Why Right Now is the Best Time to Dial in Your Spend vs. aMER

[00:00:00] Richard Gaffin: Hey folks. Welcome to the ECommerce Playbook Podcast. I'm your host, Richard Gaffin, Director of Digital Product Strategy here at Common Thread Collective. And I'm joined as ever. Well, actually, I always say that as I always am, but that's not really true because, 

[00:00:12] Taylor Holiday: No. 

[00:00:12] Richard Gaffin: Taylor has been out on vacation. But Taylor Holiday, our CEO here at Common Thread is back with us.

Taylor, what's going on, man?

[00:00:17] Taylor Holiday: Yeah. just got back from one last hurrah. Kids started school today, just dropped 'em off. My boys are in sixth grade, my daughter's in third grade. But we took a little trip out to the desert from one last hurrah with some friends wrapped up the summer well, and now where it's full. Go back to the school. 

[00:00:31] Richard Gaffin: Hell yeah. So what? What do a bunch of kids do out in the desert?

[00:00:35] Taylor Holiday: Well, we, I found this house on Instagram. I was marketed to that it has like a lazy river and a game room. And so we took, we took 30 people out to the desert?

and hung out for a week, and the kids just crushed Capri Sun and played in the pool and played Mortal Kombat until their faces fell off. So it was a, it was a good time. 

[00:00:55] Richard Gaffin: Yeah, see, see core memories being formed there for sure. Cool. So what we wanted to talk about this week is last week I had a great convo with Luke, who's our VP v eCommerce strategy here, and Steve, who is our director of data about our spend and a ER model. So just to kind of recap a little bit, currently offering free spend and a MER models.

2, 8, 9 figure businesses. A part of that is just simply we want to get to know more eight and nine figure businesses, have them get a taste of kind of what we do. But what we wanted to talk about a little bit more today was to get kind of Taylor's take on the value of these forecasting models. And then generally speaking, what we wanna talk about is sort of the set of tools that you need to make the decisions that you need to make in order to create.

Growth in your business. And basically what we're gonna talk about is how those things tie together. And I also wanna say one other thing, which is that when this time this comes out tomorrow, which is Wednesday. The 20th of August, we're gonna be having a round table discussion with Taylor q and a session, basically with brands that are in that eight nine figure range.

If you're interested in attending that reach out. We're gonna have conversations around some of these very same topics that we're gonna be talking about today. But, so without further ado, let's, let's jump into it here. So what I framed this up as the context of, like this, the cement and a ME are forecasting model is one of a set of tools that you need.

grow your e-commerce business. Talk to us a little bit more, Taylor, about what those tools are and then we'll go kind of deeper into this model specifically.

[00:02:25] Taylor Holiday: Yeah, so these are spend and a MR spend and A MER models. So acquisition, marketing, efficiency ratio, which is the efficiency of your new customer acquisition against your spend is one input in our profit system. A profit system is basically the operational system that we think you should use to drive predictable, profitable growth for your eCommerce business.

And it's the trellis on which all your decisions and planning should be done to give you the best context for where you're headed and to have a day by day expectation of you, your spend, and all of your team members on the marketing side. And it is, I, I think about. The ability as a CEO, as a leader, as you know, A CMO to understand where I am going. So at CTC we have something called the Sandbox, which is like, we've dogfooded ourself. It's a, a realtime view of the p and l of our service business. There's a joke at CTC that it's my central nervous system that like if a number changes in the spreadsheet, my elbow tingles and I go look, and I can immediately feel it.

And that's true, but I can't. And if you were to tell me that you were gonna take this away from me, I would fight you to the death because it is my view into the future of our business. It is my view into the reality of what's occurring inside of my business at all times. For the inputs to that, one, of the keys is our own version of a spend in a E or model.

Our own view of new customer revenue, which is our BD pipeline. A real-time view of every deal in the future, as well as projections about what is coming. It's a core input. It's one of the foundational inputs it into our model, and I could not imagine trying to operate without visibility into it. And I see this all the times where I encounter.

Other agency owners, we're doing a lot of m and a right now, right? Like we're looking out and meeting companies and I'll meet them and I'll tell you, one of the core things that I can always scrutinize very simply is how clear is their expectation of the future? How well established is the idea of where they're headed and why is it defensible?

Is it thoughtful? Is it data oriented? And that underpins how play, how effectively they're able to plan and operate as a leader. And so spending a MER models, retention models, event effect models, marketing calendars, incrementality tests, they're all the resources of great plans about great visibility in constructing the future that you want.

And so we wanna give you a little taste and show you what else could be available to you to have. What if you could look out into the future and effectively illustrate one, what is, what is presently possible with my media budget? How much effective, how much return can I expect in the future? Then if you don't like that number, if it's illustrates back to you something you'd be dissatisfied with, what would need to be true to change it?

And at the beginning of that, that is the doorway to building the future that you want.

[00:05:18] Richard Gaffin: So one, one thing I kinda occurred recently, like the, the successful business owners like the mark. mean, there's probably many things that connect or whatever, but one of the characteristics they all share is that they never lie to themselves. And I think that's a little bit of what we're trying to do here is like at a certain point.

Sometimes maybe you can't even tell whether or not you're lying to yourself if you don't have a clear sense of what's actually going on with your business. So a metaphor that you'd used before we hit record here was around the DEXA scan. 

[00:05:43] Taylor Holiday: Yeah. 

[00:05:43] Richard Gaffin: the idea behind a lot of these the spend in a MR model for sure, and, and other kind of elements of our profit system is to give you a very clear sense of what actually is true.

[00:05:52] Taylor Holiday: That's right. 

[00:05:53] Richard Gaffin: To, show you a little bit of, kind of a little dose of cold reality and then give you a sense of what can change once you have that. So talk to us a little bit more about how this particularly provides that.

[00:06:02] Taylor Holiday: There's sort of this hilarious, like TikTok meme man on the street content where a guy walks around and asks people what they weigh 

[00:06:09] Richard Gaffin: Mm-hmm.

[00:06:10] Taylor Holiday: he hands 'em a scale and makes 'em stand on it. And part social pressure part our own delusion, people never accurately predict what they weigh, right? And so the metaphor I was using is a DEXA scan.

So a DEXA scan, if you don't know, is a. Fitness resource that allows you to go get a body scan for your body fat percentage, bone density, visceral fat on your organs. And I was part of a fitness community run by Dane Sanders, who's our VP of employee development. And they always start with the Dexus scan 'cause it anchors you in your present state and you find out just where you're at, not just your weight, but also how much muscle and fat composition that you have.

And for many people, when they go through this community exercise and they share their DEXA scan, it's like. Oh, at first it's this like eye-opening moment of where I have allowed myself to get amongst the drift. Maybe it's positively reinforcing, but in most cases there's something surprising about where you're at versus where you allowed yourself to think you were. 

[00:07:05] Richard Gaffin: Mm-hmm.

[00:07:06] Taylor Holiday: I think this same exercise is true if you ask people about how much money do you think you could spend at a positive ROAS next month, or what is your efficiency going to be in Q4? Right. They would give you an answer that is just caked in their own bias and ambition and desire for what they want to be true versus what is actually true.

And so what's so powerful about the DEXA Scanner, about to spend an A MER model is that it anchors you in reality. 

[00:07:31] Richard Gaffin: Mm-hmm.

[00:07:32] Taylor Holiday: what that gives you now is in light of reality, you have optionality, 

[00:07:36] Richard Gaffin: Mm-hmm.

[00:07:37] Taylor Holiday: is you can begin to reconstruct the future now because you are clear on what is presently true. This is an immensely powerful idea, and so as a business to be able to stop and go, I.

Oh shit. We can't spend what we had planned at the efficiency that we want. If nothing changes, 

[00:07:53] Richard Gaffin: Mm-hmm.

[00:07:53] Taylor Holiday: you get to a really powerful question, which is what would need to change in order to create the reality you want? And there begins effective planning and strategy and efficacy where you get the opportunity to alter the future. 

[00:08:05] Richard Gaffin: Mm-hmm. So another kind of element of the DEXA scan metaphor that I really like is, not only is there the element of. Kind of, giving yourself a dose of reality. There's also the element that the DEXA scan is more precise detailed than just stepping on the scale, let's say. And I think a lot of the times, if you were to ask somebody like.

What efficiency do you think you're gonna be able to spend at in November? They may be able to ground it in some data, like maybe some kind of what happened last year maybe is the most general version of that. in a sense like that's similar to stepping on a scale at its weigh 185 pounds, but it doesn't really tell you what percentage of your body makes up that 185 pounds.

And so part of what we're offering here too, with these forecasting models and with generally speaking, the system is a more accurate, more detailed. Kind of view into what exactly this kind of your state of being is. So talk to us a little bit about like, what are those? In the same way a DEXA scan says, you're this percentage body fat, you're this percentage, like visceral fat, 

[00:09:04] Taylor Holiday: Yeah. 

[00:09:05] Richard Gaffin: What are those equivalents in our 

[00:09:07] Taylor Holiday: Yeah. So it's great. So think about revenue as weight, right? So like if you were just look at revenue, that is sort of like the baseline number on the scale. You're 185 pounds, you're gonna do a million dollars in revenue, right? And then I would say when you break that apart and now you get body fat and muscle density, you can start to look at new customer revenue, returning customer revenue as sort of a layered down breakdown of that revenue.

Some of it comes from new customers, some of it comes from returning customers, and then you get to. Spend, right? Is this other element that comprises and a cost input. Right? And so you begin to see a little bit of the construct of how much money would I have to spend to create this revenue, right?

Like this relationship between that revenue composition and, and we have models for each. And this is where, what we wanna give you is a sample of like, let's help you think about the hardest layer to predict, which we think is new customer revenue. It's the hardest one to get right. What would happen if you flexed up or down on spend?

If you increased your cardio up or down, what would happen to your muscle mass? You know, whatever the metaphor that you want. If you increased your protein consumption up and down, what would happen? And so that's really, that's the hardest to predict for people. That is the, the v version of the cake. And depending on where you're at for newer businesses, right, earlier stage businesses, new customer revenue might represent 70, 80, 90% of your revenue in any given month.

And so it's, it's absolutely where you need to start. Now, for a larger, more mature business, it might be more important to actually start with the retention model. 'cause maybe existing customer revenue represents 80% of your revenue, but that's like a starting point. Then think about the next layer down where incrementality testing comes in and allows us to look at channel level impact.

So now we're looking at the muscle mass of your left arm versus your right arm. Meta versus Google versus Snapchat versus TikTok, et cetera. To now begin to tailor the plan with a level of specificity, oh, my right arm is weaker than my left. Ooh, okay, I now need to go spend a little bit more time over here.

Or I wanna amplify X, Y, and Z. And so we, we take. Revenue forecast where you're just saying the numbers. We're gonna break it down into your media efficiency. We're gonna break it down into new customer and returning customer revenue. Then we're gonna go all the way down through an incrementality testing roadmap to channel level efficacy of everything that you're doing to be able to get to the best allocation of the best dollars in the right way.

We're gonna integrate your marketing calendar. We're gonna have all your costs with clarity. We're gonna do spend a ton of time on data integration and get all of it right so that you as a leader, end up with. A dashboard that guides you on your journey, takes you to where you want to go, gives your team accountability, creates visibility to your present state, allows you to very quickly identify when you're off course and course correct.

It's almost like having an always on dexa skin where every day you're getting this sense of where am I versus where I wanna go, and I'm making progress on the journey. 

[00:11:42] Richard Gaffin: Yeah, so I, I kinda wanna talk a little bit about may be if, and we can go into specifics if you want, but like the types of transformations that you see after. Our clients kind of get on this system, let's say. So we talked a little bit last week about people discovering that they're either under or overspending.

That's a huge part of the forecasting model or what the forecasting model reveals. But what are the other like types of information this, generally speaking, reveals for our clients when they start, when they join us?

[00:12:09] Taylor Holiday: Yeah, so the spending a MER model, what it, one of the things it gives you is like, it gives you your seasonal spending power. 

[00:12:15] Richard Gaffin: Mm-hmm.

[00:12:15] Taylor Holiday: not, it, one of the things that's often underappreciated is that it's very unlikely for most businesses that your allocation of dollars every month is the same, like that you spend a hundred K every single month.

There's these obvious elements, Q4 being the most obvious one, which is upcoming for everybody, which is like, your spending power is likely a lot greater here, but how much greater? It's a really important question. Can you spend twice as much? Can you spend three times as much? Can you spend five times as much?

Should you have spent more than last year? Yes or no? Did you underspend or overspend the opportunity like before you go into the period of the largest allocation of dollars that you'll make all year? One, you have to place a PO to make a purchase, to have the inventory on hand. How much revenue are you gonna do?

How many units are you gonna sell? All really important questions. And then did you spend the right amount? And how? What would be the right amount in what channels and why? And so I think that just understanding and then also what causes changes in your spending power. 

[00:13:06] Richard Gaffin: Mm-hmm.

[00:13:07] Taylor Holiday: Okay. Seasonality is an obvious one, but that's not in your control.

But what about that last March where you had a massive spike in the efficiency of spend and efficiency? What caused that? Oh, there was an underlying promotion. There was a product release, there was a promo, there was a sale, there was a influencer hit. How can we, and this is where we can layer in our third model, the event effect model, where we absorb your historical marketing calendar and understand which inputs altered your spending power, so then we can begin to make recommendations to the plan going forward. Right. Like you, you look at right now, Ridge is running their sweepstakes right now, and so they've, they've created this sort of like industry wide understanding that if you go out and you manufacture a big marketing moment around giving away a Lamborghini, you'll be able to spend more money. And it's like that, that the service that feels so obvious.

But what I'll tell you people don't do is they, they look out into September and October and they just go, Well, we're just gonna try it. We're just gonna say the same thing with some new creative, and we're just gonna assume that we're gonna be able to spend the same amount. But in the meantime, there's been more competition.

They're now selling to other online retailers. All of a sudden, the degradation of the surrounding ecosystem has come in and they just can't produce it anymore. And so we can help to illustrate, hey, like we actually think you're gonna spend 30% less to get the same amount of a MER as you did last year.

So we better begin to answer the question, what the heck are we gonna say that's going to alter those to break the model, to build an indication? So that question of spending power seasonally and spending power related to your marketing calendar is a critical part of these models.

[00:14:38] Richard Gaffin: Right. Well, I think it's a really good point that it demonstrates that, or, or, or I think we've illustrated nicely is like how much more robust this is than just, we did this last year, this is what's gonna happen this year. But, alright. 

[00:14:53] Taylor Holiday: Oh, sorry. Big sneeze. I got to. 

[00:14:54] Richard Gaffin: I'll.

[00:14:57] Taylor Holiday: Oh man. 

[00:14:58] Richard Gaffin: Got the hay fever in India, 

[00:14:59] Taylor Holiday: Goodness gracious.

[00:15:01] Richard Gaffin: No. So, sorry, what I was saying is that like, yeah, it, it demonstrates how much more robust this is than this thing happened 

[00:15:07] Taylor Holiday: We made progress the past two weeks

which is LA last year. Last year is a terrible, terrible data point, and this is why I hate year over year. comps. I think they're like a plague on our industry, but last year's dynamics are not this year's dynamics for all the reasons of the world, from a macroeconomic standpoint, from a specific category competition standpoint, everything is different. and so the question about what is true today is way more important than what was true last year. 

[00:15:30] Richard Gaffin: Right. And yeah, and I think what this is, this provides is like the ability to point to something and say, because I think the reason people rely on year over year comps or whatever, is that they just don't really have anything else that's like the best possible or the most efficient possible, maybe tool that they can draw on in order to make that happen.

But but what this offers is something just way more complex than that. So talk to me like, one thing I kinda wanna drill down to in is the sort of day-to-day experience of somebody without this and like a CMO owner operator, whatever the case may be. once they've kind of onboarded into the system, or we've built this, let's say free spend at NAMR model for them for, does the day to day look like afterwards?

Like how, how is the pain point? What pain point evaporates?

[00:16:15] Taylor Holiday: What we experience a lot is that brands come to us with a budget that they built at some point through some basic trend methodology, maybe a bottoms up channel level traffic breakdown. That here in August is like. Wildly off course and is no longer relevant in any way. And so they're just sort of making up a number next month, if we're really honest, that's what's happening.

Next month's budget is $80,000. It's almost always a round number, which is a good indication that there's less thought into it than you think. Next month's, $80,000, and we just wanna break even. So a lot of times what I see happen is that like the relationship between spend and efficiency is just desire like, like it is, like this is what we need.

And so therefore that's the target and we're gonna spend this much 'cause that's what we want to spend to hit our revenue goal. It's all about what we want to happen and that, that is okay. I, that should exist as an ideal. But that doesn't a answer the question of what is likely to occur that answers the question of what you'd like to occur.

And so that, that's what people come to us more often. They can represent usually pretty clearly what they would like to happen, but it's often very disassociated from what is presently true. I'll give you a big way that it often is. This year's returning customer revenue is a byproduct of last year's new customer acquisition efficiency, right?

So there's a trailing indicator between how much new customer revenue did you generate, and then how that's going to show up in your returning customer revenue in the subsequent period. And people will come to us and they're like, trailing 12 month new customer revenue is down. Year over year, like let's say 30%.

But the way that they're forecasting their Q4 is to comp last year, because again, they're still anchored in this idea that last year we did X. So to have a better year, we have to do Y. The problem is that ship has sailed. Is that by allowing the existing customer base to shrink because your new customer acquisition has been down for 12 months in a row.

You are not set up to go out and deliver the Q4 volume that you need 'cause your returning customer is gonna be soft. Now the choice that you have there is if that comp matters, what it means is you're gonna have to drive more new customer revenue than you did in the previous year. So that mix, that 50 50 new to returning customer revenue or whatever, it's gonna have to be 60 40 new customer revenue, which means your MER is gonna be lower 'cause you have to spend more money.

To do it. And depending on whether you're first order profitable or not, that might come at some cost to profitability. But the biggest problem most brands come with is that they're at this crux of needing to restart the growth in engine by reinvesting in new customer acquisition in order to get to the annual revenue growth.

And we have to anchor them in that conscious reality that until we make this choice to reinvest or create some mechanism for driving new customer acquisition growth. You're gonna have softness in your future revenue. And so this is like this, this place where they get to, that's disassociated between what they really want to have and they wanna beat year over year Q4.

And there's probably some bonus or expectation attached to it, but the reality of the underlying health of the customer file is. There is no pathway to that. And so we need to, we need to reset the expectation and go forward, or we need to understand and make the case back to leadership, et cetera, of this is what it will cost to accomplish that.

Or we need to come up with the Hail Mary marketing strategy, the thing that's going to, gives us a chance. Maybe it's a small chance, but it's still a strategy to drive disproportionate effect and outcome and take a bigger swing in order to reach the goal. 

[00:19:36] Richard Gaffin: Yeah. Yeah. I mean basically like what it sounds like is, is this sort of pain point that gets solved is this sort of general feeling things kind of aren't going right or could be going better, but there's no real way to diagnose where or why other than to just keep kind of throwing money at the problem.

I mean, it's sort of the difference between, oh, I have a pain in my abdomen or whatever, and diagnosing it with like folk medicine versus having an actual like body scan and getting it diagnosed by like. Somebody with an md and that's a little bit what we're talking about here, right?

[00:20:05] Taylor Holiday: That's right?

Exactly. So, I, I think that there's, there's so much about this that, again, it's just, I, I couldn't imagine being a, a, a leader of an e-commerce business without being able to say, alright, I wanna see a model. For my spending efficiency. I wanna see my model for my returning customer revenue.

I wanna understand the underlying costs in my business and how they've trended in the future so that I can build a predictive p and l that I can at least say Again, one thing we know is all models are wrong, right? But some are useful and they're useful if they help you to quickly identify where your off course, so that you can course correct.

And as I go out into my month, the ability to know this is what I'm trying to create. Allows me to go, Ooh, did I do that? Yes or no? If no, how do I fix it? If no, how do I fix it? And to know that my team is operating with that level of clarity to orient their actions every day to go, okay, what should I change about what I'm doing?

Versus kinda waiting to find out and then getting to the end and going, oh, that's not wanted. Or, oh, that worked. Surprise. Like the sense of a confidence in did the action we just take, produce the result that we want. Okay, awesome. Continue forward. If not, let's change our behavior. 

[00:21:11] Richard Gaffin: Yeah. Okay. So one thing I, I wanted to kind of hit on. little bit is, we talked at the beginning of this, like that there's a set of tools for e-commerce entrepreneurs that kind of give you the, the view into this sort of like more complex let's say the complex body scan or whatever for your business.

So one of these things of the spin and Amy ER model, but talk to me a little bit about like what are, what are the other sets of tools that the e-commerce entrepreneur needs?

[00:21:35] Taylor Holiday: So there's three models that we use. So spend and A MER is about new customer acquisition retention. So this is cohort specific LTV forecasting. You can get really accurate about the expectation of your returning customer revenue. We integrate your marketing calendar into what we call an event effect model.

So this is looking at the inputs of your actions, how we, we log every ad that you launch, every email that you send, every sale that you run, we tag them all in the historical database to create, okay, if you run a sale, here's the expected effect on returning and new customer revenue. Okay. 

[00:22:04] Richard Gaffin: Hmm.

[00:22:04] Taylor Holiday: Then we look at, we have a media budget now.

We use MMM to allow us to think about a media allocation by channel, and we use incrementality testing to inform the expectations of efficiency at every channel. It back informs the MMM back informs the spend and a MER model so that we have this set of tools and resources that give us budgets, expectations of media plan, channel specific plan.

Targets of spend, and then we break that down all the way to the individual campaign level every single day for every month, including every email that we're gonna send has an expectation of revenue. Every dollar that we spend in every meta Google, TikTok, Snapchat, Pinterest, wherever, has an expectation of efficiency in return.

Every channel leader, every media buyer, has an expectation then inside. Of our platform, of exactly what I'm supposed to spend today, at what target across every campaign we know. Then the creative system that needs to be supported in it. So the next step, once you have all that, is to think about the creative operating system.

How many ads do I need to make? What? What days do I need to launch them? How does that flow into a project management workflow for your team? So your creative team knows what they need to make, when it needs to go live, in what channels? The whole thing comes together and flows out of. I spent an a ER model.

Right. So we're, we're sitting here giving you the tip of the iceberg to give you a sense of this is what's possible if you were to create clarity of planning for your organization. 

[00:23:24] Richard Gaffin: Yeah, so I think, the bluntest way to maybe say it is like, if you, we build one of these spend and a MER models for you, what we're asking, or the question that you can get answered right away is at the very least, you're probably over underspending somewhere. can show you what that is or where exactly that is, and then we can give you a much clearer sense of what new customer acquisition is going to look like for you over the next 12 months.

So, and we're gonna do it for free if you get in touch with us. So please do hit us up. We would love to build one of these for you.

[00:23:53] Taylor Holiday: That, that 

[00:23:54] Richard Gaffin: wanna hit on these? 

[00:23:55] Taylor Holiday: come Wednesday for free. We're gonna walk through this, so just come hang. We're, if you're a brand owner, and this is of interest to you, we're gonna talk through some more of this stuff, give you some visual examples of what they look like, how they get applied. I want you to feel really confident going into Q4. I.

want you to feel like you have the best plan you've ever had and that you feel more confident that ever, not that it's gonna be the best, I can't promise that that's actually not the ambition here. It's to make you feel really confident that the desired result, you either have a strategy to go after it.

And clarity of what you needed to do to get there. And that's I think what we can help with.

[00:24:24] Richard Gaffin: Yeah, right. All right, so common thread co.com, hit the hire us button, talk to us about, or, or drop us a note there around the spin am ER models. Also we'll put in the show notes a little link to at least apply to join the webinar tomorrow as well. So please hit us up there. We would love to chat to you more, but I think that's gonna do it for us this week.

And until next time folks, we will see you. Bye.