Zero To $500k Part II: Life On The Margins
By Daniel DiPiazza
:This year, I learned the importance of margins.
Yesterday, I gave you the background on my new company Strength of Seduction — including how we did over $500k in revenue and moved 11,000 units our first year.
I’m growing and expanding my skillset as a businessman. This is a much different type of product than I have sold in the past. I’m used to selling high-ticket B2B (business to business) products and services. This product is low-ticket B2C (business to consumer).
Digging Into The Numbers:
To give you some context on how everything looks on paper, let me give you some insight into our main KPIs (Key Progress Indicators). If you want my spreadsheets to track all this info in your own business, make sure to invest in The Sales & Systems Toolbox.
1. Average Order Value (AOV): The average amount a customer spends on your site when they purchase.
Our Average Order Value on the site is about $50.
2. Conversion: The % of traffic who end up buying when they hit your landing page.
Earlier this year, the main landing page was converting at 1.6% to cold traffic. Think: 1.6 of every 100 people that hit the page buy.
3. Return on Ad Spend (ROAS): How much you make for every dollar spent on marketing.
Our typical ROAS was 1.8x – 2x. Meaning: every dollar we put into Facebook, we get back $1.80 to $2.00.
4. Customer Acquisition Cost (CAC): How much money it takes to convert somebody into a customer.
Our typical Customer Acquisition Cost (CAC) is $20-25 to cold traffic from Facebook and Google.
5. Margins: Profit you keep after expenses (expressed as a %)
With a $50 AOV and $25 CAC, that puts our margins at about 50% on the front end on a good day.
Those numbers weren’t earth-shattering, and I knew it. But it’s profitable…and it’s to cold traffic, so I figured that was good enough. I was wrong.
What I’ve learned this year is that one of the most important dials you can “tune” as the operator of your business machine is the MARGIN.
Life on The Margins
Your margins are a mark of how efficient your business is. Plain and simple.
The store really started to grow through the spring and early summer. May though July we saw steady growth month-over-month. In July, we peaked at $155,000 in top line revenue, but we had to spend $80,000 to get there. Our margins had dipped below 50%.
I’m sure you’re thinking “Ok, what’s the big deal? You were still profitable by nearly 50%!” And we were profitable.
The problems came as we poured more money into the Facebook engine.
When we pushed more traffic to the site in the summer, our ROAS took a dive and margins shrunk to a low of 32% in August.
Check out our numbers from August 2020:
August 2020 at Strength of Seduction
Let your eye soak this in. What do you see?
If you were to just look at the top line revenue of $103,753, you’d probably think it was a good month. But take a deeper look at the numbers:
- Plenty of traffic: over 100,000 uniques visitors
- Mediocre conversion: sub 2% the whole month
- High revenue: over $100k for the month
- High spend: over $60k for the month on ads
- Low Profit: $37k for the month
- Refund rates: creeping up
- Margins: going down
We learned that this “profit shrink” is something that can happen when you try to scale paid media before knowing your market well. It’s essentially “paying for the data” — we had to spend a bit in order to see the cracks in the machine!
We made only $37,000 profit on $100,000 revenue in August. Pretty “yikes” if you ask me.
That hurt, and it was about to get worse as the company dealt with several issues simultaneously that plagued us in Q3. Major adjustments were needed.
5 Big Issues We Discovered
Before I show you the comeback, let’s dig a bit deeper and examine a few of the issues that were causing the problems and contributing to our shrinking margins:
1. Incomplete or inaccurate attribution by Facebook:
The native dashboard on the Facebook ad platform is often inaccurate. Once you start spending several hundred dollars per day, do not depend solely on the built-in analytics to buy your ads. Facebook will often report that sales are coming from the wrong campaign or miss sales entirely. Both of these errors cause your costs to rise while driving down the effectiveness of your campaigns. We spoke with FIVE Facebook reps. Not a single one could solve the problem. We finally got a software called Hyros that allows us to double check the native dashboards on all the ad platforms. It’s been a game changer.
2. Major advertisers pulling out:
In Summer 2020, the United States was reeling from the heated protests against hatred and oppression. Many big advertisers who typically spend millions-per-month on ads (Nike, Coca Cola, etc) ads pulled their social media marketing campaigns offline.
This made it easier for us to get fat off the relatively cheap customers since there was less competition for the same ad space. This created a false sense of security because those advertisers weren’t going to stay out of the pool forever. Once they got back in, things became more expensive.
3. Product issues:
During this time, we were trying to decide if we were going to go all digital or if we would keep selling the DVD.
We also tested creating a subscription version of the product to create MRR. This flopped. I’ll dig into that in Part III.
4. Overall funnel conversion:
The main sales page needed some pretty major improvements and updated product art. There needed to be better upsell sequences and more broadcast emails sent. We also found a few autoresponders which had broken in the back end that cost us a lot of money.
5. Website issues:
During this time, we were transitioning from a single page website to a full site, complete with new custom development. There were some hiccups in this process that cost us time and money.
I’ll say it over and over again: margins!
We took our time to right the ship, fix our conversion issues and get our costs down — but we would have saved some stress if we’d paid better attention to margins from Day 1.
At an AOV of $50 with 50% margins, there’s not enough meat on the bone to spare. We had to figure out a way to deliver the product to the customer at a lower total cost to our business. This meant we had to lower overhead, increase conversion on the site and free up cash flow.
By Q4 2020, we’d figured out the formula.
Here’s how it looked 4 months later in December:
December 2020 at Strength of Seduction
- Huge reduction in traffic: 30k uniques compared to over 100k in August
- Massively Improved conversion: up from ~1.6% to ~3% on the site
- Total revenue down: Only 50% of August ($58k compared to $103k)
- Total profit up: $43k (compared to $37k in August)
- Refund rate down: below 1% for the month
- Margins doubled: 73% in Dec vs 36% in Aug
This is about as good as we could have hoped for in that timeframe. I think the most impressive improvement is that in December we made almost half the total revenue of August, but were still significantly more profitable. That’s a sign of healthy margins.
One of the biggest problems we solved first was the faulty Facebook attribution.
We had to learn the hard way that it’s good to have another dashboard to compare data against so that you can make better decisions with your ad buying. We got Hyros and it solved the problem big time. Once that happened, we finally had a reliable map to chart our course back to profitability.
In July, we were getting about $1.80 for every $1.00 spent on Facebook. By December, we were getting about $4.00 for the same $1.00.
How We Did It
Here’s how we managed to improve the margins and overall profitability of the business substantially in 4 months:
- Added the DVD back to the product lineup
- Cut some staff ☹️ (overhead expenses — didn’t enjoy this)
- Improved ad targeting resulting in lower CAC <$20
- Improved the conversion on the website from 1.5% to 2.5% overall
- Improved our email flows and follow up sequences substantially
- Started sending broadcast emails 4-7x/week
- Added stronger upsells to the post purchase sequence
- Payed off a Shopify Capital loan to free up cash
It’s a lot of work. Easier said than done, that’s for sure.
One crazy correlation we noticed: when we improved the conversion rate of the site by about 1%, we saw a roughly 2X increase in ROAS (return on ad spend), which correlated to a 2X in our margins.
That means that we took the same website and made it produce double the money by improving the conversion rate so that just 1 more person of every 100 people decided to purchase our product. The math makes my brain hurt. But it’s awesome.
It’s crazy to me how much more profitably everything runs once you tune the dial a little bit tighter and focus on margins. If you can deliver the product at a lower cost to your business, you’ll have more to reinvest back into the machine.
Apps That Grow Shopify Store Revenue
Of course, I didn’t figure all this out myself.
If you want the details on what we “tweaked” in Shopify to get momentum again, Dane, our head of operations, made a breakdown for you:
Now, one thing you may be noticing in this exhaustive report are those cool little spreadsheets that show you how bad we sucked in August and how much cooler we were in December.
As I was working through the paces of this latest business bullshit, having these simple tools for tracking KPIs was the difference between life and death. The CEO is like a pilot and the business is their plane. In order to know which direction to fly, the pilot needs a proper instrument panel!
Want to get all the tools we use to navigate the sales and systems inside of our business?
Time to get your numbers right!
The Sales & Systems Toolbox
If you’ve ever…
1.) Suffered from crippling anxiety when talking about your product or service to a potential customer via phone/zoom/in person…
2.) Gone completely “blank” during a sales presentation or not known what to say when a potential customer raises an objection…
3.) Felt unclear about revenue, profit, expenses or other numbers in of your business…
4.) Had trouble setting sales targets and hitting them consistently…
…then The Sales and Systems Toolbox is just what the doctor ordered!
PART III: The Rise of Black Netflix
Wait, you’re still here? Aren’t you sick of learning about my business? Go work on your own!
In the meantime, I’m getting more of my notes together. There’s so much I want to go over with you.
We should probably talk about the botched subscription attempt — and I can tell you more about the improvements we made to the email funnels, too.