The ‘Flow Era’ Is Coming: The End of ‘Easy’ DTC

[00:00:00] Taylor Holiday: We have to ask ourselves, what did we learn? What skills did we develop? We've lived through this. We know what COVID generated a massive influx of capital. Maybe it wasn't perfect. Maybe it was sort of faux demand. Maybe we cared a little bit too much about revenue, but we learned how to spend money. We developed the skills of growth marketers in that time.

[00:00:20] The deployment of capital is a skill. What I'll tell you is spending money is a skill. If you hire a media buyer that's come out of a place where money was scarce, they are terrified to spend money incorrectly. If you come out of a place where money is abundant, they know how to deploy capital. Now, the problem with growth in e-commerce is it's almost directly correlated to the availability of capital growth stalls when there's no available capital because you have to self-fund all of the growth.

[00:00:57] Taylor Holiday: There we go. That's a pretty intro. Thanks Jimmy. Thanks Nick. Um. Okay, today we are going to take a class in evolutionary biology, just what you all signed up for, right here. And we're gonna talk about the terrifying evolution and how we are gonna progress as a species of DTC brands. And I gotta be honest, what I saw, the speakers list, um, the idea of progressing as a species was kind of front and center because you had me, you have Gary, you have Ezra.

[00:01:26] I was afraid that Nick was scheduling like to push us all out on an iceberg at the end of it. Um, 'cause we are been around a minute. But what that means is when we have the benefit of spending a lot of time in an industry, what it means is you see a pattern emerge. You get to watch things play out over the course of 15, 20 years, and you can begin to develop an understanding of how the environments that we operate in, develop skills in US that become critical to how we improve.

[00:01:53] And that's what we're gonna look at today. We're gonna go on a journey through the eras, and we're gonna talk about how each era of DTC has developed in US skills that are critical to what we're becoming. And if you follow me in my, in my content, you might've experienced me to be a bit pessimistic right now today, and candidly I am.

[00:02:13] It's not a great environment for e-commerce. But today I have a more optimistic view that I wanna share. And it's this thesis. It's the idea that the extreme environments that we've lived in for the last five 10 years have forced evolutionary changes in brands. That will lead to the coming year and the coming era being the best in DTC history.

[00:02:35] Now, to clarify what I mean, I do not mean that we're gonna experience a COVID rising tides lift, all boats surge of demand. That's gonna make everybody win, but the winners are gonna be the best ever. We're gonna see positive returns in the public markets. We're gonna see continued m and a activity. We're gonna hear of operators driving tons of cash flow because we have evolved skills for this world through our pain.

[00:03:01] And I'm gonna talk about that today. But first I'm gonna tell you a little story 'cause that's how I like to work. So this is my kids. That's Hayden and Jet. They're my twins. This is us when we won the Costa Mesa Little League Championship this year. It's my most important job. The thing I care about more than anything else is hanging out with these dudes and playing baseball.

[00:03:19] Um, and coaching 11 and 12 year olds is also a lesson in evolutionary biology. Anybody have some preteens, some stinky feet and some smelly rooms, they're going through some of their own changes, right? Biology's beginning to kick in. And what that means is that if you get a teen of 12 year olds, you get wildly disparate size, smell, attention, physical traits.

[00:03:41] And if you look at my kids right there in the center. You'll notice like a cascade of height out the opposite direction. They're gonna be the smallest forever. That's what I've given them. That's my gift, is, uh, they'll get, uh, some loquacious and maybe a little charisma, but not much height. That's what they're in, doomed for.

[00:03:55] Now, if you look on the other side, alternatively, this is Babe Ruth, right here on the right. This kid hit 9 63 with 12 home runs. I think he threw three perfect games. He put on paper the best little league season probably in the history of the sport. Really incredible. And if you put him next to my kids, you'll get, get a sense of just what a wild juxtaposition that is.

[00:04:16] How are they the same species competing on the same field, wildly different. This isn't just about puberty, this is also the fact that their genetic makeup is gonna be small. My experience like this is very similar. This is a photo of me next to Bear Lin. So Bear is a client of mine for 10 years. Yes. An agency client relationship that has lasted 10 years.

[00:04:37] He's the CEO and founder of Born Primitive. Um, he's a Navy Seal. And someday when they dig up our bodies, there's no way they're gonna think our skulls are from the same species. Look at that man's head. It's insane. Right? So most of my life is spent around people like this where I go, man, I'm really glad he's going to war and not me.

[00:04:57] And I'm really, it's, it's hard for me to understand how he is so imposing physically and Bear's actually gonna be our inspiration today because he is not just about his physical presence, it's also about his brand and the way that he has evolved over the 10 years that I have known him. To adapt through each era to build the best version of his business today.

[00:05:22] And we're gonna use him as an inspiration to learn from, to understand what traits we need to adapt and evolve in order to succeed in the coming future. But first, we have to go backwards. We have to ask ourselves, what did we learn? What skills did we develop and what does that mean about us today? Now, I'm not gonna labor on this too much because we've lived through this.

[00:05:41] We know it. We know what COVID generated a massive influx of capital 2021. There was $5 billion of venture capital that flowed into our industry. Suddenly the all time, uh, the interest rates were in an all time low. There was an abundance of free money from all of our friends that used to sponsor these events.

[00:06:01] No offense, but they were giving it away and the demand was through the roof. We saw, this is from a blog article we wrote during COVID all time highs demands. It was Black Friday in April. All the stories that we lived through. So the question is, what did we learn in that time? Okay, so maybe it wasn't perfect.

[00:06:17] Maybe it was sort of fa demand. Maybe we cared a little bit too much about revenue, but we learned how to spend money. We developed the skills of growth marketers in that time. The deployment of capital is a skill, and what you saw was you had a lot of things like this. So this is, Jordan talked about cohorts earlier.

[00:06:35] This is a very similar idea. Let's see if I can laser this. Not gonna work that way. I'm sorry for the people in the back. I was expecting the horizontal layout, Nick, and you went vertical on me. So if you're in the back, I'm gonna explain on the left how many new customers, 2020. January 4,000 new customers at a slight loss by April.

[00:06:53] That's 6,600 by the end of the year. It's 24,000 new customers in a month. All wildly profitable, tons of deployment of capital. This was the skill that got developed. We developed the capacity to spend money, and I've hired a lot of media buyers in 12 years of running an agency, and what I'll tell you is spending money is a skill.

[00:07:09] If you hire a media buyer that's come out of a place where money was scarce, they are terrified to spend money incorrectly. If you come out of a place where money is abundant. They know how to deploy capital and it's a skill and we evolved it as an industry. And on top of that, we also, um, I'm gonna skip this.

[00:07:24] We're gonna come back to that later. We also developed the capacity to produce. The other thing that happened is we had to ramp up production. We had to make more stuff faster. We had to fulfill it, we had to get it from point A to point B. And so we learned how to make, and we learned how to deploy.

[00:07:38] That's what we learned in COVID. And the end result was we grew top line revenue really, really fast. So we run a data aggregator called the DTC Index. If you go to d dc index.com, you can follow us along. It's a combination of three different brands, ROS ourselves at Common Threat Collective, and no commerce.

[00:07:55] We aggregate about $12 billion of GMV every year. It's a really large data set that we pull this information from, and you can see that prior to COVID, the average store was growing about 15%. COVID hits, it jumps to 60% in 2020, 70%. In 2021, the average store was growing that rate. So most stores were growing hundreds of percent.

[00:08:14] We all remember it. We lived through it. What does that mean? During that era, we developed a defining metric of top line revenue. We had an average performance of 60% top line revenue growth, probably at a negative EBITDA. All the funding came from venture capital and cheap debt, and we evolved the skill of growth marketing and we took it with us into the next era and we had a hammer and everything was a nail and we were just gonna whack it.

[00:08:36] Even still today, there's a little bit of that in us, especially in this room. There's a lot of hammers in here. But what happened was in 2022, it turned off like a switch. I dunno if you remembered it. We experienced it in our business the summer of 22, July of 2022. I laid off a hundred people inside a common thread collective.

[00:08:53] It was a horrible period of time. All of a sudden, everybody's spend went from a ton to not very much overnight, iOS retail opening, back up venture dollars, leaving interest rates rising. All of it culminating, but yet everyone was trying to grow off of this base. We had a 70% year over year growth comp. We had to grow and we're just gonna pound and pound and pound and pound, and those cohorts become more and more and more and more negative, and the growth slows down.

[00:09:23] All of a sudden, that 70% growth turns to 30%. And this brings on what I call the Ozempic era, where all of a sudden we have to learn how to get lean. There's no more money. All the venture capital, as quick as it came in, it ran away, said, thank you very much everyone. I've had enough of this. I'm gone. 97% deduction from 2021 to 2022 in dollars flowed in the industry.

[00:09:50] Interest rates skyrocket. The cost of acquisition just keeps going up and up and up. In attempt to grow off of the previous baseline, you had to comp it. You had to grow again, and so brands were taking worse and worse and worse acquisition. The end result was you had a 97% decrease in venture funding. 195% increase in the cost of debt, 130% increase or decrease in media efficiency.

[00:10:16] And remember the skill, other skill we learned, what was it? We made a bunch of? We made tons of it, and we shipped it all here because it was backed up, the supply chain was backed up. And so we needed more. This demand's going on forever. Make it, make it ship it all to us, and all of a sudden we were flooded with supply that didn't match demand.

[00:10:32] The byproduct was discount rates skyrocketed. If you go look in any category, especially like look in the outdoor space, something like that, go look at standup paddleboards as an industry and follow the price changes over time. And you'll see a wild influx of demand, a massive supply of competition demand falls off a cliff and all of a sudden it's a race to try and liquidate inventory.

[00:10:54] So part of the reason you can't drive efficient CAC is 'cause everybody's undercutting on price. Discount rates grow the through the roof and growth continues to slow. 

[00:11:03]

[00:11:08] Taylor Holiday: Now, the problem with growth in e-commerce is it's almost directly correlated to the availability of capital. If you're running an e-commerce business and you're profitable, even, let's say you run it 6%, 7%, 8% EBITDA, what that might mean in a translation to free cash flow is something like 2%, 3%.

[00:11:31] After you get outta taxes, after you get out of all the obligations that go on top of that money, the interest due on whatever debt you have, any CapEx charges that aren't included. What that means is that the availability to go out and purchase an increase of supply, right? If I'm gonna grow my business, I have to take money and I have to go buy more inventory and access of the previous purchase of inventory with a smaller amount of money than I started with growth stalls when there's no available capital, because you have to self-fund all of the growth.

[00:11:59] On top of that, some of these people were just so bloated on the opex side that they didn't make it, and there was tons of deaths, right? 22, 23 tons of bankruptcies that you read about. Lots of layoffs, people, right-sizing staff. A lot of this, which is, this is new customer acquisition over time for a very large e-commerce brand where it peaks and then all of a sudden it just declines.

[00:12:23] You're trying to depend on your existing customer revenue to drive profitability. So you cut back on marketing spend and it's on a death spiral. And in 2024, our average growth rate as an industry was only 10%. So you write it all the way up, and then 2024 is worse than pre COVID because we are dealing with the consequence of an excess of supply and limitation of demand.

[00:12:49] Bloated opex, no available capital. All the problems. The availability of capital in 24 is worse than 2019 because by 2019 everyone didn't know yet whether this would still work. And so there was optimism, hope, possibility. 24, that's all dead. It's gone. So as we started the year, I wanted to get a sense of the state of the financial reality of our industry.

[00:13:08] So we know top line revenue growth has slowed, but what's happening underneath it? So final loop, um, accounting platform in our space. Leo's a good friend. We work closely with them on a lot of data projects and so I had him pull 508 figure brands and I wanted to understand the financial reality of those businesses at the start of 2025.

[00:13:27] This is what we saw. Okay. Net sales. So think of this as after returns. After discounts about 87%. Median gross margin, about 57%. Median contribution margin about 28%, and median EBITDA about 7%. So coming into this year, you have median EBITDA on an eight figure business. Forget seven figure stores where it's an even more of a bloodbath.

[00:13:50] Eight figure stores healthy have existing customer revenue that they can rely on. Media and EBITDA. 7% growing 10% as a business. That was at the start of the year. But the problem we all know is that the worst is actually yet to come. This is from Lululemon, CEO. Their stock just tanked on the most recent quarterly earnings, and this was the statement that he made.

[00:14:11] It's going to get worse. And the reason for that is because tariffs, which we all know became a big story this year, have yet to really affect our p and ls. So there's a lagging effect to the realization of revenue. One of the things. That's an interesting data point. It's the median cash conversion cycle of an eight figure e-commerce brand is about 92 days.

[00:14:29] Speaker 2: So practically what that means is that the median on hand available inventory is about three months of 

[00:14:34] Taylor Holiday: supply. So what that means is that tariffs, which started in April, or for some of you, started when DI minimis closed, or maybe somewhere in between, depending on where you were manufacturing, you've got some amount of inventory that you're working through prior to the realization of all those duties and the change in cogs.

[00:14:51] So it's a lagging effect. And so it's yet to show up. So this sort of just illustrates if the tariff policy begins 90 days after that, the p and l impact begins. And so for somebody like Lululemon, they're like, Hey, just warning, you gonna get real bad. 'cause we're gonna realize all of these duty effects in the coming months.

[00:15:10] And this idea that we're gonna be able to pass it purely on to the customer is just not real. Now in part, we may be able to, and some of us are in more inelastic pricing spaces than others, but for most what we're seeing is that about right now, 64% of the companies are eating the tariff, 22% by the customer.

[00:15:28] And so that's being distributed some by your own profitability and some by pricing changes. So particle, you guys know particle, they're in our space. They do this cool little inflation tracker that they track on their website. That's sort of an index of all the prices that they look at across all the things.

[00:15:41] This is what it looks like since tariffs. That's not good. That's inflation in our space of price over time. What happens when we just raise all the prices? Do you think customers are like, yeah, freaking awesome guys. We're just in, we'll be in more than ever. Nope. You get a corresponding lag in consumer demand.

[00:15:59] As inflation increases, they feel poorer. They can buy less things. It's a bad indication. And so one of the things that we do is we build the D-T-C-C-I, which is the direct to Consumer Confidence Index. Every month we survey 5,000 customers about their sentiments, about the economy and their plans to spend in the future of the past.

[00:16:17] So what this shows is a question about whether they plan to spend more or less in the future. And you can see for the last two years, the pen, the pattern's pretty similar. It ramps up right ahead of Q4. They say we're gonna spend a ton, and then afterwards they say, we're not spending anymore. And the green line is just where we're at now.

[00:16:31] Same pattern. Less spending. This is the self-reported online spending habits just graphed and visualized in a different way where you can see where we're at today relative to the past. So we've got worse cogs, we've got soft consumer demand, and we've got continued rising cac. This is then, uh, graph of just the underlying data of all of the customer acquisition costs on average for all the brands over time.

[00:16:59] So that's a bad combination of things. Rising cac, worse cogs, worse consumer demand. How does that produce a better future? Well, the funny thing about change, and I learned this, I, I dunno if you guys have ever gone through real hardship in your business, like the one I talked about where I had to lay off a hundred people.

[00:17:15] Well, one of the things about being just okay is it doesn't really force you to change anything when it's just okay, there's no real impetus for change. This is the thing about evolution that I find to be fascinating is that it's the impetus for survival that leads to adaptation. It's the I will die if I don't.

[00:17:37] That creates change. It's where we are. We're in the, I will die if I don't right now today. That's why I am so sure that we're gonna get better. 'cause I see it happening. The reality is if the CACs gonna rise and your cost of delivery is gonna go up, there's only one release valve. That exists, and I'm seeing brands act on this already.

[00:17:56] This is Cody. You guys know Cody. This is a tweet he put out early in the year. This is the year of efficiency and cost cutting at Jones Road across the org, we have initiatives of getting, staying lean and having improved both gross margin, landed gross margin considerably in opex considerably. Here are 11 things we've done to lead the blah, blah, blah.

[00:18:11] And then he goes on to talk about the suddenly becoming CEO changed his mind on full-time employees versus out stores and leverage. But he's just one example. What about the data? Well, if I look at Q2 across all of e-commerce brands. Despite the pending future of issues related to cogs, brands are getting lean.

[00:18:31] You're starting to understand that OPEX is not a person gain. It is a business that you have to find labor leverage in. And so OPEX is being reduced in every imaginable way that affects service providers, that affects software vendors, that affects all lifetime la, the labor market. Every podcast you listen to is Rich Panel telling you how they're gonna help you fire 50 people.

[00:18:55] It's like literally every podcast is like, Hey, hire us and you can fire half your people tomorrow. That's where we're at, is that people understand that the mechanism for profitability I can't make. To Jordan's earlier point, you can't just make the cat go lower. You're a market taker, you're not a market maker.

[00:19:13] So if you can't move that lever, where do you find relief? If COGS are under pressure. So in the Ozempic era, the defining metric becomes EBITDA. Suddenly everybody cares about profitability. Our average performance slows, were about 20% revenue growth on average over the last couple years. About 6% EBITDA.

[00:19:29] The funding is yourself, and you involve the skill of finance and operations. Okay? But suddenly this is a pretty powerful combination. I had growth marketing, I'm learning finance. I'm learning how to operate lean. Ah. Suddenly you're becoming powerful. Suddenly you're beginning to understand the way in which this kind of business becomes how you survive long term.

[00:19:55] And this is how we reach our flow era where we learn to produce free cash flow. It's the ultimate ascension of the kind of the metrics that we use as a scoreboard for our businesses was revenue. Then it's EBITDA, which is just sort of a made up p and l game to ultimately, can I grow the money in my bank account?

[00:20:13] Can I actually deliver shareholder value to people? Can I distribute cash to myself? Could I actually make some money? It's the ultimate end note of the game. And Bear's a great example. We're gonna talk about him Bear at the peak of this graph in 2022. Okay? They have the same growth rate as everybody else.

[00:20:30] 2019. 2020 we're rocking and rolling. 2021. Oh, 20 22, 20 23. At the peak of that, they were in the process of looking to sell like everybody else. They were doing multiple eight figures, uh, in EBITDA, but had paid $0 in dividends. $0 in dividends and in apparel. This is not abnormal because it's a very inventory intensive business, but they just kept buying more and more and more.

[00:20:56] And so he is looking at his business going, I feel like I'm making a ton of money, but I'm broke. I have no cash. I'm not able to pay myself anything. The sale didn't end up happening. 2022 happens, the business goes backwards, and all of a sudden he decides, I can't do this anymore. I have to build it a different way.

[00:21:13] The impetus for change. So he evolved five traits. That I wanna offer to you as traits you could evolve that could help you reach your flow era wherever you are at in this journey. And some of you are more advanced than others for sure. The first one is constraint. This sounds like a simple idea, but it's almost impossible for people to embrace.

[00:21:38] And the danger is that we all absorb so many anecdotes about what could be somewhere else. We all go talk to a friend and their rowhouse is a little bit better, and then they're spending a little bit more. And this is possible. And maybe if we just do in the business, we could get this efficiency back down and, but if we just keep spending, we'll get there.

[00:21:58] And you come up with all these reasons why you just push the boundary out a little further and a little further and a little further. And this was happening in this, right? We saw this story. It goes good, and then I have to grow and it goes worse. And I go off to grow again, and it gets worse. And all you do is you move the goalpost, you move the goalpost, your marketing team comes to you and says, this is what's available.

[00:22:17] This is the CAC I can get. And you look around and you go, I don't know. I guess maybe this is just the reality now I have to now lose $99 to acquire a customer that's not, that's not even remotely viable, that won't pay back in any lifetime. And BP was on the same plan in 2023. Bear came to us because 2022 was down and he said, I have a goal.

[00:22:37] My goal for the business Bear is like big, uh, he likes metaphors. And so he goes, we're gonna fill the Michigan big house with new customers this year. 120,000 people can sit at the University of Michigan football stadium. And so we every call, we all had to have a Zoom background of the University of Michigan big house.

[00:22:51] And it was this big unifying moment and we went after it and we started the year and we spent money. And then the next month we tried to spend more and we tried to spend more and we were finding ourselves on the same hamster wheel that all those other businesses before us were gonna be on. And to Bear his credit, he stood up.

[00:23:06] It was in March, he called me or in April, and he said, we're not going to do this anymore. The new rule is you don't lose money acquiring a customer. That's the new rule. And if you fail at it, I'm gonna fire you. Eight years into our relationship. So fair enough. The constraint bred a creativity and new way of thinking.

[00:23:31] The line in the sand became this is not an option anymore. So what are you going to do in light of that? Now, this is so important, this boundary, especially as leaders, okay? Sometimes our job is to stare at our team and go, that thing you think is impossible is now the expectation. And if you can't, I'll find someone who will try, because that's the rule Now.

[00:23:53] And that constraint in this moment, I'm telling you, unlocks a change in the way that everybody behaves because instead of a bunch of reasons why the CAC is getting worse, we just removed that discussion. We just say, we don't talk about that anymore. We don't do that. That's not how we behave. And as a result, what happened was it changed our thinking entirely.

[00:24:10] And I'm gonna talk about that now. And this was the end result from that day forward. Okay? We never were unprofitable again in new customer acquisition and, and. We grew new customer acquisition by more than 50% year over year for consecutive years, and we're gonna do it again for a third straight year.

[00:24:31] And we never violated again, the first part four store of profitability. We changed our way of thinking about the thing entirely and it worked. So I'm here to tell you that if you draw this constraint, the boundary will create creativity in your team. And this is where it led us. The constraint led to a new form of thinking that pushed us down different paths.

[00:24:50] We didn't talk about account setups or a BO or testing or blah, blah, blah. We changed the form factor of thinking entirely. I started with this product not meta as gross. You guys are gonna get tired. This is gonna be a narrative that you're hearing it on the Operator's podcast. You're hearing it everywhere.

[00:25:06] This is the reality is that one of the hard things about our industry is there's basically zero barrier to entry in every product category, and all the profits get competed away over time. That is every SERP page is literally designed to eliminate every cent of profit and move it from the competing bids into the pockets of Google and Meta and Amazon, and everywhere else.

[00:25:30] And as every category matures, somebody is willing to take less and less and less and less profit and push their demand capture out further and further and further. Down the line and in every product category, with no moat, no barrier to entry, no ip, all the profits get competed away. So I'm gonna give you an illustration.

[00:25:51] Born primitive sold women's fitness apparel at the start of 2023. This was their share of business by product. Women's leggings were 20% of the business. Sports bras were 15. You can see the mix. The point is that it was a women's fitness company, okay? Anyone ever searched for leggings? This is an absolute bloodbath of the biggest brands in the world, all undercutting each other on price, constantly willing to bid more than you to sell products with.

[00:26:21] Let's be honest, not much differentiation. There is no CAC ADD creative change to this environment. This gets competed down to nothing. Maybe you catch a trend for a minute, maybe your TikTok video takes off for a few weeks. But the economics of this product category on the open internet get deteriorated down to nothing, and this is what was happening to born primitive.

[00:26:47] The other problem with leggings is the seasonal product. I don't need to wear them in the summer. So born primitives business followed the seasonal patterns of leggings. And what's the problem with being a summer brand? With a massive Q4 peak. If you have a summer brand that's really low and a Q4 peak, that's really high, what's the problem?

[00:27:11] Cash. When do I have to place my PO for Q4? At the moment, I'm getting the worst performance possible. As a business, that means you're gonna find yourself taking the worst terms, or you're gonna have to forecast further out because you don't have it, which is gonna increase the error bars on your forecast and all sorts of things.

[00:27:29] And if you look at their business, this is what it looked like. You could see that early in the year, there were peaks, a lot of demand. The summer money, uh, months got really soft and then there was big MQ four. So when you think about product development, you have to think about solving all the problems.

[00:27:44] This isn't just solve cac. This is how can we solve cash? Remember, the game we're playing is cash flow. So how do I solve cash? We build a peak in a valley. This is how they did this, okay? They started with the shoe. So the Savage one training shoe. This was the product that they introduced as a novel, net new category, shoes pretty good online product.

[00:28:06] They have good gross margin, higher A OV. They had an overlap to their existing customer base, so they knew they could get some demand off of that, as well as drive net new customer acquisition, not inherently a summer product necessarily, but I'm gonna explain how we handled that in a second, and this is what it looked like.

[00:28:20] Okay? So I want you to think about every one of these lines as the sales of an individual product category. Okay? The blue is leggings. The dark teal at the bottom is shoes. As we go through the year, what happens? The decline in leggings is offset and subsidized by the growth of shoes. That's how you create growth is you don't try and sell more leggings in June and scream at the ad account and post on the Twitter.

[00:28:49] Why is my ad account down in June? It just doesn't happen. You subsidize it with something new and the end result was by launching shoes by the end of 2024. Almost 17% of the business was now coming from shoes. They had all offset all of the decline from leggings and they went, aha, this is the future. And so they didn't stop there.

[00:29:11] Bear went full Navy seal. Most of their customers were already first responders who were into CrossFit. That was kind of their initial four-way. They launched a tactical line. They launched an outdoors collect. Just last month, their growth strategist Garrett sent me this message. He said, BP's top 20 skews in August, literally zero active wear in the top 30, even all savage, one outdoor hunting pants and tactical pants.

[00:29:36] Crazy. They walked away entirely from degrading category with no product leverage. Said, how could we take the brand that we've built with an understanding of who the customer is to bring them something new and novel that can allow us to continue to grow? On top of that, they embraced story, not iteration.

[00:29:58] There is an endless narrative in our space about the idea that you are going to iterate your way to some massive unlock in the ad account. Um, I don't believe it. I've been doing this for 12 years. I've never seen anyone produce a consistent capacity to make an ad, read some metrics, change it, change it, change it, change it, and grow your business forever.

[00:30:21] Doing that doesn't work. I, I just never seen it happen. David Ogilvy. You cannot bore people into your product. You can only interest them into buying it. This is what BP lived in. So we lived in this iteration hamster wheel. We bought like look, hook, line, and sinker. We were in on all of it. Track the creative metrics, make a change, do the thing.

[00:30:39] And this is what it looks like. Okay? This is every ad we've made for them in four years. Okay? So you can see thousands of ads created and what it the dots are, are the highest performing ads by spend over time. Now let me ask you, do you wanna be in the game of making the pink dot? Like who? Any gamblers here?

[00:31:01] Anybody go to the casino and like, it's a terrible idea that the house has a 52 48 edge. You wanna be in the game of make the pink.one in 5,000, you're gonna hit the pink dot. And yet that's the expectation so often is next month we're just gonna make another ad and it's gonna be the pink dot. And I watch, we as an agency, it's like if we haven't beaten the Pink dot, we're garbage your trash.

[00:31:25] Why is my ad still there? It's 'cause it's the pink dot. It's the best agile ever make. Why do you think the best agile ever make is one you're gonna make in the future? Why is that what you think? This is what happens when you iterate. You fall down this hamster wheel where you find an ad that works and you follow a small band of variation pattern to try and change it, and you go, Ooh, the best performing ad was someone's ass.

[00:31:47] Let's make ass in every color. Okay, let's get UGC of people shaking the, and then let's get it in red with a red background in blue and pink and white and every color. And we made every imaginable variation of women's tights ads you could ever think of. But you know, the only thing that other that mattered, and the other thing that will happen if you follow the pattern of you respond to the highest performing raw discounts, this is also the mechanism by which it will always be the best performing thing in the window that you're measuring it.

[00:32:19] And so you'll fall into a small iterative band of small changes and you will fall to price. And we were in that trap. Everything was a flash sale. Everything was this high percentage discount rate. It was small iteration on the same ad format, and we tried everything you could imagine. But we were running into a market that was no longer profitable with no real differentiation in the product category.

[00:32:39] Nothing novel to say. So Bear stopped. He said, I'm not gonna do this anymore. And he decided to tell a story. A story. Only he could tell. One that would matter to his customers and generate for him, word of mouth generate virality. And so what he did was he found out that it was the 80th anniversary of D-Day Bears, a Navy Seal.

[00:33:02] He has a lot of credibility and authority in that community and he found out that they were sending back the Marines that were, that stormed the beach of Normandy and probably for their last time they're really old. It was in 1942. This was probably the last time they were ever gonna be there. So what they did is they created a limited edition D-Day shoe, and the proceeds paid for those guys trips.

[00:33:28] The marines that jumped outta the airplane per part of the show were all wearing the shoe. They created this limited edition box that included sand from the beach of Normandy, Dwight Eisenhower's initial statement, this coin, baseball cards of all of the players and they released, released a limited edition batch of the shoe.

[00:33:45] Do you think it did better than the ass ad?

[00:33:51] It worked so well that he doubled down. On this November 7th Veterans Day, Bear decides we're gonna pay off $5 million in medical debt for veterans. Every dollar that is sold on November 7th will go back to eliminate medical debt for veterans. He gets on Fox and Friends. They do live calls on their Instagram, letting these people know that their debt has been relieved, and they record them and publish them.

[00:34:17] They publish stories of everybody and at the end of it, they ended up paying off $10 million in medical debt for veterans as the agency. Just give me that ad, I'll put it in whatever account setup you want and it's gonna work better. It's a story that matters to people, that moves people that emotionally means something with a product story that connects to.

[00:34:40] And the end result was basically the entirety of the growth for the business comes out of shoes in the summer around the D-Day moment, the Veteran's Day peak, that leads to an even bigger peak before Black Friday. We call this progressive peaking. If you can do sale before a sale, you can generate a bunch of new customers on November 7th.

[00:34:58] Then when your Black Friday comes around sale, it's your biggest ever

[00:35:04] accurate forecasting. So we talked about this idea that there, there. Their cash was constantly tied up in inventory. One of the things that we've learned about this idea, okay, accurate forecasting is a constant conversation. The biggest challenge that you have in your business is the ability to sit down, place a po for a large amount of money for some amount of units, and the more complex your, your SKU mix becomes, the heart of this problem gets Well, what I'm gonna tell you is that accurate forecasting is an exercising execution as much as it is in modeling.

[00:35:30] If this is what my talk was on last year, if you haven't seen it, go watch it and you'll get a sense of what we believe about this process. But what we've figured out is how to work with the BBB BP team around how media is built around product. It's around inventory, and it's around understanding opportunity to match our demand creation to their Dan man planning.

[00:35:48] That's how you create cash is that no product sits on shelves. It has a life, it has an age, and it has a price at what you're willing to liquidate it when it gets to a certain age and you get it out. And if you lost on that bet, you get your money back and you make a new bet on a new sku. So we created this thing we call the product MVP.

[00:36:04] We look at every product through this lens, margin, value, popularity, and we created these four attributes that we call product segments, champions, growth drivers, underperformers, and hidden gems. And every week we meet and we look at this, we use AI to match all of their product syntax into categories.

[00:36:20] One of the things I'm gonna tell you that you all do is you make a mess. Of your product titles. I don't know if you've ever tried to export all of your product data, but some of you will create 74 versions of the same SKU by just changing the name to a new price, a new offer, a new variation, and so trying to organize the actual product sales data is really complicated.

[00:36:36] It's a great thing to use AI for. But what we meet as a team we look at is we can assign all of our ad spend into these product categories and we say, okay, what is the return on investment by product category? How does that match to our inventory position? Where are these areas of underperformers, hidden gems, growth drivers, champions, et cetera, that we could use then to change the ad account?

[00:36:57] So rather than the entire ad account conversation being driven by where's the highest roas, move the money there, that doesn't work in an inventory business, you can't do that. You have to sell what you have in the warehouse and you gotta get it back into cash as fast as you can. The other thing we adopt is this principle that I call, uh, the maximizing of every, the maximizing of every, the maximum cartoon production margin of every unit of sale.

[00:37:18] Okay? So we break the product into three categories, a grade, B grade, and C grade. And the price at which I'm willing to sell all of the inventory is relative to the age of the inventory. Okay? So the way you would maximize the marginal value of an a, a, a set of products that you've ordered is you would sell all of them to your existing customers with an email.

[00:37:37] There'd be zero cac, you'd get it at full price. That would be maximum contribution margin, but it would be any on a per user basis, but it wouldn't be in a total dollar basis. That would mean that you underrepresented the total opportunity. So each of these stars sort of represent a different point based on your business strategy.

[00:37:53] Star one is where I would maximize the total contribution dollars. That star is where I maximize cash. Okay. And the key here is as the inventory ages. My promotion and liquidation strategy increases. Now, this is where you have to be able to look at your ad account through the lens of a balance sheet, not just the p and l.

[00:38:15] Okay? Because if I go on the ad account and I say, well, I've got this aged inventory that nobody wants in colors that nobody cares about, usually what will happen is there's a liquidation threshold that like TJ Maxx will pay this, okay? If we can liquidate it for anything better than the TJ Maxx offer, get it outta here.

[00:38:31] You set up a separate funnel, a landing page that's not in the main header, URL, and you move that shit, get it outta here, get me the cash back. Let me go buy more a grade stuff that we people actually want. But the phase of this, we have to move through it with intention and pace. And so this conversation and dialogue means that we're having a conversation where we're forecasting the p and l.

[00:38:50] We're forecasting the monthly contribution. We're dealing with cash, we're managing inventory. This is all what marketing does. Marketing does. This is the evolved trait of built generating cash flow as a marketer. Let's skip through this. The last one is manufactured capital. So I talked about earlier, there's no money available.

[00:39:08] The venture dollars aren't back yet. Maybe once we clear a few brands into the public markets, there'll be a little bit more interest, but for now, there's still no money. And I wanna give you a story about what the ultimate leverage point is that some of you don't realize you have. So we worked with Proctor and Gamble since the day that Native was acquired by them and this past summer.

[00:39:27] In the midst of their own hardship, they came to us and they said, Hey, we have a new policy now for every agency provider, so uh, you have seven days to sign this new MSA and take on this policy, or we're gonna move on. I said, okay, what is this policy? You're now going to float, you're gonna pay my ad spend and you're gonna float it for 90 days, and then I will pay you back on an invoice that you send after 90 days that has net 60 terms.

[00:39:55] You want me to float millions of dollars of ad spend for 150 days? Yep. You have seven days. Oh. If you need help, we actually have an internal lending team that we built that will provide you credit to do it. They turned me into a float for them and then made a VI on it. That's how much leverage they have.

[00:40:18] They're Proctor & Gamble. What am I gonna do? They will go to 77,000 other agencies that will gladly take that job. Now I'm out of that game. I can't afford to do that. It's way too much risk for me. It's not worth it. But the point is, they will find a densu, someone large enough that's willing to float the risk, and they will turn them in.

[00:40:36] They'll become an insurance business. They're gonna turn their ad spend into a float that they're gonna make a rake on. But that's what leverage is. When capital's not abundant, you go turn your vendors into lenders, right? Because you have leverage against them. The same thing is with your suppliers, right?

[00:40:51] So this is what Bear did. He said, in our first year we did net 30 on payments for the shoes. And they were like, Hey, you need to get trust. But then we went back to the drawing board and we're like, Hey, we're taking this thing to the moon. You know, you need to give us net 90. This is big compelling big skull Bear, right?

[00:41:08] And he's gonna tell them I need net 90 on delivery. And he got 'em to agree to it. So he turned his vendor into a net 90 recipient, but he didn't stop there. He then said, you know what else we're gonna do? Everything we do is pre-order. Now every new product release is pre-order. So before he even places that PO that he has net 90 on, he's already captured money from the customer.

[00:41:30] So everything's on pre-order. It tightens up his accuracy of, uh, his demand planning, and then he places his PO and then he waits. And I mean, that's crazy. And you know, particularly for pre-order items, I mean, you're paying for it nine months later. Nine months after the initial PO is placed is when he actually has to fulfill the cash.

[00:41:53] Turns his vendors into lenders creates capital where it didn't exist at a rate. I was, uh, talking with the final loop team. The average cost of capital right now, uh, on the debt on balancing of e-commerce business is about 14%. Um, that's pretty onerous, right? Like in a business with 7% EBITDA, if you have an interest rate that you're carrying at 14% on a substantial amount of debt, there's no, there's no money.

[00:42:13] There's no money left. So this is the evolution. How do we get to free cash flow forecasting accuracy? A compelling brand story. You gotta have an acquisition constraint. Turn your suppliers into finances and find product-led growth in your business. You too can reach the flow era. Say hello when you're on X.

[00:42:35] I'm @TaylorHoliday. Appreciate the time.