Forget Stability — Chaos Is the New Normal

[00:00:00] Richard: Hey folks. Welcome to the Ecommerce Playbook Podcast. I'm your host, Richard Gaffin, Director of Digital Product Strategy here at Common Thread Collective. And I'm joined bright and early in the morning here on a Thursday wearing his, by the way, his he's, he's got the the old eSports special on here.

Brand new mic, Mr. Taylor Holiday, CEO here at Common Thread Collective. Taylor, what's going on, man?

[00:00:19] Taylor Holiday: Yeah, I've I've been berated on the internet for my audio problems, which are caused by having a fixed mic stand and moving a lot.

So I recognize that that is user error. So we're trying this new vibe out. I'm just gonna be the, like the headset guy. I've been thinking, trying to channel my Tony Romo.

Broadcaster experience here.

And we'll see. So would love some feedback. Is the audio better? Is this worth it? Is it worth having this giant helmet on to, to get to a better audio? Because I'm here for you all. So if it works, I'll be the headset guy. I'm not afraid of that.

[00:00:54] Richard: Yeah, there you go. I mean, part of what we're you're trying to do with that headset is to create a little bit of stability. And folks, that's what [00:01:00] we're here to talk. What's what we're here to talk about 

[00:01:01] Taylor Holiday: That's why he's the host folks. 

[00:01:03] Richard: That's right, that's right. Pro segue. But yeah, I think what we wanted to talk about today is what we've been talking about for the last couple of weeks, which is what to do in the face of uncertainty now.

We've covered this subject a couple times, like in, you know, in reference to Covid and coming out of Covid, but in this particular moment, there's a, an element of chaos that we really haven't experienced before. I think just on a macro sense. And so I think what we wanted to talk about today is like, what do you do when.

The kind of when the macroeconomic picture can shift so rapidly and have such a profound impact on your bottom line. And so I think what we wanted to talk about is like the characteristics maybe of an e-commerce brand that's able to weather these types of storms. And then just kind of like the, the way that you wanna think about or, or the things that remain stable in the face of this type of chaos.

So Taylor, let's let's kind of dig into that a little bit.

[00:01:54] Taylor Holiday: Yeah, I mean, I. I think if I look back over the last five years, [00:02:00] the amount of times that we've talked about sort of an unprecedented change or a devastating X, y, Z has sort of reframed for me the idea that maybe, maybe the volatility is the constant. And in light of that. We should continue to design a business that assumes chaos, that doesn't assume order. And that is actually the lesson over the last five years is actually to assume the vol, not to assume the constant. And therefore when it comes, you're actually set up for it. And I know that sounds weird to say, set up for what, well, I don't know, some anomalous crazy event. And the answer is sort of yes. And this is, it's the same feeling I got during COVI, which was a reflection on which brands were actually having success in that period and what was true about them. And that's what led us to [00:03:00] sort of developing this idea that we called the anti-fragile e-commerce Playbook, right? This idea that what the idea of anti-fragile is when pressure comes, you don't break.

That would be fragile. don't just resist that would be sturdy or strong, but you actually become stronger. You're anti-fragile. You actually, as pressure increases, you become better. And so what would need to be true of you to do that? And I think it's just worth revisiting that idea in this moment I. To set aside tactical solutions, because I even have caught myself that this week we're doing this webinar, we're finding all these problems, but like the problem has changed so much in the last 36 hours that the tactics feel like a chasing of the wind. They feel very much like an attempt to grab onto something that's not actually there. And so I'm sort of taking a step back again and going, okay. Ha what is true of the businesses that won't have to do that? What are true of the ones that won't have to run around in [00:04:00] circles in this moment, trying to solve for a thing that's broken? But they will have the capacity to weather it. And what will they look like and be like?

And I think the many of the attributes will be the same as last time.

[00:04:13] Richard: Yeah. So I mean, what we could do is I could run through like the seven. Characteristics that we had in the old anti-fragile playbook. So this was back, man, this was published originally, probably 2022. So this was, again, this, this was the moment where we were coming out of Covid and they kinda shift back to brick and mortar retail and all that type of thing was really taken to a toll on brands that had thrived during Covid.

And so these were the seven characteristics that we talked about. Then one was production lead times two was improving supplier payment terms. Three was fixing your opex as a percentage of revenue. Four was your contribution margin, making sure that that was sufficient. Having a decent organic versus paid traffic mix, growing your 60 day customer lifetime value, and then expanding the number of distribution channels that you have.

So I would [00:05:00] imagine that on, at least on the surface, those are all seem like great things to have. But is there anything particular that makes sense to call out in this moment?

[00:05:08] Taylor Holiday: Yeah, I mean, if you think about. In this case and, and really that what happens is that as your costs concentrate into different vectors of your p and l, like risk accrues as the cost grows. So if you think about four quarter accounting, very basic principle that sort of looks at your costs of cost of delivery, so all the parts of the supply chain marketing. Opex and then profit, right? That's the four quarters of four quarter accounting as cost accrues in any of these areas, you accrue risk accordingly. So the idea is like if you can keep them all fairly lean then you have less sort of concentrated risk. And so the first part of what we're talking about and where we've seen in multiple times over the last five years. A bunch of risk show up as in the cost and the supply chain, right? So if I think about that, let's [00:06:00] talk about the three ways that are mentioned there, and I think we could even add in another one. That sort of de-risks, that set of costs. So in the supply chain, number one is flexibility of lead times.

Okay? Why is this so important and continues to be something that will forever be true? Is that the further out into the future you are forced to try and predict the wider your error bars will be on that prediction.

[00:06:28] Richard: Hm.

[00:06:29] Taylor Holiday: Okay, so if I wanna predict tomorrow's revenue, I can do so with much greater access or accuracy than I can next October's revenue. The world is just subject to a lot more potential variables between now and then. 'cause they include all of tomorrow's variables, plus all of the variables associated with each subsequent day between now and then. So the shorter my lead time has to be in order between when I can place that purchase order and when I receive the product, the more [00:07:00] flexible I become in reducing my greatest risk factor in e-commerce, which is the outlay of cash for the purchase of inventory. That's where you die the most often. And we've talked about a bunch of different ways that brands have offset this. So as an example, we're negotiating, really low minimum mortar quantities is one way to increase that flexibility. The other is my favorite example of this is seed beauty, which actually sort of thinks about. Their supply chain as two parts. One is they have an in-house actual, like when I say in-house, in their office in Oxnard, California, a lab where they can actually build small order runs of skews themselves. So if we wanna test out a new lipstick or eyeshadow, we could make a hundred units right now. Put it on the website, see what happens, and then place a larger order.

Once we have a sense of the demand. That's like an example of how you could [00:08:00] defer this risk associated with making large outlays of inventory purchase way out into the future with an unknown amount of demand. So that's like the first part. The second is then the terms of those payments, right? So. The amount of inventory you have to purchase, how far out into the future is one variable.

The second is when you have to pay for it. And so right now it is especially crucial that as our suppliers are often we're gonna ask them to one, participate with us in this tariff cost, most likely. So if your cost of goods is going up 30%, you're gonna want to go about and ask for. Them to cover half of that in the cogs, 5% of that in the cogs, as much as you can get them to take on in the cog side where you're reducing the actual unit cost to cover the tariff expense. You're gonna wanna negotiate that, and then two, then, depending on where your margin profile is, maybe more importantly, is to actually get them to handle a deferment of when the payment is made. [00:09:00] So usually the default would be, for most suppliers, is like 50% on po, 50% on delivery. That's sort of a standard first order. Obviously if you can get it all the way to net 60 or net 90 on delivery, now you have a better chance to cycle through the cash and you can actually, the COGS risk is sort of offset because you can get all the dollars back before you have to pay for it. That doesn't mean that your margin will be as good as it was before, but it just means that the cash risk is reduced.

So that's like another really, really important part that we talk about a lot. And then the last one, which we didn't really cover in the original the original. E anti-fragile playbook. It would be about supplier redundancy. And this is obviously really acute now because the tariffs are not. As of today equal, equally applied to every nation and are hyper concentrated into China. So what do I mean by supplier redundancy is if you have a manufacturer in China and in [00:10:00] Vietnam and in the Philippines and in Mexico, that can all produce some amount of volume for you. Well then if one. Has a issue, maybe there's a natural disaster in that country or there's a tariff, or there's political unrest or a strike or whatever might happen, or a machine breaks, you still have the capacity to produce in other places. Now, generally speaking, that redundancy, just like you're investing of diversification there's sort of the old cliche like concentrate for wealth creation and diversify for wealth preservation and some. In some ways it's likely true that that diversification of suppliers isn't the most efficient way to do it, but it does create this security that in the event that that one thing fails, you have another direction to go.

And the brands that have that right now are able to sort of turn off and on levers relative to where the rate is best. And so that's just another, I think, part of that supply chain consideration. 

[00:10:56] Richard: Yeah. This is just kind of a, a, a question for [00:11:00] my own curiosity. Like in terms of negotiating those supplier terms. Right. What I'm just like curious, like what leverage do you tend to have with them to get more, to get more favorable supplier terms? Because like 50% upfront, 50% on or on delivery feels like.

Pretty fair and, and moving it in any direction towards yourself just does not seem their own interest, especially in this time. So like what, how do you see that work?

[00:11:27] Taylor Holiday: Yeah, the best way to create leverage is to have optionality,

right? So if you can take your business elsewhere, then depending on how much business you're doing, which is usually your other leverage, how important you are to

their business you have the capacity to play with that. The other thing to understand is to have an eye to the capital markets that allow you to understand. What it costs each of you to float capital. So what do I mean by that? If the cost of capital, meaning the cost of debt here in the United States [00:12:00] is eight to 12% or whatever it may be in this moment, depending on your sort of credit worthiness and banking partners, et cetera, et cetera and the cost of capital in China is closer to two to 4%. Then it actually costs them less money to. Imagine that you have to get, somebody has to take out a loan to either pay the workers, which is functionally the root initial cost, right? You have to pay the labor to buy the raw materials to produce the product. That's like the root first cost here.

Somebody has to actually pay for that. Well, if they get a loan to pay for it. And carry the interest on that loan until you pay them 90 days later. That's actually gonna be cheaper than if you do it. And so oftentimes you can, if you understand that you can have a negotiation related to how that interest cost could show up in your unit.

Costs paid back later. And so just understanding the available [00:13:00] resource that they have, having conversations with them about their credit access. They also have nationalized insurance in China in particular related to if you don't pay a po, so there's less risk. For them too as well. So these are all things to just understand and have discussions about with your supplier in terms of how you create that.

But in any negotiation, leverage is created through optionality. And so if you can take your business elsewhere and know other options and can bring, go to 40 different people and figure out who's willing to work with you the most. There's somebody who needs your business more than others and is probably willing to work with you on price.

[00:13:38] Richard: Yeah. Okay. So, so talk to me about then, like, we had this discussion a little bit beforehand, like the state or, or the percentage of e-commerce brands that are set up with this type of diversification, this type of redundancy.

Seems like it's, it's, it's pretty low 

[00:13:52] Taylor Holiday: it's really small. It's really small. 

[00:13:54] Richard: Yeah. So let's, let's talk through like the reasons behind that, which we've already touched on a little bit, and then like [00:14:00] maybe the, the, the quickest, if there is one fixed to that situation.

[00:14:05] Taylor Holiday: Well, one of the things I've been thinking a lot about is, I'm conscious of this for my own business, is that when things are going well, it can often feel like a waste of time to go try to build out scenarios about hypothetical future

problems, right? So let's imagine you have a great relationship with a supplier and things are going awesome, and the price is good, and they're making good product. The idea that in that moment. You're going to go and create an alternative supply option, it feels like working on the wrong thing.

And in a world of scarce resources, time and people, there's probably more pressing problems to choose from. And so, and also it, it can be offensive to your

supplier, right?

If they know that about what you're doing. Now, whether you need to disclose that or not, a sort of separate question, and this is what I think a lot about, is that like, it's not usually the [00:15:00] case that many of us are trying to build a hundred year business. And so this, a lot goes down to like the root goal of the organization and whether you're in a trying to build for survival or you're trying to build for exploitation of margin.

Because building redundancy probably doesn't create in the short term exploitation of margin. It probably is more of a. You're building a shelter. It's like building a a, a bug out shelter

in your basement right now. It's like, okay, it's not useful until it is, it's just a cost until it's a lifesaver, you know?

And I think that. It can feel a little paranoid or wasteful in some ways to do it. So I, I, it's, it's rare that it happens and oftentimes what it actually gets born out of is you have a supplier who can't meet your capacity and so you're actually forced to increase the nodes in the network because of your need to produce more things than one individual supplier is [00:16:00] capable of.

But there's, there's real risk to concentration that shows up in different ways.

[00:16:04] Richard: Yeah. Well, no, no. It's an interesting line to walk between essentially behaving in sort of like a paranoid way, which is kind of what you're hinting at. And then also being like sufficiently prepared for whatever's to come. So, I mean, like, how do you, how do you make that decision? Like maybe just you personally in, in the businesses that you've run between redundancy and resiliency on the one hand, and then exploitation of margin on the other.

[00:16:27] Taylor Holiday: Yeah. And it's funny, the area where this has like become, I. Most, it's like around finance for me, where you go through this phase as a business owner, assuming you kind of can experience some modicum success over a long period of time, where in the beginning you have no money and so you're just desperately trying to sell all the time to try and get some money. And you don't ever think about like, what would you do if you had money? And then, and then you get some money and then you have to think about like, how much should I keep? What is it? Mean to run corporate treasury and should I have a credit line? I never use a credit line, [00:17:00] but what if I needed a credit line?

Well, you don't wanna be asking for a credit line when you need one. You wanna be asking for one when you don't want one. Because the funny thing about finance is that everybody's trying to get you to take debt when you don't need it. And then when you do need it, nobody wants to give it to you. And so when should I go out and actually secure? Like CTC has like a really large credit line that we like never draw on, but it's there if we ever needed it. And so it creates this like security net that is about our survival and in, in the long term that's like, I hope we never have to, but if we did, it's there kind of thing. And. This sort of fits in that category of like, in the times when things are good, are you building the security around the moat, around the thing.

So, so that when winter inevitably comes, like you will survive it. And I think that's like a, a, a, there's a part of that preparation that I think you have to have lived through a few winters to then start to 

be the kind of person that prepares that way.

[00:17:53] Richard: Yeah. I mean, is there like, maybe a better way to phrase the question would be like, is there, so you mentioned like the credit line for instance, [00:18:00] is there sort of like a. Like a one thing that you would like be over prepared for maybe is a way to put it. Like, like even if you are, you're just, you're not, you're all on, all your chips are on the exploitation side or whatever.

In the good times, what's like the one thing that you should be building a mode around consistently.

[00:18:17] Taylor Holiday: I think every business should be like acutely aware of the number one threat that could

kill them. And in e-commerce, I think that is all related to the purchase of inventory.

And so, because it's so much of where the costs lie, that and, and costs that you can move the least flexibly, like payroll is always flexible.

The reality is you can move that up and down as needed. I. The marketing spend is somewhat flexible. The fixed costs related to the purchase of inventory that sit in your warehouse, unfortunately is very hard. So in each of those areas, I would sort of. Build a list of a hierarchy of most likely to kill me [00:19:00] to least, and then I would build the security around the highest risk items.

And so that's why so often you hear the focus talked about in terms of lead times and supplier terms, because that purchase is usually the largest outlay of cash on the longest time horizon with the highest variation of error. That brand's experience. And so I think you've gotta start there. And, and this is easy to say in this moment.

It feels like almost like pedantic, but like, it, it it just sequentially is the highest risk activity that requires the most most thought around how you could defer some of that

[00:19:36] Richard: Mm-hmm. Yeah. And so may, maybe this is also a good time to reiterate some things about like how you connect marketing to your operations. As well, like that idea of, of making sure that the cash outlet for inventory is commensurate with the amount that you expect to be spending on Facebook, let's say, or how much you expect to be 

[00:19:56] Taylor Holiday: That's right. And that and that. And that's even why we started down that path,

right, is [00:20:00] because I wanted to be closest to the most valuable action. And the most valuable action is the one that's closest to life and death, I think. And so that's why I think trying to connect those ideas was all about, wait a second, if you make this large PO and then your marketing team doesn't behave consistent with that purchase, like the, the thing breaks, the system breaks, the design breaks, and it actually increases the risk of that purchase.

And so how could we unify these things? And I think there's still. Long ways to go in in continuing to do that. And that sort of gets like the second part of this sort of anti-fragile idea, which is what is your capacity to move product? Like how powerful is your sales motor and how many different levers do you possess to move things? And I think about, this is where I. Brands that have both paid and organic traffic have the capacity generally to be more effective. They can, they have these multiple mechanisms that they can depend on to move through things where if one is inefficient or one is suppressed, then I can still move through both of those versus brands that are hyper [00:21:00] concentrated into paid media only. That's a really risky endeavor because we've seen massive volatility in that channel over the last few years. So it's just, again, you're seeing a similar thing. Theme that divers the redundancy, and then that, that goes into distribution, right? If you can move product through your retail sales channel, your B2B sales channel, your, and then your direct sales channel and Amazon sales channel, there's just optionality as it relates to solving for problems.

Now, that creates other complexity in the supply chain and things like that, but they all just represent options to pull on in a moment of crisis.

[00:21:35] Richard: that makes sense. Well, yeah, so it seems, just in summary, this entire conversation is just diversification. Diversification, diversification seems to be essentially like the, the direction you need to move towards in any given moment in order to be prepared for this type of situation, 

[00:21:51] Taylor Holiday: yeah, and this, this to be clear though, like, 'cause I, I have been a, I I've called Diversification the Siren song of death and media buying. Right? Like,[00:22:00] 

and, and I think this is really where. You have to decide what level of risk tolerance you want to absorb given the thing that you're trying to accomplish.

So again, if you told me Tether, I'm trying to, my goal is that I want my children's, children's children to run my business. Okay? the the game then is survive.

Build a thing that will never die. And in that case, you start eliminating all the risks of death as the primary action points. But if you tell me, maximize TTM EBITDA in the next eight months, 'cause I wanna sell this thing that is not the same set of actions.

And

what I have found is that many more brands are closer to the maximize EBITDA game than they are. Pass it down to their children's, children's children.

And this is actually why I think. This moment. Actually introduces so much life and death, death risk. Now [00:23:00] this is pretty extreme on the like things that could occur curve, but I just think we are a pretty fragile industry

and it's because we're primarily a microwave industry. Like we were built fast. Then that creates a lot of risk for ruin quickly as well. 'cause the underlying structures are pretty weak and not redundant in any way. There's one sale, one primary marketing channel. There's one primary supplier, there's like one primary point of distribution, and all of that is subject to single point of failure risk.

And that's our industry. And so. I think we can accept that. What's beautiful about our industry is the low barrier to entry and how fast you can potentially make it up. But we also have to accept that that level of rapid succession usually doesn't also come with a broad base risk deferral. Like if there's,

there's sort of this relationship volatility. [00:24:00] Tends to be associated with more risk and more upside, right? So

you, you, you, you buy the index because it's got an upper bound of 15% return and a lower bound of 15% return. And over many years it's gonna be 8%. And that's like really low risk, but it's low volatility. You buy Bitcoin because it could be much higher vol or much higher upside, but the volatility is correspondingly wild, right?

And I think our industry is a lot more like that. Something that it's going to grow slow and steady at 8% over many, many years. That's just not how most people approach e-commerce.

[00:24:34] Richard: Yeah. So if you're in that, in that situation, which it sounds like most people are of the, your business purpose here, at least for the next little while, is to maximize, like you were saying, eight month TTME, but or whatever in this moment, then how do you preserve that, your ability to achieve that goal, I guess?

Or is this a question of like, well. This, this is just a high risk industry. You rolled the dice and you kinda lost here, or like [00:25:00] what's like, yeah, yeah. How do you 

[00:25:01] Taylor Holiday: Yeah. Well, I, I would never say that, but I, I, I do think

there is there, there is a little bit of an underpinning of that reality is that

we redline this thing and that's a

little bit of the game. And so in these moments, we're gonna have to, have to deal with that reality. But in light of that, there, there's still endless things that we can try and do as operators, right?

And so I think about to like, we're gonna go through this big webinar tomorrow where we've gathered a bunch of offers from lots of providers that if I think about like the absorption of a cost, let's just say, let's just assume 10% that you've found some way around the China 140% or whatever it is this morning.

Because the reality is like you can't stomach an 140% increase in cogs, like. It doesn't work. So let's just set that aside and assume that the solution to that is to get out of that problem because there is no absorbing that. But let's assume that you've made your way to Vietnam or you to the Philippines or your 3, 2, 1 through Mexico or whatever it might be, and you're absorbing a 10% increase to your cogs as like the base level tariff here. That is very solvable where I think [00:26:00] about a price test to pick up 3% on the overall value. You've got a lean opex that you're gonna find 2% of reduction in. You're gonna get to a level of marketing efficiency that demands just a 3% better cac, and all of a sudden you can absorb away. 5% or a 10% increase to your cogs pretty quickly.

And so we're gonna go through a bunch of ways to do that, starting with price testing, going through marketing efficiency and deliberation on like really diligent marketing measurements and reduction of CAC expectations. Driving organic demand. Other partners in ways that we can get lean on the opex side and consolidate some of our expenses in this moment. Get to more variable staffing, different things like that that we'll go through. And you can absorb 10% that's totally absorbable for a period as a business. And I think it doesn't have to just require that you pass all those costs onto your customer. 'cause I think there's also this like desire that we should care to serve the customer in a way that's as, as beneficial as possible while also making sure our business can [00:27:00] succeed.

[00:27:00] Richard: Yeah. Okay. Cool. Well, I think that that kind of segues nicely into to the final question I always have, which of course is like what given. Let's say that you're an e-commerce business in the, in the standard situation, which is to say you are trying to, let's say, maximize eight month PTME, but whatever, right.

What's, what is the one thing that you could do right now? To shore yourself up against or maximize your, your potential of achieving that goal.

[00:27:25] Taylor Holiday: Yeah, what I would, so there's, there's short and long term. So I, I want to start, start with the long term thing again is that I would find some space in the, the mania of this moment to ask yourself to, to not act like this is. A Black Swan event. Like I think this is one of the, the mistakes that we make in these moments is that we go, oh, one of these things that is so unbelievable that it'll never happen again.

But it's like the eighth time, something like that has happened in the last five years. And to find some space to ask yourself. Okay. Let's assume more crazy volatility in the future. [00:28:00] What longer term actions should my business take to make sure that when the next one inevitably comes, I'm not surprised, I expect it and we're better set up. Okay. And then build a list of those items. Then in the short term, we have to solve for what do I need to have happen? Because I think there's two. Opportunities here for this moment. One is like a market capture strategy, which says that I'm actually financially set up, whether that's 'cause I have a great balance sheet, I have greater margin to go and actually take market to put pressure on my competitive set by keeping my prices low, by being aggressive on the marketing spend. Am I in a market taker position where I can go strangle out some of the people who might not be, there's some brands that are in that position and should act accordingly? Or am I in a efficiency, life saving mode where I have to reduce costs, reduce marketing expenses, and ensure life going forward, and figure out a way to absorb a 10% increase to my base underlying cost in order to be around in six months?

Like, where are you? Who are you? [00:29:00] And then. Like, we always like to say that a strategy is just a bridge between your present state and a desired future reality. Get clear on that desired future reality. Understand your base position, and then you can design a set of very specific actions that go into this.

But I think price, like everyone's rushing to price increase and I I definitely think that that's a worthwhile. Consideration, but maybe the opposite could be true. Like what would, what would you do if you actually drove the expectation of your, your category to a place that your competitors couldn't sustain for a while?

Could you handle that? So I think that's a consideration.

And then like a last technical thing is find a partners who are gonna be in this with you. So we talked about your suppliers, but as an agency partner, we feel like this is our moment to step through the door and go, Hey, we are going to help absorb that cost too. And so we've put forward what we call the tariff relief plan, which is to say that if you bring us your. P and l, and we look through your service and software costs and we can't save you [00:30:00] 20% on those costs. We'll pay you $500 for the meeting because we believe that through our consolidation of sort of tech and service that we're gonna find you savings across that stack. And then we're also gonna offer you net 60 payment terms. For all of Q2 if you sign up with us. And so that's our, our way to just step through the door and say, Hey, we recognize that our partners are in experiencing an acute issue, and so how could we, like we're saying you should go do with all of your suppliers, walk through that door with you and make sure that we're supporting you in this moment so that we can all be healthier on the other side.

[00:30:27] Richard: That's right. Yeah. So, everyone listening, check that out@ctctariffrelief.com. And remember, of course, tariff has one R and two Fs, so check it out there. We'd love to chat to you more about how we can help you achieve this stability amongst this time of chaos. All right, folks, thanks so much for joining us.

We'll talk to you again next week. See ya.