Valentin Kuznetcov & Rok Hrastnik on ecommerce economics & profit optimizationApr 13, 2023
How to survive the ecommerce winter and the re-focus on profits VS growth at all costs?
Valentin Kuznetcov of YourOptimizator.com and me on ecommerce profit optimization.
Watch the full video below, or read the short summary after the video:
Key DTC Profit Blocker
One of the biggest ecommerce & direct-to-consumer profit blockers? Businesses running finance, operations and marketing in isolation, instead of tackling the three areas holistically. In today's environment, the only way forward is a holistic business approach to managing ecommerce.
On Quick Financial Turnarounds
How to make a quick financial turnaround in ecommerce?
There's no single recipe that works for everyone, but usually operating expenses are one of the most overlooked aspects of running an ecommerce business. Most of the time ecommerce people focus on gross margins, AOVs, which are all critical for profitability and cash flow, but it's often the operating expenses that kill your business.
- Look at your operating expenses, list them from largest to smallest
- Understand the net benefit or net loss of each Dollar spent
- Identify potential cost cutbacks that won't hurt profitable sales
Val's Simplified Financial Optimization Framework
- Review P&Ls, balance sheets, cash flow
- Calculate financial rations, compare with benchmarks
- Identify potential problem areas and optimize (too high inventory etc.)
- Dig into ecommerce metrics and financial models (LTV, CAC, unit economics), see where you can squeeze more margin
- Apply ecommerce metrics to financial statements to see if there's a gap and how to bridge it
How to Deduct If You Have Too Much Stock?
1) First look at the stock turnover and compare with sales. If for example you're carrying six months of inventory and your lead time is three months, the potential overstoc is three months. Because you can potentially get the product within three months, you don't need to keep product for the other 3 months on stock, even with some safety margins.
2) Break down overstock by category. If certain categories sell less than others, but you have bigger stocks, that's an optimization opportunity.
3) How to reduce the stock you're carrying? Renegotiate with suppliers, see if you can change the lead time, get only partial shipments etc.
How to Decide Which Products to Remove From Your Portfolio?
1) Rank your products in terms of sales, profitability and returns
2) Determine the "value" of products and give them simple scores like A, B and C (A products could be your heroes that sell a lot, even at a lower gross margin, and your OK sellers with high margins; a product with a super low sell-through rate of 365 days+ would get a C etc.)
3) Focus on the As, watch the Bs and try to grow them (test different creatives, landing pages etc.), get rid of the Cs
What's the Biggest Financial Optimization Lever Businesses Have at Early Stages as They Try to Grow
Operating expesnes. Find top talent, pay them more, but don't overhire. When starting out you really need:
- The founder themself (usually focused on product development, understanding the bigger picture, driving and motivating the team)
- Growth marketer (fractional growth agency or full-time growth marketer, but cannot be someone with limited experience; focuses on creative, the copy side, building out the voice of the brand)
- Operational finance & operations (experienced in both operations and finance, understands the dynamic across the back-end processes)
- Customer service person (maintains your brand presence, voice of your company, bridge between the customer and the brand)
- Book keeper (outsourced)
- Super experienced performance marketer (if you have some money left, to focus on operational performance marketing, deep analytics etc.)
- Creative person (killer content, photography, videography)
And hire the rest in sprints, as freelancers, or on a project basis.
And There's More ...
Quick sample of the other key topics covered:
- Understand the tradeoffs between growth and profitability
- The real holistic cost of product overstocks and terminating them
- Cutting down your product portfolio
- Quick practical tips on terminating overstocks
- Holistic profit margin optimization, from supply chain to marketing and operating expenses
- Omnichannel measurement and the pitfalls of going to far into attribution
- Optimizing for growth VS optimizing for profitability, and whether to keep high revenues at lower profit margins for better supply chain cost efficiency