind of run outta friends and family to sell stuff to I had a lunch. I just reached out to this guy, his name's Andrew Faris. You guys might be familiar with him.

[00:02:24] We had a lunch in Torrance and he said, Hey, you should join this thing called Admission and learn Facebook ads. Might work. And then, you know, I was like, okay, that sounds interesting. So we tried Facebook ads and we went from. The month of April, $1,200 in revenue to $63,000 in revenue the next month just by turning on ads.

[00:02:39] Come on, Come on. I gave you guys all the credit. And then Connor just took it and and scaled it to the moon. Well, he was at another agency. Love that man. That's really cool. Thanks for sharing that story. I know I remembered a little bit of that background, Richie, so it's appreciate you bringing it up.

[00:02:54] Connor, give us your bio, man. Yeah. I'm Connor, head of growth at Hex Clad Cookware, new newly head of growth. I'm about two months in there, so really focused on all of our initiatives that are driving growth and profits on our online channel. So that's dot com, Amazon, costco.com are the three online channels we're currently selling.

[00:03:12] Um, Yeah our, our product is the first hybrid cookware available. So it's really taking the best features of stainless steel, non-stick and cast iron and kind of merging them all into a single pan. And we kind of, yeah, the way we, you know, market that is, you know, hybrid technology cookware we're a nine-figure brand.

[00:03:30] Had a solid year of growth last year and are looking to do the same this year. Awesome. So what I love about this conversation is we've got businesses in multiple range. So Richie, are you guys primarily DTC only right now, or do you have any wholesale or omnichannel distribution? Oh yeah, we actually have wholesale, we do a little bit of retail.

[00:03:48] Okay, cool. QVCs kind of significant. Yeah. . Great. So, okay, so we've got multiple channels of distribution to solve for we've got different product types. And so we're gonna be able to, I think, connect the dots for a lot of different potential businesses here around this topic. But first, you guys gotta bring me into this conversation.

[00:04:04] So what prompted you to put out this tweet Connor? What were you guys talking about? And what is this black magic that Richie is working with on the unit economics and forecasting? Yeah, so, so Richie and I are good buddies. We go way back. I think, you know, back in college when we were both kind of, getting into our first digital hustles is when we first got connected and then we kind of went our separate ways for a bit.

[00:04:26] I joined Homestead Studio, which is a growth marketing agency. I'm sure a lot of people are familiar with. Richie started, She's Birdie with a couple of other founders and then when, you know, we connected. , you know, after we had originally connected in college and then eventually Homestead started working with She's Birdie.

[00:04:41] And that's really how we ended up working together ultimately. But Richie and I, you know, we meet monthly. We're always kind of just chopping it up all things ecom on this particular call. You know, part of what, you know I do and what we always did at the agency whenever we would onboard a client is we would send them some sort of like, MER blended ROAS, like blended CAC calculator.

[00:05:02] Essentially trying to understand like where does their business need to be to hit their goals? Like ultimately the goal of it was to say, okay, if you want to hit your goal profit margin, whether that's 10%, 20%, whatever it is, what MER do we need to be at to back into that? So, so Richie though has essentially taken this tool and has like 100xed the benefit and the value of it.

[00:05:25] Like he's taken it and he's really just done such an incredible job of putting in like every single cost that's related to marketing is inputted into that and included in that MER calculation. So, really, like the whole goal of it is to make this MER calculator. You know, there, there should be no surprises then when you go to your P&L at the end of the year or the end of the quarter, and you're looking at your actual profit margin.

[00:05:46] And I just think in terms of like, there's the obvious things, right? Like COGs you know, fulfillment fees, freight costs, like costs of, you know, your tech costs. But like, Richie's even taken that a step further and has done a really good job of boiling down a number of variable costs and including that in his calculator.

[00:06:03] So like the number he knows he needs to be at in terms of a media efficiency ratio is just so directly connected to their profit margin and contribution margin goals. And that's what, that's why I was so impressed cause I hadn't seen it in a while. Like I, I still use that tool, but I hadn't seen the version that Richie had been continuing to iterate on.

[00:06:22] And like when I saw that, I was just like, this is the best I've ever seen, like any marketing person is gonna be so happy to work with Richie and She's Birdie because there's no question about where the numbers need to be. Whereas I can't tell you how many brands I've worked with, and Taylor, I'm sure it's the same for you with your, you know, CTC experience that like you'll ask them where they need to be and they really don't know.

[00:06:45] They're kind of throwing out this MER number that's really, or this CAC number that's really not rooted in a in profit margin. And that just ultimately makes the marketer's job very hard because you're kind of shooting blind a little. So that was the initial inspiration behind the tweet I put out.

[00:06:58] Love it. That's awesome to hear. So, Richie, take us in here, man. Aare we gonna get this sheet? How do we get our eyeballs on this thing? Tell us what you've done and how you're driving towards this for everybody. Yeah. Hope Connor didn't oversell me here, but uh, , yeah, we, let's definitely make the we could definitely make the sheet available to anyone who wants to see it.

[00:07:15] Cool. But, So, yeah, the first thing I, I think for context for us, we, you're kind of looting this earlier, Taylor, we are DTC, that's maybe about half of our business, Amazon, that's maybe about 40% of our business. And then we have, you know, these other channels, right? So one of the things I'm sure like a lot marketers have seen, you know, in the past few years, there's been like a lot of volatility in like performance, you know, I think generally over time I think you've also like alluded to this in some of the videos that I've seen, like marketing performance might degrade over time from like a Facebook aspect just because kinda like that low hanging fruit might be gone.

[00:07:58] Unless you know, you keep pumping new creative, you work all these tactics. So, uh, for us it's really important to understand where does, where do we make our money? And for us as a business, we actually basically just break even on our DTC channel and all the profit is derived from the other channels of the business. Right?

[00:08:17] So what I wanted to do is I kind of wanted to take this base. Sheet that, or this calculator, I think you guys use it also in Admission which basically says, Hey, what's the AOV? How many units are in that order? What's the cost of those units? What's the, or you know, all the variable costs, fulfillment, shipping, processing fees, and then what's that contribution margin that you want to get out of it?

[00:08:41] And then for us, what we also do is we calculate a G&A or Opex of some amount per unit. Right? And that's how we arrive at like the profit of each unit of each order basically, and each unit sold. And I do that on Amazon, on Shopify QVC, wholesale, et cetera.

[00:09:08] Love it. So, oh man, I have so many questions. This is great. So let me start by trying to understand, cause it sounds like I've heard a couple of different financial metrics thrown out from contribution margin to net profit, to whatever it might be. When you think about building a model to define we, so, so I think about the sequence of building a model for a forecast begins with, define the output of the model, right?

[00:09:30] Mm-hmm. . And. then you can figure out the inputs to that model. And then you can figure out sort of how to model the variations in the inputs. Basically, that's sort of a very simple three-step process. Define the output. Find the inputs, model the inputs. Right. And now you can sort of get to potential outputs.

[00:09:44] So when you think about designing this model, what is the output or the primary measure that you want to make sure you accomplish? In designing it? Is it contribution margin? Is it overall net income? Like what do you think about the model's purpose for a business? Yeah, I think for. It's about defining the net profit, right?

[00:10:03] Because okay, we are bootstrapped, we haven't raised any money, and profitability is very important for us. Right now, if you're, you know, in a different situation and you don't necessarily care about I shouldn't say necessarily care about it, but you know, different businesses have different models and for us, there's not a lot of LTV in the business just because of product DNA. Right? And it's not like a consumable. 

[00:10:25]So we have to be profitable on each purchase, essentially. So, or at least not losing money, right? So for us, the key thing that we wanna make sure is, hey, we're not losing money on each order. And I think that's the net profit number. 

[00:10:55] That's great. So for the sake of defining financial terms and creating agreement cause I think this is a challenge in e-com, I would think about net income as basically, total sales or net revenue minus all of our cost of delivery, minus all of opex, which would give me operating income or earning where EBITDA would be calculated. And then net profit I would actually consider to be even after any interest or amortization debt payment that would be included. So would, do you, are you saying operating income or do you include.

[00:11:16] Do you have any outstanding debt or inter amortization or anything that it included at that level? Or are you just saying business operating income at sort of the EBITDA calculation level, kind of the EBITDA calculation? We don't have any debt on the business, so for us Okay. That it's a little different.

[00:11:30] Yeah. Okay. Great. Okay, so that's super helpful. So, Taylor, go ahead Connor. I think one thing that, that I think the most important variable, or most, at least impressive variable to me in the calculator Rich is using, which I think is hard for a lot of brands to define, is like it's easy. I think like the COGs and the cost to fulfill, like the, I think those things are fairly easy to like pull in, include in a calculator.

[00:11:53] What Richie's done, which is really impressive to me, is he's boiled down a lot of variable expenses that are directly related to like the marketing mix and actually selling those products. And he's included that variable in that. And for me, that's one of the hardest things I've struggled with brands that I've worked with at the agency and when I was freelancing is like, They need to be including some sort of variable cost as a percentage of their AOV, but a lot of brands aren't sure which cost to include in that.

[00:12:20] They don't necessarily know, always know how to pull that or how to like, take that as a percentage of their top line revenue. And that was like when I met with Richie a couple weeks ago and we were talking about this, like to me that was what I love the most is that he was able to boil down that variable and include it in that overall profit goal, which is I think hard to do and a lot of brands don't know how to do that. 

[00:12:36] So let's talk about this cuz I think this. One of the biggest discussions we have across, you know, like, this is a very Twitter-centric argument here about what is contribution margin. So in other words, what variable costs should you include in the consideration of this?

[00:12:56] So I'd be curious cause I think there's some potential traps here, right? That a lot of these variable costs become non-linear with revenue. So one of the debates that as an example, Nate Pauline, digitally native and I like to debate, is he likes to say that customer service is a variable cost that scales with revenue.

[00:13:12] I don't think it scales with revenue in a perfect linear relationship, so I don't like to include it. That's like an example where this like sort of opinions can deviate. So, Richie, what goes into what Connor just described for you? What are you including as a variable cost calculation that you wanna take out on a per order basis to help you sort of establish a target CAC?

[00:13:31] Yep. So, basically it's cost of good sold, right? So, fulfillment, credit card processing fees, okay. And advertising, right? Those are kind of the, the four things. I think most e-commerce brands who've used this calculator that I've not come up with, it's not original have those things in there.

[00:13:53] But the thing that I've added was estimating like a G&A cost per unit. And G&A is like, right, the operating expenses of the business. And normally with e-commerce businesses, OPEX doesn't really scale with revenue, as much as say, like, advertising or cost goods. Cost delivery, fulfillment.

[00:14:12] Right? So that's like just taking it, looking at the P&L and saying, Hey, what percentage of the P&L what percentage of revenue is operating expenses, what's G&A? And then basically just taking a rough number and assigning that to a unit level. And for us it's really simple just because we have two products. So, so we could do that.

[00:14:27] Are you doing that like when you're looking at, so you're, you looking at, you're using the P&L for that and when you're trying to decide, cuz you're essentially trying to take your P&L and boil that variable down to a percentage of your average order value.

[00:14:41] Are you essentially saying like, okay, first is like, define all the different costs that are gonna go into that variable. And then is, are you just saying, what percentage is this total of our top line revenue? And then that's how you're like baking that into an AOV level variable. Yeah, exactly.

[00:14:59] Okay. Okay, so here's I'm, this is my first, probably our first divergence of where we would go a different way here, cuz here's my concern. Okay? When you attempt to turn fixed costs into a percentage of revenue, what you do is you miss the reality that that percentage decreases as revenue grows, right? So let's just use as an example, a fair, something very simple.

[00:15:22] Let's just say my rent is $10,000 a month and I make a hundred thousand dollars a month. We'll make, we'll, I have a hundred thousand dollars in revenue. So in your model, we would take rent and we would say 10% of revenue goes to this fixed cost. We could, you know, bundle all of G&A in there for the sake of this illustration.

[00:15:38] Right. But if I could generate $150,000 in revenue, Now that cost went from 10% of revenue to whatever that is, 5% of revenue. You know, like it drops down significantly. Right? So how do you account for the inelasticity of a fixed cost in thinking through that CAC percentage? Because this is often where I see people they miss the fact that the way to generate incremental profit is to scale beyond fixed costs to actually spend out.

[00:16:08] And so what I'll see happen a lot is someone will use a calculation like the one you're describing. They'll say, my OPEX is 20% of revenue. And they'll look at that in a determination of cac, but they don't realize that 20% is actually marginal contribution that I could keep spending and actually decreasing the OPEX percentage as my revenue grows.

[00:16:26] So how do you think about that part of it, Richie? Yeah. So I think that's all true and I think for, from my perspective of looking at it, it. It's more about well one, you could repro project you could kind of see every month. Right. And get some the more history that you have. Yeah. And the more that you're able to kind of project out, then you can make adjustments on like a monthly basis, I guess.

[00:16:47] And that's just like kind of being on top of it. Right. And then, but for us going back to like, we don't want to lose money. We don't want to be unprofitable for us, It's better to err on the more conservative side, I guess, per se as like a guardrail, right? Yeah. But ultimately, yep.

[00:17:04] Ultimately, like you said there's different ways to think about it, right? But you're right, that what you're describing, yeah. You're not gonna miss, like, you're missing potential upside, but you're not gonna screw it up the other way. And so if you're bootstrapped, there is this like security buffer.

[00:17:17] Cuz the other thing I see a lot. One like mar cost of goods actually varies more than people realize. Like, yeah, we assume like we can be wrong about our cost of goods. Product could be bad, we could lose it. There could be all sorts of things that happen along the way that actually increase the actual per unit cost that I end up paying in reality.

[00:17:35] Shipping containers go through the roof for a month, whatever, right? We've seen that happen a lot this last year and so some buffer and I think that whether you call it, you know, an opex consideration or. One of the things that we'll do is we'll look at the trend of the variation of COGS over time. So let's say over the last 12 months, what did it actually reconcile to?

[00:17:52] And it usually ranges maybe four to 5%. And so we'll actually create some sort of marginal buffer in the consideration of the CAC because that that there's some definitely, especially for bootstrap businesses, something really there. Connor, I wanna go to you because you guys are in a different position.

[00:18:05] You're more mature. You have, you know, a bigger revenue base as ahead of growth. What is your respon what is the financial line item that is your responsibility? Are you responsible all the way down to the net income level? I'm assuming you don't have control over the entirety of the opex or really even the cost of good side of it.

[00:18:19] So what is your output as a head of growth leader inside of a big organization that you are responsible for in thinking through this? Yeah, it's it's certainly more down funnel from where Richie's involved. Like Richie's obviously the one, like he's actually the one calculating all the COGs in the freight costs and the fulfillment fees.

[00:18:37] Right. I am. Not that far. Up funnel, we have a, you know, Jason, who is our president, Jason Panzer, he and our, technically his title is our chief of staff, but he is really, he really is the head of forecasting and financials. Those two are the ones that are really doing a lot of the work that Richie's describing for Birdie.

[00:18:56] So, but my role is more so at the intersection of operations forecasting slash inventory, and marketing. So we obviously are a little bit of a different scenario than Richie because we have a very wide range of SKUs. So essentially our process is, you know, every month, every quarter, myself, Jason and Niles are getting together.

[00:19:19] And we're saying, what do we think we can do top line revenue, you know, this month, this quarter, this year. So we have a, so we start with that, right? We are establishing that, you know, that's based on historical data, that's based on any upcoming initiatives we have, like a sale or a new product drop.

[00:19:34] From there, the next step is Niles, our head of forecasting. He's then going in and breaking that top line number down by product. So he's again, using historical data, upcoming initiatives to say, okay. Let's say we're trying to do, you know, a hundred thousand dollars in a month and he's gonna say, all right, here's how many 13 piece sets is gonna make that up.

[00:19:52] Here's how many six piece sets, mixing bowls, pepper mills. This is where marketing and forecasting in our org and operations really come together. It was a missing link actually, before I came on, and I'm already seeing like tons of value from like that collaboration. But essentially Niles then brings that to me.

[00:20:10] And then we run through it looking at historicals and say, okay, like what do we need to do in our marketing stack this quarter to hit these goals? So let's say, you know, the pepper mill is a great example. We launched our pepper mill. We did not do a good job of marketing it when we initially launched it.

[00:20:24] We were too product focused. We were not enough, you know, problem agitate, problem solution focused. We've done a lot, much of, much better job of that in the last few months. Niles and I met in January and we were projecting to sell like 650 pepper mills. I was looking at the previous two months, and we had only sold like 100 to 200 per month in that month.

[00:20:42] So that's, you know, this is where we made that connection of like, here's what we're forecasting, here's what we have inventory for. Our marketing initiatives need to reflect that. So my change was, okay, let's go look what we did in December and November that led to, you know, 100 to 200 sales per. And now let's make some changes for this upcoming month.

[00:20:59] So we, we did more product seeding with influencers on the pepper mill. We started launching paid media behind the pepper mill. We started pushing more campaigns on the pepper mill. And then now in February we were looking back at January we sold 750 out of 650. So that's kind of our process.

[00:21:13] And then we continued that process over and over again. So it's, so then it's like, okay, did we hit it a hundred percent great? Did we sell 150% of what we projected? Okay, maybe this is a more popular product than we thought we need to order. Did we only do 30% of what we projected? Okay, well we need to do a better job of marketing this product.

[00:21:29] Or maybe we only did 30%, but we still felt like we actually put out a lot of marketing touchpoints. Well then maybe it's the pepper mill scenario, the initial pepper mill scenario where we did a bad job of explaining the product and presenting it to our customers. So, , that's our feedback loop. You know, that's kind of our evergreen process.

[00:21:45] And then there's some kind of like, you know, like low inventory times is another point where like our, it's been really helpful to have marketing operations in, forecasting all, you know, come to this intersection. So we had a really strong Q4 last year. It put us in a little bit of an inventory struggle this quarter.

[00:22:01] You know, again, I met with Niles, Jason, and myself, and the question was, you know, what are we pacing at? It was specifically related to our Hero 13 piece set. What are we pacing at? Here's what we have inventory for to sell in January, February, and March. How do we, you know, need to adjust our paid media and marketing mix to not oversell?

[00:22:19] Cause if we oversell in January and February, we're kind of screwed for March. So that's something. Spent a lot of time thinking about in January, we actually had to scale way back because we were way overselling our 13 piece sets. That doesn't happen if marketing's not at the table in those conversations.

[00:22:34] Sales are another example here. We just ran a President's Day sale. It went really well for us. . Part of when we run sales is we do a lot of bundling in at our scale. It's really helpful to our warehouse team if they can prepackage a lot of these bundles ahead of time as opposed to picking and packing everyone in real time.

[00:22:49] So, that's right. Yeah. On Monday we had, you know, four to five days of data. At that time I was sitting with Brian Nari, our head of operations, and Niles, our head of forecasting, and the conversation was, Hey, we have two more days of the sale. How many more should we be packing together? Brian initially wanted to pack together 800.

[00:23:07] Then I went and looked yesterday at how many we sold, which was like 500 or so. Then I was looking at today, Monday, and I said we're actually up 6% day over day. Like we're gonna put our inventory, our warehouse team a tough spot. If we only prepack 800, we should probably prepack closer to like 11 or 1200.

[00:23:24] Those conversations like are really hard to have unless there's someone in marketing at the table there. So those are like three examples just within the first couple months. Of joining that have, like, I've really been enjoying cuz like the collaboration it's very obvious that we're making a lot better decisions by having ops forecasting and marketing all in the same room, talking about one another.

[00:23:47] You know, leveraging each other's knowledge and expertise. I'm sure there's gonna be another, you know, five really important use cases that present themselves over the next three, six months as well. But those are some of the ones that are, have come up immediately. . Yeah. That, so you're getting to something that I think is just so critical, and I love the phrase, give marketing a seat at the financial table, or give them a seat at the forecasting table.

[00:24:09] Because when I see organizations that disassociate demand planning what we're buying, how much of it we're buying in demand creation, problems happen. And one of the primary ways that I see this happen is in sort of the incentive structure of the system. So as an example, let's imagine you're a media buyer and my KPI or my bonus or my promotion or my, as an agency, maybe my comp is related to ROAS, okay? Or even it could be related to some CAC target or an MER target or whatever. If there isn't a consideration for what I'm selling, then I don't care about inventory position. I'm gonna look at my five campaigns and whatever one has the most efficient return, I'm gonna allocate more budget towards that campaign, and that's the incentive structure that I've been given and how I should behave.

[00:24:58] So, oftentimes what I see is like when this media buying process, which is the primary demand creation engine for most of these businesses is completely disassociated and has no view into inventory and purchasing, you have incentives that move in just completely d different directions. And we know that on any given day, it might turn out that, hey, we hit on a great ad.

[00:25:18] All of a sudden all the budget's moving away from the demand plan because this new creative hit and my incentive is to spend and scale against that result. So you get these, like these systems. And this is why when I think like anytime, you know, like audits are a big thing in our industry and I think that they are, you cannot do a Facebook or a media account audit with an understanding of the strategy that the person buying was deploying against, right?

[00:25:41] And so really getting insight into is this an activation against the marginal value of every SKU that we sail connected to a demand plan, in which case, sometimes moving to the lower performing thing because it better matches my inventory position and the product has higher margin whatever is the right action. 

[00:25:55] But these things, as you're describing, Connor, have to be connected and they have to be connected every single day almost. Like as an agency, how do you do approach it?

[00:26:05] Yeah. So our primary thing that we do is we want to actually be responsible for the forecast. And now this is a really hard thing, right? Mm-hmm. Because … what it means is like I just think that if you give me a financial expectation of performance that's disassociated from reality I now am participating in a system that my people are set up to fail.

[00:26:25] I think you're gonna make bad financial decisions off of, or, you know, maybe vice versa. Maybe you're underselling it in some stages. And so, generally speaking, our first process is we have a very specific model we use for a cohort specific LTV forecast all the way down to the P&L level, we can do it on a unit basis if you want as well.

[00:26:40] And we're gonna do that for a year, and then we reforecast every month. And so at the very least what we wanna be able to do is bring our version, which is a modeled version based on data. And so what we like to tell people is, here's what is likely to occur, and now you tell me what you would like to occur and let's try and reconcile that.

[00:26:58] Right. Let's try to understand what input needs to change. Do I need better production outta my existing customer revenue? Do I need more efficient new customer acquisition? What moments do we have? What days are gonna create that inventory or that velocity of sales that's different than what I have planned?

[00:27:11] And we'll map it all the way down like Connor's describing down to a revenue sales contribution unit, sales expectation for every day of every month. And what that gives us is visibility to when we're on or off track to that expectation and how to course. Because what I'll often say is that I believe that forecasting is an exercise in execution more than it is an exercise in planning.

[00:27:32] Like what you're describing, Connor, is every day we have to sit back down and go, what is happening relative to what we thought was gonna happen and what do we need to change? And so you're saying, , we're selling more of these than we thought. We're going to get the fulfillment side invested in helping us to actualize against the plan with accuracy.

[00:27:49] Or if we need to adjust the plan and we're exceeding it, how do we ramp up production and be flexible enough to do so? And so it's this, it's the every day sort of check in against expectation. And Taylor, you're the scenario you described about the disconnect. A business's actual like forecasting and like goals and then media buying.

[00:28:06] Yes. If someone, if a media buyer were to come into our account and look at January for example, they would have the same exact experience that you just described. They would see us taking money out of our 13 piece set ads, which are our top performing ads. They would see us putting money into our hex mill and dutch oven and chicken fryer ads, which in platform do not perform as well.

[00:28:25] But That's right. Cause we knew what we needed to move units. and we knew that we were a little bit in a constraint for 13 piece set. Like you're spot on. Like that would be the exact takeaway. If from an audit, someone would say, I don't think you're media buyer is doing a good job. They were taking money out of the top performing stuff and putting it into low performing stuff, but that obviously, you know, the buck doesn't stop there like you described. 

[00:28:42] That's right. And so I think this is a good thing for brands, like if you are talking to a partner, whether it's a potential, a new employee, a freelancer, or an agency, and they're giving you an opinion on the ad account without understanding this strategy, that's a red flag to me.

[00:28:57] It's like, how can you assess the performance without understanding what was attempting to be accomplished here? So yeah, this is great. So my next question, so Richie is about averages. Okay. So this is um, I have this uh, there's a great saying, an old statistician this is pretty nerdy says, but it's that no measure of central tendency is best meaning, mean, median, and mode.

[00:29:17] Mm-hmm. Those are the measures of central tendency. None is best, but using one is certainly worse. Okay. And it's because averages lie, especially in order values. And I'll give you a great example for Qalo. Okay. Back when we were running Qalo, okay. Selling silicone wedding. They sold one ring for $20 or two rings for $40.

[00:29:36] Guess what the average order value was for that business? It was about 30 bucks. It was about somewhere in between, but $30 orders actually never occurred. It wasn't an order. You literally couldn't make the products add up to $30, and yet that was our AOV. And so if we had gone in and said on a unit calculator basis, $30 AOV minus cost of goods, we would've gotten to a CAC target that would've completely eliminated the actual modal order. 

[00:29:59] So we would've eliminated single unit purchases because that CAC wouldn't have, it would've been non-profitable on a, but, so, so one of the things I'd like to think about is like for a business, especially with two SKUs, maybe you could be in a similar position now on a much, this is especially true if you have SKUs that range from like, a thousand dollars down to $50. Connor, you guys, I think, have a really wide margin of potential values.

[00:30:24] Averages are almost useless. They're almost entirely noise because they don't actually represent the actual orders that occur. Cuz what we really want is to protect profit on every single order at the value that order occurs. So how do you think about the that Richie? Or do you guys consider the dangers of averages when building this?

[00:30:45] Well, I think I should go look at this sheet again.

[00:30:51] And then so, so okay look, can we talk through it a little bit? So yeah, we have so we have our Birdie V One product and our Birdie Plus. Let's just look at the Birdie V one product. So it's people buy one. Yep. They buy two cuz there's a free shipping threshold. Yep. They buy three because we have a bundle of three that's discounted and then a bundle of five.

[00:31:14] Yes. Right. Five and above. Yes. So I, so, so every one of those has a different marginal value to you, every single one. Yep. And then especially at whatever your target CAC is. Right? Right. So then would you take it and say like, Hey, if 20% of our orders are one unit, like 40% are three units and 10% or five and whatever percent are two.

[00:31:40] Would you basically take the blended, like an average of the CPA? No. No. How would you, How would you go about that? I would launch every funnel with a expectation of which order I'm going to create. With intention because what the number one thing I see happen is that yeah. Most there's profitable orders and there's unprofitable orders when you do averages.

[00:32:01] Right? Right, right. And so what I'm willing to bet Richie, is that every single individual unit purchase is a non-profitable order for you guys. And that, that app, assuming you're using a blended average, because if you take the Right, right, right. The big, the easiest thing to do is build what's called like an AOV histogram.

[00:32:16] Right? So if you think about, like, I'll show you, I'll show you a visual of this for like Bamboo Earth. So, okay. You see the, you see this graph right here? Do you see my screen? Yep. Yep. Okay. So this shows me dynamic ranges of order values for customers. So you can see this is a great example. Let me look at a different time range cause this is a little noisy cuz it's small.

[00:32:37] Let's do like from January through today. And what I wanna understand is, this is very common, right? So you can see my average order value is $93.97. Right. My median order is $79 and my modal order. The order that occurs most often, and you can see it here illustrated, is actually $47 and much more often, the largest buckets of purchases are actually single units or $47.

[00:33:02] Now, imagine I build my CAC target off of the average order value, $93.97 when my modal order value is $47. What's gonna happen is I'm gonna set a way too high CAC target for the vast majority of my orders because averages get dragged up by the long tail. Right? Especially if you have like a 13 piece set like you're saying, Connor, they get dragged.

[00:33:26] And so what ends up happening is like you set this target where most of your orders at the CAC are not profitable. And so in Facebook we think about it. I have a single product funnel. I have a, you know, the funnel for this, for the funnel for that, and I have an expectation of the order value, not even the average order value, the order value that occurs most often in this campaign.

[00:33:45] And I want to ensure profitability on the majority of orders at that value. So Taylor, are you, so you're cuz we, we do something similar in the sense that we keep all of our, all the products that we're pushing in our paid media accounts, they're all segmented by adset. So yes, at any given time I can go in and say, in the last 30 days we've spent this on 13 piece set.

[00:34:04] We've spent this on the Dutch oven. So essentially, are you pulling like a blended cack then of saying like, first time orders that included Dutch oven divided by ad spend that went into Dutch oven? Or is that. Yeah, that's how we started the, I'm looking at the CAC on that specific campaign, right? And so I'm looking at it relative to the average order value to ensure that CAC against that AOV and that campaign is profitable against the margin of that product because Richie, another great example.

[00:34:33] Yeah. That I know like a tight click window. Now we don't. Okay. We can save the attribution debate, but whatever you prefer. Yeah. From an attribution perspective, I trusted the tight click window as a as an okay indicator for me against that CAC target, against that AOV. Now the other thing to remember too here is like, Richie you described something really important, which is the free shipping threshold. Which is, the second you give away the shipping, it's margin destructive often. Right?

[00:34:52] Right. Like there's a total percentage, right? And so you just gotta think about, okay, in that case I actually have to get it's total, it's more gross dollars, gross margin dollars, but as a percentage it's actually less margin.

[00:35:07] Right? Same thing if I run a discount or anything else, right? When I, the second I offer 10% off. And this is another thing is like a lot of people will use 10% off your first order. And you don't know, you're not actually clear on what percentage of them are actually take, what the take rate is of that.

[00:35:22] Right? And so again, discounts are another thing that are often margin destructive. So it's just like really getting clear, not at an average level, at an individual order level. What the actual profitability is. And then Connor, what you're saying is like roll it all up to, on an overall basis, new customer revenue against ad spend against the blended margin of all the products sold to new customers. Is that profitable at the level I want then? Yes.

[00:35:42] And then I work down from there. Does that make sense? Yeah, it does. One thing we've struggled with is going back to the Dutch of an example, that's a new product of ours. People wanted it. . So we made it and we rolled it out. We did a great launch for that product, and we also had a lot of first time orders.

[00:35:59] It wasn't all, and most of it was returning customer orders, but it was a ton of first time orders with that product. Now, what I'm trying to suss out here is how many of those first time orders are, because I. We were running paid media campaigns, top of funnel campaigns, pushing the Dutch oven.

[00:36:14] How many of those first time orders that included the dutch oven were people that maybe came in through a 13 piece set ad, they bought the 13 piece set and they also were shopping around. They're like, oh, this Dutch oven looks good. I'm gonna buy that too. So, you know, if you look at our blended CAC on a Dutch oven and you're only looking at first time orders in Shopify that included that product divided by ad spend that went into Dutch oven it's like 30 bucks on a like 179, $8 product.

[00:36:39] That's not the reality though. Like if you go look at the ad campaigns, it's, you know, so the other problem is though we have a very long, our, according to our post-purchase survey, our most common consideration periods one to three months. So like we're still trying to suss out the best way to model that.

[00:36:55] Ultimately we want to try to crack our top of funnel with more than just our hero 13 piece set or six piece set, right? Yeah. So we're still trying to model that out. But that's our, that's been our experience so far with like looking at blended versus in platform, you know, byproduct. And what you're getting at is exactly right.

[00:37:10] And what, so this is where like locked in landers and offer pages, whether you cannot end up buying a bunch of other things, actually gives you the clearest visibility to to the actual order value. Because you're right, if you run to a category page or you run to a homepage like. You're gonna end up with leakage everywhere to all sorts of products.

[00:37:30] Now, you should be able to look at, you know, using, assuming you all use UTM parameters, like what order, what products were purchased off of this campaign. And then you can get to like a gross margin of the campaign and sort of use that as an indication. And again, depending some businesses like this is really hard, especially in like apparel where you.

[00:37:47] Men's and women's return rates that vary like 15%, and so there's like wild variation of margin. Then it's a bigger issue. If most of your product sales have a similar margin, then it's like, well, we might be off a dollar or two here or there, but it's not that big of an issue, you know? 

[00:38:02] So yeah, this is main, the main, this is mainly an issue if you have wide variation in margin by SKU. If all of your SKUs are fairly consistent margin, then this is less of an issue.

[00:38:10] But it, what I see is sometimes there's businesses where they're driving to a category page that has. SKUs that you could buy from $10 to $500 and the margin ranges from 20% to 70% and you're like, wow, how could we possibly set a cap target against that wide of set of outcomes? So every business is different.

[00:38:27] Richie, it'll be easier for you guys cuz you're a little bit smaller SKU set. Connor, certainly a more complicated problem, but um, I will say definitely looking into. We do have a fairly consistent gross margin across our entire product mix. Obviously the order values varies a lot, but it does help that, you know, within probably like plus or minus 10% gross margin across all of our products.

[00:38:50] Yeah, that's certainly helpful. And if your return rates are consistent, that's another thing that tends to vary a ton in some businesses. But it's just, you want to understand as much as you can every time you go to a sella product, what's the value of that sale to you? And that's, I think, Richie, when we started this, that's what you're getting at, right?

[00:39:04] Is like with as much clarity as possible, understand the actual amount of money that you make when you sell something.

[00:39:11] I think really understanding. Where your business makes money and being able to push back on people who may be like outside of marketing to give them like a realistic set of expectations, right? And just like really quick, like if you overorder inventory, if you run outta cash, to me, that's like a near-death experience.

[00:39:29] Or that could be like a death experience, right? So I think I think figuring out what does staying alive look like? And being really firm and saying, and going to other stakeholders and saying, Hey, I know you want these to fulfill these set of expectations, but just push back and say, Hey, based on on how our ads are doing, how our marketing is, this is what realistically I think is gonna happen.

[00:39:52] And just having that courage to say like, Hey, we're not gonna hit the high number. We might hit this number. And be okay with it. And just to be like, Hey, we're not gonna die though. We're gonna make money still.

[00:40:01] Yeah. Yeah, absolutely. Yeah. No, I think for me, at least in, in the first, you know, two months of being at Hex Clad, it's been like whoever's leading your operations, whoever's leading your growth marketing, whoever's leading your finance and inventory projections, they need to be collaborating regularly, very closely.

[00:40:18] If they're not, you're gonna be making bad decisions or decisions that aren't as good as they could be if you didn't have the inputs from each one of those you know, verticals within your business. Like, it's just, it's become apparent how crucial that is for evergreen forecasting, for sales periods, for low inventory times, for projecting new product launches.

[00:40:36] Like all of those people and all of those verticals within the business need to be collaborating and making these decisions together.

[00:40:41] There you have it. To wrap it up with some key takeaways, averages lie. Deeply understand the value of every sale. Equip yourself with that information to earn authority in the room with finance and give marketing a seat at the table. Big thank you to Richie, and Connor for joining and sharing their wisdom on their journey from eight figures to nine figures and how they think about forecasting side of their organization.

[00:41:07] As always, if you've enjoyed this conversation, go rate, review, subscribe, on Apple Podcast and YouTube preferably, and we appreciate you coming by the ECommerce Playbook podcast.