The Ecommerce Diagnostic Toolkit

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[00:00:21] Richard: Hey folks. Welcome to the E-Commerce Playbook Podcast. I'm your host, Richard Gaffin, the Director of Digital Product here at Common Thread Collective, and I'm joined as always by CEO of Common Thread Collective, the Sulton of Scale himself. Mr. Taylor Holiday. Taylor, how you doing?

[00:00:35] Taylor: I'm doing good, Richard. It's funny, I was Dane Sanders, who's our VP of Employee Development and Performance here at CTC was just slacking me. He's been talking to the chatGPT bot and asking it for opinions of mine um, and chatGPT is now giving Taylor Holiday opinions as part of its thing.

So he said like, gimme an e-commerce playbook in the tone of Taylor Holiday, and

[00:00:58] Richard: Mm-hmm.

[00:00:59] Taylor: I'm realizing that I'm not long for this world Richard. So if,

[00:01:03] Richard: Yeah.

[00:01:03] Taylor: this podcast, soak me up while you can because the AI version is coming and it's more thoughtful and more articulate than the real

[00:01:10] Richard: Yeah. Do you have a, do you have a greatest hit?

[00:01:14] Taylor: Well, it's funny, like, so he, one of the things he asked, it was let me see if I can pull this up exactly like. Gimme the 10 most controversial opinions that Taylor Holiday has about e-commerce. Right. And it's funny, the number, the first one I actually is like profit over revenue. So it actually like, I'm like, okay, I'm on, on board with

[00:01:31] Richard: nice. Good.

[00:01:31] Taylor: go and, and then it goes into a bunch of things about Let's see. Number two is build a brand, not just a store. Holiday believes that building a strong brand is essential for e-commerce success, and that e-commerce businesses should focus on creating unique brand identity to differentiate themselves from competitors.

So I'm like, all right. You know what, ChatGPT, you're listening. Thanks for the uh, maybe, maybe like, like writing and review if you would. If you don't mind chat, G

[00:01:54] Richard: Yeah. Right. That's right. Right. Taylor Bot is coming your way soon. Cool man. Well, so today we have a very, very special episode that we previewed a couple of weeks ago. And what we're presenting to you guys today, or, or what we're excited to announce is our latest product from Common Thread Collective.

And that is the e-commerce diagnostic toolkit. And the idea here is this takes all of our philosophy and distills it into essentially two things. A PDF that you'll download, essentially a white paper that kind of lays out the philosophy, the thought work behind this diagnostic, and then the diagnostic itself which is a I wanna say like 25 question or something like that assessment, where you enter in all of these metrics from your brand specifically, and at the end of.

The diagnostic spits out a very special number, a new metric that we're calling your GQ or growth quotient. And the idea behind the growth quotient is this is a way to assess the growth potential of your brand, not necessarily whether your brand is healthy or not, although there's some relationship there.

But to what extent, or maybe I should say this, like how ready is the fire to burn, right? How much rocket fuel is on it? What I want to talk about today is not only the specifics of this product uh, but also, you know, a lot of this, as many things do come from the mind of Taylor, the real Taylor, not Taylor bot.

And so we have Taylor here to kind of explain some of the thought behind it. So, yeah, so, so let's get started. Maybe. This, it was adapted, I think from a training that you would do with our growth strategist about when a new brand comes to us, how do we, as what are the initial um, signals that we look at to assess whether or not there's potential for this brand to grow.

And, on one hand to be a good client, but also to rapidly expand their operation. So maybe get into a little bit of your thought work behind um, kind of starting this out.

[00:03:52] Taylor: As an agency ceo, my primary responsibility, I believe, is to figure out how. We are deploying institutional knowledge through every end node of the system. Okay, you, you get hired because of the 12 years of history that we have and everything we've learned along the way. But the reality is, is that knowledge isn't encapsulated in each individual.

It's encapsulated in this sort of amorphous idea of the organization or the company. And so my job is to really, actually, Quantify and operationalize that knowledge. And so one of the ways that I wanted to do that was to look over the history of CTC and try to identify a common set of attributes that exist amongst the brands that have been highly effective and have grown really well.

That's our job. Or an e-commerce growth agency. And then to begin to teach people how they could search for those attributes. And when a new brand starts, a strategist's primary job is to. the present landscape to identify the gap between their present state and the future reality that they want to have, and then identify what they need to accomplish in order to achieve that outcome. And what I have found is that this diagnostic set, this set of things to look at, is a wonderful place to start, to begin to identify the biggest hurdles to growth or the areas that are opportunities to accelerate growth. And so by teaching, coming up with a framework, and this is a very. McKinsey thought modeling idea that like there is no single answer, there's a framework of ideas that you can apply onto data and to sort out, you can get each person, regardless of their experience or how long they've been at CTC to replicate the same set of evaluations criteria. To get to a common identification of problems. Now there's almost always a novel solution. There's directionally consistent solutions, but each solution is pretty novel. But the identification process of the problem is pretty consistent. And so this is what I set out to do to train our strategists. And then anytime I'm thinking about doing something at CTC, I want it to affect the full customer journey.

So how does this turn into marketing collateral? That helps the sales team, that helps the service team all the way through. And I think this, this product that we're building is exactly that. It's internal training and methodology meets, marking collateral meets a way that we can help you in the sales process, identify how we'll service you.

And so, I think it has a chance to be really, really impactful for both upskilling our employees and leveling people up and helping brands very quickly identify their own opportunities.

[00:06:23] Richard: Right. I think like one of the ideas behind this and this is some of the way that I framed it in the, in the introduction to the product itself is this idea that, to your point, like I think one of the, the, the. Some of the thought work behind the GQ score was the idea that there are a consistent set of things or set of problems that most businesses have as you, as you point out the, the actual solutions themselves could be all kinds of different things, and, and they're different for every business, but in fact, like.

Once we kind of put together like what this score looked like and, and figured out the, the ways that it was calculated became pretty clear. Like, yeah, it's consistent with like the brands who are crushing it, get high scores. The brands who are really struggling get low scores. That's just the way it goes, and it's just because there's, there's about, According to this, we have about 10 things that you can struggle with and 10 places where you can have serious gaps.

And the point behind this is like a lot of clients come to us and, we've seen this happen a number of times, and they're desperately trying to solve a problem that they don't really have. And I think that the, the classic example or, or kind of the The dead horse we like to beat is the idea of ROAS being the problem, right?

Our Facebook performance isn't efficient enough and they're doing everything they can to figure out how to fix that performance issue. When an actual fact, if they had gone through this diagnostic process, they would've learned that there were actually much different problems or deeper problems or more complex problems that they had to have a totally different set of tools to solve.

So let's go into those. Those 10 issues, or let's say opportunity areas, which we're calling the duckweed metrics. Now this is a metaphor of yours Taylor. So why don't you share with us what, what a Duckweed brand is and why you use this metaphor.

[00:08:06] Taylor: So for everyone listening, being a Duckweed brand should be your aspiration, right?

[00:08:11] Richard: Yeah.

[00:08:11] Taylor: when I was thinking about teaching this, I wanted to come up with a category of the really elite brands, right? Like, what are the brands that look that are the best? And so I started looking into, is the fastest growing plant in the world?

That was my initial Google search and I started down this rabbit hole and I found Duckweed. And so Duckweed is the fastest growing plant on earth in terms of how quickly it can replicate and grow. And the reason is really fascinating. It was sort of like a perfect metaphorical setup, is that there are less Cells inside of a duckweed plant that require light, which is the primary mechanism for photosynthesis in most plants that require light to replicate.

And so, Duck we can grow in the dark is a really fancy way of saying that. And so what it made me think about was as we enter a macroeconomic environment that is sort of the light and dark metaphor can represent a really macro environment. And the dark is sort of a resistant headwind environment.

What is the plant, what is the brand that grows in any environment That sort of, it is and anti-fragile is another way of saying this, right? It's all in the same ethos of the things we're looking at all the time, which is that what is the brand that can grow in any environ. And so that's what I sort of coined was duckweed brands are the fastest growing brands in the world because they can grow in any environment.

They're not dependent on anything because they have this set of attributes about them that are inherent to the makeup of the business that make them incredibly good at growth. And so that's what we wanted to assign to. Richard, I think we put it as like the top 10% of brands in this

[00:09:38] Richard: Mm-hmm.

[00:09:38] Taylor: exact threshold that gets you the duckweed label.

And so every brand should be aspiring to become a Duckweed brand. then we should study very closely those brands that fall into this category. And over the next few weeks, we're gonna have a few of them on this podcast to discuss what makes them so special. But that's the that's the idea behind Duckweed.

It's the most elite scorers in the gq. And if you think about GQ is our comp for iq, right? Intelligence quotient,

[00:10:03] Richard: Mm-hmm.

[00:10:03] Taylor: geniuses, right? Like, so that the top, you know, 10% of IQ scores are what we would consider genius. Well, the top 10% of GQ scores are what we would consider duckweed brands or the fastest growing brands in.

[00:10:14] Richard: Yeah, and we've sort of at least initially benchmarked the, like the Duckweed GQ score, the Genius score at one 30, which is of course the IQ score necessary to get into Mensa. Um, And so yeah, that's sort of the idea is and.

[00:10:28] Taylor: that's the word I was looking for. Yeah.

[00:10:29] Richard: Yeah, yeah, yeah, exactly. So I um, yeah, as, as a former English major who took a poetry class or two, like the, the beauty of this metaphor is very satisfying because there's obviously, it's, its ability to grow at any time, but also this idea, a, that.

Duckweed is also basically food for all of the creatures on a pond. So there's also this element too of like, it creates nourishment or sus sustenance for all, like the things around it and brands that grow rapidly do have that effect on the people who work for them and, and sort of the environment around them.

And then also um, yeah, that idea that like there are specific attributes to the planet. Deep down, like on the DNA level that cause it to be able to survive at all times. And that's exactly what we're looking for, these diagnostic attributes. These are the 10 genetic markers. If you, picture like the what Gatica thing, right?

Ga, like the different. Pieces that make up your DNA N Strand, these are those pieces. So let's break down exactly what some of them are. I've d divided these into two buckets, right? So bucket number one is the operational metrics. These are metrics that generally you'll need to find on your own P&L.

That don't necessarily have to do specifically with marketing. And then the other half of the metrics, or rather I should say seven of the metrics are marketing metrics, which are just specific to how are you distributing, how are you sending your message, where are you paying for attention, that kind of thing.

So the three operational metrics, let's go through a each. We have, first off is this is another tailor original metric here, which is cost of delivery as a percentage of revenue. Taylor, what is cost of delivery and why is it different than what everyone else is using right now?

[00:12:05] Taylor: Yeah, well, in a gap basis, everyone would refer to what they would call cogs, cost of goods sold, and that's sort of the general above the. Gross margin calculation. And that's, that's certainly important and useful and should be tracked on your p and l. But more interesting to me is every dollar that is required to get the product the customer.

And so we would refer to those as variable costs. They go up as orders go up. So we coin this term cost of delivery, which is the. Total cost to get the product from production all the way to the doorstep of a customer. And because every time you sell something, that's actually the cost that you incur.

And so when we think about calculating contribution margin, we want to include every variable expense associated with that process. And so I wanna look at that number as a percentage of your total revenue, more so even than I wanna look at your cost of goods as a percentage of total revenue because cost of goods. In some cases is actually a smaller line item than the shipping cost itself, right?

[00:12:55] Richard: Mm-hmm.

[00:12:55] Taylor: weight ratio of the product. And so we, we just have to include every transaction fee, every fulfillment expense, every shipping expense, and the actual cost of production of the product to get a sense of how much money we make every time we sell something.

[00:13:08] Richard: Yep. Right. So, so it's, to put simply, it's just any cost that scales with sales, right.

[00:13:16] Taylor: order,

[00:13:17] Richard: obviously that's,

[00:13:18] Taylor: goes up, the cost goes up. That's right.

[00:13:19] Richard: yeah. Right. And then so actually maybe you could point out are the, what, what expenses are maybe classically thought of as. Fixed cost or opex that we are actually including in cost of delivery.

[00:13:31] Taylor: Well, so I think I, I think that shipping is . Certainly one of 'em. But the other, like merchant processing fees on a p and l, you'll absolutely see that in g and a. Right? You're not gonna see that above the

[00:13:40] Richard: Yeah.

[00:13:41] Taylor: gross margin. But, but for me, like. It is a direct percentage of every order that you're paying on, right?

So I think that's a very obvious one. Another one is the fulfillment expense. So like if your three PL charges you a pick fee, so a dollar per order as a pick fee that's gonna show up as an invoice that you pay to your vendor, right? And again, because the way it gets paid and accounted for and sort of set up, it doesn't get tracked on that like per order basis.

It's like at the end of the month, here's your invoice. You pay the invoice that shows up in your G N A as a vendor payment. But in reality what you're being charged is every time an order comes in, you do a pick. You get charged on that. And so it should be the uh consideration in the cost when you're calculating contribution margin.

[00:14:22] Richard: And so we've set kind of as the benchmark for the Duckweed brand is 30% or less of total revenue. So on the flip side then of cost of delivery. Oh,

[00:14:32] Taylor: I just wanna say like,

[00:14:33] Richard: Yeah.

[00:14:33] Taylor: a high bar, right? Like,

[00:14:35] Richard: Yeah.

[00:14:35] Taylor: and, and, but that's important to understand is that when we're talking, we're talking about Mensa here, we're talking about duckweed,

[00:14:40] Richard: Mm-hmm.

[00:14:41] Taylor: elite of the elite in the ability to drive efficient value capture and go listen to Bernard Arno on talk about L V M H and why it's such a great business.

It's because they drive massive margin capture on the value of the product, right? Like that is what happens in elite brands. They have pricing leverage against their costs in a way that produces meaningful. So it's a high bar,

[00:15:01] Richard: right?

[00:15:01] Taylor: know it.

[00:15:02] Richard: Yeah. And right. And maybe this is a good point to, or a good time to point out that if you are, if you are missing on a specific metric, that may not necessarily be the end of the discussion for you being a Duckweed brand because if you are absolutely crushing it on another one, you may be able to balance that out.

So there are brands that we have that are duckweed brands for sure, that aren't hitting this particular metric, cuz it is a difficult one to hit, but they make up for it in other ways. It's just a good point. Yeah, there's no, having a good or bad score here isn't necessarily like going to kill your business or make it successful.

There's just a lot of, there are a lot of other kind of factors that play into it as well. So the flip side of cost of delivery is of course opex as a percentage of revenue. And I guess there's maybe not much to say here other than there are certain costs. Maybe classically thought of as not opex that we do include as opex because it's just, it's any fixed cost or any cost that does not scale with volume of production.

Yeah, I don't know if there's anything to elaborate on there, really.

[00:15:59] Taylor: Would just say that more and more, I, if there's any metric I'm thinking of, like pushing down further in terms of what the baseline expectation is. It's this one.

[00:16:08] Richard: yeah.

[00:16:09] Taylor: a world where like labor costs in many categories are being driven down to zero, and the volume output is being driven to infinity, right?

Like that's what AI does, is that. It, it takes these production costs around things like design and copywriting and other production element tasks and drives the cost down to zero. And so more and more greater organizations are gonna get incredible labor leverage, and I think that

[00:16:29] Richard: Yeah.

[00:16:30] Taylor: that you're gonna see a lot more of is that payroll is gonna be driven from, I think it's like an eight to 12% average in most brands, down to four to six.

And that's just gonna keep continue to create margin expansion opportunities.

[00:16:41] Richard: Yeah, and I think like this, this may be of all the, all the metrics we have here missing on this one may be maybe the most red flaggy I would say. Cuz currently we, I think we have our benchmark set of 25%. And a lot of brands are actually ab able to clear that like they've gotten their costs to a place where they're not, where it's, it's less than 25%, which is great.

But as you point out like that, those numbers are going to need to come down more and more to be able to compete. And if you're over that in this. , that's you're not in a great spot and that's something to figure out urgently, I think. Okay, so the third operational metrics. Metric is one that I think maybe could use a little bit of, of unpacking here, and that's cash conversion cycle.

And so the idea here is like, this is essentially the, the number of days that you have to float inventory costs. Now obviously for some like big ticket items, that's going to be, that's going to be a really long time, like furniture or whatever, cars or something. But for other brands, like the ideal is to get to a place.

You are this where the cash conversion cycle is negative. So maybe Taylor, you can talk us through what is cash conversion cycle and then what are the individual elements that go into it that can affect this number.

[00:17:54] Taylor: E-commerce businesses, the hardest thing about them is how cash intensive they can be if the terms of this aren't correct. And so cash conversion cycle refers to the process of taking cash, inventory, receiving that inventory, and turning it back into cash through sales. That's simply what it is, right?

It's the process of taking your cash, turning it into product, and then back into more cash. And so the question is often, much of a gap is there in the outlay of your capital? when you pay for the goods, how long do you wait before it turns back into cash and ideally more cash than you started with?

Right. And

[00:18:32] Richard: Right.

[00:18:33] Taylor: when we say a negative cash conversion cycle, what we mean is that you actually can order the product, receive the product, sell it, and pay for it with the proceeds of the sale so that you actually never have an outlay of capital. Right now, that's incredibly hard to do because it requires that you have incredible terms with your. Such that they're usually willing to allow you to pay. 30 to 90 days after receipt of the product. brands, when they start out early on, they have very little leverage with their supplier and they're paying for all their product up front, which means, let's say it takes 12 weeks to produce something, I pay for it. now out cashed 12 weeks before I can even try and sell it. and then it takes me another 30, 60, 90 days, whatever to sell it. And so that total cycle before I get my money back is really, really long. Well, that means I have a deficit in my bank account. very simply, and I have to figure out how to cover that deficit to cover all the other expenses that the business needs to operate. So the longer that deficit is, the more at risk the business becomes of suffering. Death really is the problem is

[00:19:36] Richard: Yeah.

[00:19:37] Taylor: the ultimately the lifeblood of the business. And so, there, now there's all sorts of solutions for this related to, inventory, financing and other capital and financing vehicles.

And so part of this consideration, if I were to dive deeper into just what is the cash conversion cycle would be, what that facilities you have available to you and what other financial engineering. And sourcing. Can you pull? But it's an initial glance. Understanding your cash conversion cycle understands the amount of inventory purchasing power somebody can have, which is a huge factor in growth because if you can buy excess inventory, tons of it, you can fuel growth when it happens.

A lot of times what I saw in Covid V was that growth was constrained. for people based on their ability to buy enough product because they had to outlaw so much cash. They couldn't even capture the demand when it existed. And so a duckweed brand never misses the moment because they have inventory purchasing leverage all the time.

And so their risk in buying inventory is really low. And it doesn't create depletion of their cash reserves. And so they can seize every moment all the time.

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[00:21:24] Richard: Yeah. So let's, let's move on to the marketing metrics then. So if those three operational metrics are just sort of about maybe the fundamentals of your business and how it operates, these are more about what we do, let's say at C T C and what we can do for you. And. So thi this, I should say too, like this is a combination of some of the anti-fragile metrics that we talked about was that last year or two years ago.

And,

[00:21:48] Taylor: Yep.

[00:21:48] Richard: some of the metrics that are included in the, in the actual strategist training. So the marketing metrics can be broken down, I would say, and two, maybe three different buckets or four. And so the first one is just around your 60 day ltv, and there's four metrics that really play into that or sort of, um, Part in, in conversation with that, I suppose.

And so first is 60 day incremental revenue growth percentage. This is, what does the percentage gain in revenue between first order your first purchase rather, and then in 60 days, right? One year incremental revenue growth percentage, which is the same metric, but over the course of a year.

And the bench works for those two are 30%. For 60 day and then a hundred percent growth for one year. And then we also wanna calculate this in terms of ratio, right? Which is, so two, two comparisons here. One is first order value to new customer acquisition cost ratio, right? Which is, what is the ratio of your A O V, basically to the CAC of getting that customer.

And then the one year L T V, to new customer acquisition cost ratio. CAC stays the same, but revenue grows. What does that look like a year from now? So Taylor, maybe break down. This kind of like complex of metrics and, and talk to us a little bit about how this works a Duckweed

[00:23:04] Taylor: very simply stated, a Duckweed brand profitably acquires new customers on their first order, and those customers meaningfully increase in value over the subsequent. 30, 60, 90 days all the way up through Infinity, right? So Duckweed brands efficiently acquire customers and those customers increase in value significant over time.

That's like the simplest way to say that. And

[00:23:23] Richard: Mm-hmm.

[00:23:23] Taylor: quantify it, we wanna look at a few different things. So the ltv, so LTV is a metric. We've talked a lot about how it's got a deficiency in that it references a variable time period. And so what we wanna look at is the actual. Sort of very specified time periods of growth.

So we look at 60 days and why 60 days? Well, it's an immediate window, and there's two interesting things about L T V. For most brands. most brands, the majority more than 50% of the value capture. Of the lifetime value of the customer happens within 60 days of purchase. This is not intuitive like now, the longer the business exists, the lower that percentage can go down.

But a lot of the subsequent value happens very shortly after purchase, right? And so, We wanna see, not just does a brand have the ability to produce value over a very long period of time, but how quickly do they produce additional value? This has a real impact on your cash flow. We call this the cash multiplier for that reason.

How fast do you increase the value of your customers? So it's not just how much, but also the velocity of it really matters. And then we wanna pair that with a longer view. So one year. So we wanna look at. 60 days and over a year, we wanna make sure that it isn't just a sort of offer trick that you've created where you did free shipping or free free product plus shipping, and then you sold them something.

And so it looks like there's a big L t V increase over 60 days, but it just flattens out from there and doesn't

[00:24:41] Richard: Mm-hmm.

[00:24:42] Taylor: great brands, they have this curve that for 60 days it's going up, but it continues up through the next, 12 months, 24 months, 36 months, uh uh, for all time and. Both of those things are really great indicators, and we've found a very clear benchmark that the best brands have a 30% increase in 60 days and a hundred percent in the year.

And so that's like a great indication of it. And then from there, f o V over NCA is just a question of first order profitability. So we would, when I only say forced order value, we would put V value in this case in brackets, and we use that as a symbol to. Net value. So actual contribution divided by N cac.

Basically

[00:25:20] Richard: Right.

[00:25:20] Taylor: you making a profitable dollar on your first new customer? Because this is really important. We go back to cash conversion cycle. We go back to the ability to order inventory. We go back to the latency of value capture. The best brands produce first order profit and that that's sort of a gold standard today, more than ever before because the cost of capital's high because this idea of fueling unprofitable growth is sort of deteriorated, is left. gotta be first order profitable, and that's basically what you're assessing. And then

[00:25:44] Richard: Mm-hmm.

[00:25:45] Taylor: that, if you have first order profitability and you have a hundred percent increase in value in a year, Then when we look at this next metric, which is the one year LT V to new customer acquisition cost, which is another, like another thing we'll often talk about is Reich return on invested capital, which would be net

[00:26:00] Richard: Mm-hmm.

[00:26:01] Taylor: by investment, right? So if, if we think about in this that case, one year L T V, in the same way, V value bracketed net value. So contribution in one year over the cost, acquire customer net operating profit over investment. What that means, if you're first order profitable and your customer increases a hundred percent in a year, you have an at m machine, you have a investment vehicle that generates at least a hundred percent return on invested capital in a year.

Like that is the kind of thing that you should be pouring dollars into and brands do, which is why they're duckweed brands cuz they grow really, really fast when those uh economics exist inside of the.

[00:26:38] Richard: Yeah. So this is actually maybe like a good example or a good place to point out. Like the way that all of these metrics relate to one another and how being deficient in one isn't necessarily an issue per se, if you're killing it in the other ones. Right. So one thing that we talk about a lot, and maybe this is something you can break down for us here, is that is.

As you grow and as you expand that number, the first order value to new NCA ratio is going to kind of approach zero, right? Like being net profitable on that first sale is going to get lower and lower. And ultimately that can be an indicator of a good thing, which is that your brand is growing and your, let's say, more well capitalized, you're more able to float those costs.

And in the best scenarios that 30%. In L T V or greater over 60 days is enough to make sure that you break even on that first sale. So, yeah, maybe talk about that relationship a little bit.

[00:27:32] Taylor: Yeah, so I think that you want to continue to aggressively fund. Every dollar that produces a return in excess of your hurdle rates, whatever that is, is a business. And

[00:27:48] Richard: Mm.

[00:27:49] Taylor: have a consideration for the cost of capital. That's gotta have a consideration for your current capitalization. let's just say that that's 50%, like you should be pressing every dollar. up until that 50% threshold is hit, and that

[00:28:03] Richard: Mm-hmm.

[00:28:03] Taylor: gonna press right up against first order profitability if you have a good L t V, right? Because again, remember if you're returning 30% within 60 days, even if you break even on the first order, you are making a lot of money. So there is almost no reason not to fund that acquisition right now. The, the only reason you wouldn't fund it is if, cuz you're attempting to achieve some sort of short-term profitability outcome.

[00:28:26] Richard: Right.

[00:28:27] Taylor: people should continue to press up until that marginal threshold, we would call it the marginal frontier, right?

This is a term that Jason Bornstein, who's been on this product, our podcast with me before from 4runner Ventures uses, which is that that's the moment at which you are no longer producing any incremental profit on first order. Like that line

[00:28:45] Richard: Mm-hmm.

[00:28:46] Taylor: your spend. you know Matrice uh is that threshold and you wanna press against it and most good brands do.

A great example. If you listen to the President from True classic Tees who was on a MO podcast like he talks about this, right? Like they are looking for every mechanism to press up against this threshold to go as fast as they can. Cuz the other thing about these channels is they don't last forever. When

[00:29:07] Richard: Mm-hmm.

[00:29:08] Taylor: a mechanism for generating that kind of return on a customer, you should insatiably take. Like you should go as fast as you can because it doesn't last forever. But when the unit economics are right, grab as much as you can. Now, the brands, they can do that. They have the cash conversion cycle, they have the inventory leverage, they have the capitalization, they have all the things to do that.

So these are all the, the, not just the attributes, but the behaviors that you see inside of these duckweed brands is that they insatiably grab profitable customer acquisition and throttle until they can't anymore.

[00:29:40] Richard: Yeah, this just maybe a good way of saying like, even if you're missing, let's say on this one, the solution to it isn't necessarily going to be like, let's try to figure out how to make ourselves as efficient on first order value capture as possible.

[00:29:50] Taylor: No

[00:29:51] Richard: Because that's not necessarily the solution.

Although our most, let's say our most duckweed brand that we've put through this process so far, which has a GQ over a. Are outrageously profitable on the first order of value and outrageously their growth of their L T V is is unbelievable over 30%. So if you can have all of these in a great place, that's of course the better scenario.

But it's, it's unusual to be in a situation like that where they're, they appear any way to be having difficulty even getting to that breakeven threshold because their, their CTA F O V ratio is so crazy.

[00:30:24] Taylor: Yeah

[00:30:25] Richard: so yeah.

Yeah,

[00:30:26] Taylor: there are these anomalies like that but but even in that scenario I would contend Their founder and I we talk about this is that like the problem probably is that they're not pressing hard enough that that

[00:30:36] Richard: Yeah.

[00:30:37] Taylor: behaviorally is that there's actually more available to them than they realize despite like their organizational obligations being monthly percentage growth every single month like that that that's the measure of success inside of that Whereas most of us are like if we could get year over year 8% we'd be happy They're like every month eight to 10% you know So uh it's just different d Different attributes provide different opportunities

[00:31:00] Richard: Yeah And we're, we'll hopefully talk to talk to the founder in a couple of weeks because it's a really fascinating case study. And I think just sort of pointing out how this GQ metric can be so indicative of your potential and then how like the solutions to capitalizing of that opportunity can be so different for so many different brands.

Okay, so let's move on to like the, the sort of last three metrics. I kind of think of these together even though like they're not really. Interrelated. But so first off is like the number of distribution channels. And this is a, a holdover from our anti-fragile scorecard. But this is idea of like, basically where are you selling and you have too many eggs in one basket.

So maybe talk a little bit about about that and the way that people can kind of go wrong with distribution channels.

[00:31:43] Taylor: Yeah so again there's always this tension between just like trying to make the numbers on this thing go up just for the sake of the numbers but what And so just having distribution that sort of conflicts with itself So like if you were to say I have my online store and then I have a bunch of other online retailers that only sell online and only capture and slice my existing demand the value's not nearly as meaningful as if you have real distribution in let's say retail or a B2B channel that is purely incremental to the work that you're already doing But the reality is is that the more points of distribution that you have the more opportunity for demand capture For the work that you do to create demand exists We're still in a world where 15% of e-commerce or 15% of retail transactions happen online and 85% don't Right

[00:32:27] Richard: Yeah.

[00:32:28] Taylor: that's category specific and it's different in different categories blah blah blah But the reality is is that most of the demand captures still happens offline And so if you're going to be a brand that is going to do uh uh the work of realizing all of your efforts in marketing you're gonna have be able to meet the customer in more than one location And I was listening to Bill Alessandro on a podcast yesterday talking or and he put out a tweet today too just saying like D two C is not a business model it's a channel like and I think I think that's that's what we're all sort of uh realizing in in coming to terms with is that our job is to meet the customer everywhere they are and the customers a lot aren't just on our website And so I think we have to think about creating channel diversification that offsets the risk of depletion in any channel as well Now there's different sets of risks with each of the alternative channels But the reality is is that there's value to be had in having more points of distribution as a business

[00:33:23] Richard: Right. What are some of the distribution channels that maybe you don't think of or, or what is, what are where like there's opportunity that maybe it's not just like, oh, get your product in target. Like what are, what are distribution channel possibilities?

[00:33:34] Taylor: wholesale's the sort of obvious one right Like that's what you're talking

[00:33:36] Richard: Mm-hmm.

[00:33:37] Taylor: and there's sort of a whole set of those from independent retailers to small chain stores to the big you know uh mass market chains that you just mentioned there The targets in the Walmarts that are the sort of the obvious part of channel distribution I think one of the more powerful ones that's often underappreciated is what I would refer to as B2B sales Think of this as When we were at klo we would sell to the government for police and firefighters or we would sell to safety like OSHA safety standards for people working in assembly lines right Where the product becomes sort of issue gear for some worker in some environment. Like those are really powerful channels if you can get into b2b. Another one would be like corporate gifting. Where your product becomes a gift that's given at Christmas to all the employees of a company and they're bulk buying thousands of units at a time, right?

So those are additional channels of distribution that are generally really high leverage, really good partners, if you can tap into them and are often sort of afterthought in many cases, is.

[00:34:34] Richard: Cool. So let's talk then about our last two here. So the first is your percentage of organic traffic, and this is pretty straightforward. What percentage of traffic to your website comes from organic, non-paid channels? Maybe specifically the I think the flip side of this or the way that people.

Tend to fail on this metric is being over leveraged, on paid, right? This is the classic. Your brand sells maybe one or two things, and you're building all of your growth comes via Facebook, which is ultimately volatile. So let's talk a little bit maybe about how this. I, I think like it sort of relates to the, the revenue layer cake concept, I think, right?

Is that your sta the stable sort of base of growth needs to be organic channels in order for you to be able to safely fuel that fire with paid acquisition, right?

[00:35:18] Taylor: It, it's very buzzwordy right now to say that brands want channel diversification in their media or

[00:35:24] Richard: Mm-hmm.

[00:35:25] Taylor: And what they usually say is like, we want another paid channel where we can go put paid dollars that will perform

[00:35:29] Richard: Yeah, totally. Yeah.

[00:35:31] Taylor: but real channel diversification is a power of having an organic lever, and that usually comes from one of two things.

Either you are an influencer that has an audience in some channel that you can siphon the, the audience attention there into your website. This is why creator brands are such a big thing that have real leverage over a lot of the non um brands, right? Or alternatively, maybe you have a really great SEO position in some keyword that generates a bunch of value over time for your business in a way that gives you a constant source of organic traffic outside something that you have to pay for right.

And, and these things. The, and then the third one is like you have an organic flywheel that's inherent to your business.

[00:36:12] Richard: Mm-hmm.

[00:36:12] Taylor: use APL as a reference for this, one of our partners a lot. The beautiful nature of their product and the customer that they sell it to leads to their customers posting on social a ton about their product in a non-paid way because it's beautiful and they wanna show off that they wear it right?

And that leads to people seeing the posts and coming back and driving organic demand in this like sort of virtuous cycle. And so those three things create. Make it so that you get this sort of viral coefficient effect where every customer that you acquire has this ability to bring with them more future customers in an organic, unpaid way.

And so the, the value capture of your paid acquisition is actually greater than what shows up on a direct L t V to ca calculation because there's also this referral inference that's unmeasured that is real uh and generating future value as well.

[00:36:57] Richard: Yeah. Another fantastic example would be our, our client born primitive as well, who at the point that they came to us, I believe they hadn't paid, they hadn't. Any money on paid media. I believe it had been all organic growth, which os also, is another sort of example of just product market fit being the best advertising in a lot of ways.

They make sports bras that fit women who do have CrossFit bodies, which is really unusual. You show up to the gym in one of those people are like, oh my God, where can I get that? I'm tired of pinching when I do, my Olympic lifts or whatever. And bam, you get that sort of expansion on the organic level, which then our job becomes.

The fire is already built. All we have to do is dump a little lighter, lighter fluid on top, and that's just sort of the beauty of having a organic traffic percentage over 50. So, okay. And then finally, number of revenue peaks. This is another sort of CTC original, this idea of the four Peaks calendar, having four moments throughout your.

Marketing calendar where revenue peaks a certain level over the mean. Um, So let's talk a little bit about this. I know we've already, there's a lot of material out there about the Four Peaks theory but I think it's maybe important to unpack here that we're, we're talking about. So we are defining revenue peak as any month of the year that where revenue is 25% over the mean of non-holiday revenue, which is to say taking January through October, the mean of that 25% over that any.

January through December, that beats that number is a revenue peak. And the idea here is that, of course, classically, a lot of people peak once or technically twice in November and December, and there's a lot of opportunity to find. Places to peak that revenue, seasonal drops, whatever. And I think really this is, this is ultimately about the fact that a lot of brands don't really have a marketing calendar that's planned out any further in advance than a couple of months.

So, I don't know, Taylor, is there anything you wanna unpack on that?

[00:38:54] Taylor: it's just this is a hat tip to people who plan well and who understand how to think about how product releases and product development fits into the process of becoming a great brand. So it's almost, you could almost make an argument that this one goes into the operational part of the consideration here, more than

[00:39:09] Richard: Yeah.

[00:39:09] Taylor: right where it is to say that like, these are people who plan great campaigns.

They plan product releases, they plan moments, and they invest in developing. Moments where they have over-invested and over-indexed on the quality of work that they're doing, such that you can't every day produce wonderfully beautiful work that's deeply thoughtful, deeply planned, and broadly distributed.

It just doesn't work that way. But you can do it at multiple points throughout the year. And the best brands do this. They sync together between product development and marketing in ways that one of the best ways, we talk about this a lot to arbitrage. Advertising is to create unexpected in your estimated conversion or your conversion rate against your estimated conversion rate. If Facebook's out there bidding at a certain price against an expected, conversion rate all the time, and then suddenly your site conversion rate spikes, you're gonna be able to drive that bid price up, get more volume, capture more demand, get more new customer expectation. And while you know CRO is sort of this evergreen attempt at driving a, small gains, these kinds of moments, limited edition products, campaign releases, influencer partnerships, et cetera, they can create these moments of peaking in your conversion rate that drive increased volume of new customer acquisition.

It's why if you go look for almost any brand in the world, their largest day, single day of new customer acquisition for the entire year is Black Friday. And so that's just sort of tanking that premise and saying, okay, how do I replicate what's happening? more moments throughout the year to drive the best total outcome I can.

[00:40:40] Richard: Yeah, that wraps up the 10 Duckweed metrics. These are the 10 genetic attributes of a Duckweed brand. And what we wanna know is how do you fit into this, right? For all our listeners out there. What is your growth quotient? And I think this is going to be a super, super valuable tool to identify exactly the places where you can um, begin to think about uh, taking advantage of, of your biggest opportunities to grow as fast as you possibly can.

[00:41:07] Taylor: Here

[00:41:07] Richard: so after you go through, oh, go ahead.

[00:41:09] Taylor: real fast with this like

[00:41:10] Richard: Yeah.

[00:41:11] Taylor: this is I believe that this has the potential that if you have a head of growth or if you have a chief growth officer, like this could be their K P I is to make this

[00:41:21] Richard: Yeah.

[00:41:22] Taylor: better. Like, because there are so many things inherent in this attribute that it gives you a really clean measurement of all the work you're doing to make your brand more ready for growth. And so same thing

[00:41:32] Richard: Mm-hmm.

[00:41:33] Taylor: you could use this to say, here's how we've made you better, here's how we've improved your business. Because one of the tensions in even financial metrics, like in using contribution margin in a 30 day window is it doesn't necessarily tell you whether or not your future growth is set up well.

Right. It's always hard

[00:41:47] Richard: right?

[00:41:48] Taylor: the short

[00:41:48] Richard: Yeah.

[00:41:49] Taylor: but alongside creating financial, The health of the vehicle, the overall performance of the business, and its, its overall viability is encapsulated really well in your gq. And so if you were sort of regularly taking your GQ once a quarter to see what have we done to improve this, that goal and KPI ping somebody against it, I think would be a highly effective way to manage your internal team.

[00:42:15] Richard: Yeah. And that's a great call out too because I think like it's, it's tempting and we've, we've sort of set it up this way that there is, there is a benchmark one 30, like that's, that's the sort of duckweed benchmark above that. You're in a great place below that you have some stuff to work on, whatever, but also theoretically there's no upper limit to this.

There's also no lower limit. But I think the idea of like using this as a benchmark for yourself against which you can grow. Is probably the most effective way to use it because yeah, any improvement in any one of these things is going to ultimately be good. And I think that this number, your GQ and the results of this assessment are as close I, I think, I think as, as we have of like a unified theory of, of sort of CTC and all of the things that we think about.

Unified theory of e-com. Even all of the metrics, all of the variables that go into it, brought into one place and turned into a single number that you can affect meaningfully on a day-to-day basis. So yeah, we're, we're stoked to put this out. Taylor, you got any any final thoughts for us?

[00:43:11] Taylor: No, I like, I want you, part of this is like one of the things that I want to take pride in doing is that we wanna put a model. We wanna get feedback against the model and we wanna continue to refine it over time. We've got V2 of the

[00:43:25] Richard: Exactly.

[00:43:25] Taylor: Guide coming out here soon. That's gonna be like an even better version of the forecasting model and the way that we build that.

The same thing we wanna do here. So if you take it and you feel like it doesn't reflect you, or there's some metric that you think we're missing and not considering, Give us

[00:43:38] Richard: Mm-hmm.

[00:43:39] Taylor: gonna keep improving GQ over time and the way that we assess it to make it a better and better score. We wanna build a database of brands, of the scores that they have to be able to, and then run correlation against their growth rate and overall profitability to really hold ourselves accountable to producing something that's useful in the market.

So please participate in this research with us and we'll do our best to continue to make it as valuable as we can.

Hey folks. Thanks for listening to the E-Commerce Playbook podcast. We are so excited to share the diagnostic toolkit with the community, and that's why right now through Wednesday May the third, we're offering special early bird pricing to the CTC community, which includes you, our podcast listeners.

All you have to do is go to commonthreadco.com/products/ecommerce-diagnostic or it would probably be easier to just follow the link in the show notes. There's no discount code required to get the special pricing. Just click through. You'll get the pricing, you'll be good to go. So we hope to see you on the other side of the assessment.

We're really stoked about it. And until next week, happy scaling everyone.