Tyler Jefcoat 3:41
Yeah, during your intro, you mentioned making mistakes that made it harder to get to eight figures than you thought it was going to be. And, you know, lest you guys think this isn’t true. Just because I’m an accountant doesn’t mean I didn’t make some of the same mistakes. I just want to, you know, empathize with you there. Yeah, we we grew really quickly. And I think the long and short of it was that two things. One is home health care is an amazing mission. It’s a really difficult business model is 24/7 365. When my nurses or CNAs or LPN is when they screwed up, it can be someone’s life that’s at stake. And so to be honest with you was a really stressful business. And I was not a very good husband and father, the last couple of years of that experiment. And then the second issue that really kind of catalyzed that was I had a really good business partnership where I was the guy coming fresh out of grad school, he was the money I was the operator and it just candidly we got to a point where it’s time for that Partnership to End and the way for it to end well was for was for me to exit and so I was really grateful to get to observe the business transition to a new leadership team didn’t transition back to him it just was to a new leadership team and then you know, we got to make a little money and pivot and so what but the transition into accounting as I am an accountant, my MBA focus is finance. I’m kind of finance guy that got hacked off because I two grandparents had really bad Alzheimer’s experiences. And so we built this home healthcare company to try to do that better. I think we really accomplished a lot in that mission, I learned a lot about how to listen to customers, we literally got 30 of our target customers in a, in a room for a weekend, and they named the company care to continue. They’re the ones that built the essence of our brand. So this idea of what if we just wanted the people who are going to use our service or our product and really ask them core questions, and then build an essence and a delivery around what they want. I think that was the success story, you know, kind of behind this, the success of care to continue. And so you know, but during my 100 Day transition, where I was contractually there, but there was a new leadership team running because I’m accountant boy, I was relegated to kind of like CFO bookkeeper for this 90 days, which to be honest with you, as a as a as a kind of a sales guy, visionary leader, that was not always a really easy role for me to be in because I was definitely on the sidelines, kind of with a clipboard keeping score. But it forced me to realize how great our financial processes had become through lots of tears and heartache. And that company, you know, and some kind of thing you guys deal with where there might have been 50,000 hours a week and payroll or for you guys might have been satisfying a big Pio. And you realize how tight cash flow can get. And so we skinned our knees enough to kind of figure it out. And once I was back in the trenches, I was like, Oh, this bookkeeping thing is really, really important is the reason we survived through the hardest growth stage of care to continue. I’m going to count what I want to do. Now my wife says, I can’t stay home. She says, We’re not moving to a city. What are we going to do? And so I had a friend approached me who was in the Amazon space, and he said, Dude, you need to consider this ecommerce thing. And I was like, I don’t know anything about e commerce except I was an eBay seller back in college and used to build guitars and stuff because I was bored. And I’m not even sure if I made any money doing it right. And so we got to looking at the space. And I firmly believe Josh, that there are there are riches and niches, if I can find something really, really, really narrow to be great at, I might be able to generate outsized value for my clients. And so you know, we sold care to continue when camping for with my wife and two daughters for the long weekend. And then the following Monday, showed up to work with a laptop and a cell phone, called three of my largest national competitors that I now know, their national competitors for accounting, decided to build a firm that just does bookkeeping and CFO. Candidly, I hate taxes, I have a CPA, do my taxes, thank God for them. I’m more of a forward thinking, accountant, I want to see how the numbers can impact our growth in our Strategy.
Josh Hadley 7:26
Fascinating, fascinating. I think you have a, you know, an abnormal journey. But I think all of us do, right? You didn’t have a clear path of like, Oh, I’ve always been in E commerce. But I love that you’ve seen an example of exiting another business in a completely different industry. Because there are similar principles. Jay Abraham does a really good job at this, right, he can see many different industries. And what I think happens too often is that everybody in the same industry just gets siloed into thinking, this is the way ecommerce works. So we got to be implementing e commerce best practices. But if you actually take a step back, and you take some of the best practices from other industries, but then tweak them and refine them into your current industry, that’s where you can open up some some major doors for yourself. So I think Tyler, you come with a lot of experience. So what year was it that you kind of got turned up into the Amazon ecosystem?
Tyler Jefcoat 8:26
Yeah, so right at the end of 2017, is when that the transaction happened. And so right at the very beginning of 2018, is when seller account was born. So about five years now crazy,
Josh Hadley 8:36
awesome. So you’ve definitely, you’ve seen a lot, you’ve, you’ve gone through the COVID Spike, you’ve you’ve been through the aggregator push as well, where everybody was just getting acquired by aggregators, multiples were going through the roof. Now we’ve kind of come down off of that high recently. So what I would love to dive into here with your experience, Tyler, is you’ve worked with lots of brands, or you’re helping manage accounting for over $100 million plus plus of sales right now, I want to dive into what are some of the mistakes that you see sellers making? You know, when they come to you with their books, you’re like, oh, man, like, did you not realize X, Y and Z is happening? Why don’t you share that with our audience to hopefully glean just a few quick tips and maybe mistakes that our listeners could say, hey, let’s make sure we’re not making some of these basic mistakes.
Tyler Jefcoat 9:29
Yeah, I think the most basic mistake and I’m hoping is we have kind of a fairly scaled audience here that no one’s failing to do this. But you really can’t afford to opt out of your accounting like you. You don’t have to do it. You can outsource. You don’t have to even outsource it to me, you can hire someone to do this for you if you don’t like doing accounting, but if whatever whatever you’re doing right now, however you feel about your business. If we were at a show, let’s say we met up in Vegas and one of the national shows and if you were tempted to only talk about the sale Have your business but really either had no idea what your profit was, or were kind of nervous that it may not be very good. That’s a, that’s a good indication that your numbers may not be telling you enough of a true story that you can, you know, pivot appropriate because here’s the reality. Entrepreneurs, Josh Tyler, you that are listening to the show, we’re really optimistic as a population. I mean, I am always almost 100% Convinced that just over the next corner is gonna be gold. And so unless I have really, really compelling data in my face, that forces me to change my choices, I’m going to tend to just run thinking, I’m gonna win, I’m gonna win, I’m gonna win, I’m gonna win. And so that’s why you have to have really good bookkeeping, because it should tell you bad news a few times a year, like, Oh, I didn’t realize my tacos had crept up to 22% on a product, I don’t have the market for Okay, time to change the Strategy time to go back to my marketing team, time to make sure that I am aligned with my strikes that that’s an error. Number one is not having real accrual accounting, where the months lineup, yes, you can use it to get through due diligence. If you were to sell the business, yes, you’re gonna get a higher multiple, but also, more importantly, now you’re not driving blind, you don’t have mud on the windshield, right? And you can actually move forward thinking is the first most fundamental if you may need to pause there and go fix that. Right. And that’s the first thing I think the second thing is failing to measure profitability and performance per SKU, which is hard, right? I mean, if you I can’t tell you how many of our CFO clients here seller, accountant, Josh, you know, they pay for Tikka metrics, or for helium 10, or seller labs, or whichever, you know, we all pay for like seven of these tools, right. But they’ve never even clicked on the profits module, uploaded their cost of goods sold, and just kept an eye on how are my products performing each month, where am I seeing drag on my profitability, thanks, Amazon fees went up, or, Oh, my goodness, I’m getting a lot of pressure on my tacos. And so it’s important to not just look at the macro, although that’s critical, you have to take a few moments, occasionally, maybe it’s not even every day, once a month, once a quarter and look on a product by product level, to get a huge catalog, you’re gonna have to have a system that makes it to where you can sort your most important products, you know, because you’re not gonna be able to look at all of them. So I think that’s the second error. And then the third error that I see all the time, right now, Josh, is that you mentioned this early, but this is a very cash, heavy business, like we have a lot of capital that goes into these e-comm shops. And we are surprised when we run out of it as we grow. And you don’t have to be surprised, we can plan our cash flow in advance to use our past performance to predict, you know, to oversimplify this, by the way, if I needed $100,000 of inventory, to generate a million dollars in revenue, and my goal is to do $2 million in revenue. unless I do something dramatically more efficiently, I probably need an extra 100k in working capital, right? I’m gonna have to grow my working capital, in proportion with my scale. And in fact, I would expect it to get a little worse with scale, because you got more complexity to manage.
Josh Hadley 13:01
Yeah, yeah, that that makes a lot of sense. So summarizing those, those three mistakes, you know, number one is not having just accrual accounting, right? That’s just kind of the basics. Number two is measuring your SKUs profitability on its SKU by SKU basis. And then finally, like managing your cash flow, and also forecasting, you know, predicting, budgeting planning, what your cash flow needs, and working capital is going to be so, Tyler, I think there’s so many areas that we could dive into, let’s go at a at a high level, I mean, we’re going to talk about preparing to exit, and all of those things. But let’s go through kind of like basic metrics, or maybe some like targets that people should be shooting towards. So let’s talk about you know, what, what would be the ideal tacos numbers that you see across all of your clients? What’s a good net margin percentage that you see across the board that people should be buying towards? Because and then finally, I think the last thing is like your gross margin percentage. I think those are like the three things that if we can just give people some targets and ballparks to say like, you should be shooting towards this. What’s your experience and advice for gross profit margin for your total return on adspend? Right tacos for Amazon sellers. And then last but not least, your net profit margin.
Tyler Jefcoat 14:28
Those are probably the three most interesting ones to think about maybe adding your cogs percentage in there. But so the first thing I want to redefine you guys already doing this, but I want to just state it instead of just doing the American gross profit. I want to go ahead and add advertising up above the line especially sponsored product ads from amazon so that we’re getting a seller account we call this pag so it’s post advertising gross profit. In other words, I don’t really understand how healthy product A is or how healthy my portfolio is before ads because of how crucial. Even if you’re a direct consumer, if you’re doing just Facebook ads, it’s so crucial. And so that true gross margin or pag is what I call it. Yeah, it’s really, really crucial. And so I would say two years ago, Josh, the target was to get above 25%. After advertising, okay, we saw some pressure on margins coming out of the pandemic, continued container cost continued increases in advertising. And so for most products, if we are able to get above 20%, we’re, we’re okay, we’re not thrilled, we wish we could still get that 25. But 20%, we’re okay, my concern, my alarm bells start going off, Josh, if I see products that are consistently below 15%, after ads, so again, just to make sure you guys are clear, this is after refunds, of course, after our product cogs after Amazon fees, and then after those advertising charges, if I’m not able to capture at least 15 points, I’m looking at a product that really isn’t going to scale because the cost of capital of buying more of it is going to eat me up. And so if I have products that are consistently below 15, I want to look to phase them out in favor of products that are maybe closer to that 2530. To give you a kind of an aspiration here, the brands that sold for maximum multiple during the heat of the kind of aggregator kind of fever, were guys that were getting 3035 points, in some cases even a little better than that after ads. So that’s a 35% gross profit margin after advertising after Amazon fees. Your second question was about tacos in particular. And I want to reframe this question because I get this the one I get asked if I could if I could say what’s the one question that CFO blue gets asked whether it’s an you know, prosper or somewhere else, it’s how much can I spend on ads? And the answer is always the I need to just start thinking about your ads plus your product cost of goods sold as a single KPI, meaning I have really, really good margins on my product. Let’s say that when I look at my p&l, so here’s what I want you guys to do pull up your profit and loss statement for maybe the last quarter, or some meaningful amount of data and put those percentages next to it on the right hand side. If your product cost of goods sold, is like 20, or 25%, of sales, which is pretty good, you’re gonna have more budget for tacos, you’re gonna be able to spend maybe 15 points, maybe even a little bit more on tacos, and you’re gonna be okay, that’s a premium. That means I have the ability to put the foot on the gas. That means in frankly, Josh, here’s the question is, wait a moment, how can I get so much margin that I can afford to outspend my competitors on ads and actually get those precious, you know, real estate spaces. Now let’s think if, again, if you pull up your p&l, and maybe your product cost of goods sold is more like the average, by the way, it’s about 30 33%. But let’s say it’s really high for like, let’s say we’re kind of getting closer to arbitrage kind of thing, where 40 points of every sales dollar are just going to buy the product. Boy, I’m going to have to have a tacos of like, 5%, I’m gonna have to really have a lean ad budget. And so again, I want you to start thinking about those two metrics in tandem, because they’re a seesaw. The better margin I have on columns, the more I can afford to put food on the gas from a marketing standpoint, and the more expensive my product is free to buy, relative what my customer will pay me, the more that I don’t have a competitive advantage on cost. And we have to be really, really efficient with my advertising.
Josh Hadley 18:19
Yep. That makes a lot of sense. Now, let’s jump. So the last portion of that kind of equation, then is what percentage should be the Amazon fees? Right? What are you seeing there? Because with inflation, I mean, good grief, the Amazon continues to raise their fees. It seems like every quarter now there’s a new fee coming out. Right? So what are you seeing there? Right now? There’s like, an average.
Tyler Jefcoat 18:45
I’m sorry. So certainly 2021 I think we saw the average was total, by the way, think about what you’re paying Amazon and total. So this is Amazon you’re 50% Commission plus your pick and pack plus like advertising. The entire Amazon. We call it the Bezos load, right? The Bezos load in 2021 was like 41% of your total p&l, which on one hand is like Good grief. That’s a lot. But it’s not as bad as it is now when it’s closer to 48%. So think about that. We’ve been encroached on by Amazon to the tune of about seven points of profit over the last let’s call it 24 months or so. And the the two leaders in the clubhouse are by far obviously Amazon has hiked FBA fees, at least three times. The second, Amazon has been become more aggressive in its in its storage fees. And even then, we used to be able to send a container just to one FC and Amazon would do the nice slice dice split increasingly we’re seeing our clients, the larger ones, having to split their shipments and send it to Amazon because Amazon’s no longer willing to foot the bill for that extra shipping. And then of course, the tacos number being just additional pressure on ads. And so I think if you’re if you’re a premium, you know you’re going to pay Amazon the 15 points for the commission. You’re going to pay at least 15 points for the FBA fee. So that’s 30, you’re gonna feel really good. If your Amazon fees are 30 points, probably 35% is probably going to be more normal. And you did ask one more question earlier about just net profit. So if you think about, yeah, this brand that has 20% After ads, and then if I can maybe have my overhead, this is all the software consultants, contractors rent the whole nine yards, if I can have that be 10% and actually have a 10%, double digit profit, I would call that good. I think from can I get acquired if I can get 15 or better 15 points or better net profit? I’m kind of a premium target from a from an operating profit standpoint. But you know, the game is really this, how can I get pag which is that true gross margin as high as possible? And then how can I be as lean and mean as possible below that gross margin line, so that I’m capturing as many points as possible. Now the other thing is, you know, the reason we talk more about pag than we do about net profit seller account is that some sellers pay themselves, some of them don’t. And so sometimes overhead can be a little bit of a gooey situation to look into. But I think in general, if you’re going to go to market, having a 50%, net profit is really going to be premium, that will be really strong.
Josh Hadley 21:11
Awesome. This has been awesome. Jeff, and this are Tyler. Sorry, Tyler Jeffco, it always makes me want to say, Jeff at the beginning, but Tyler, this is this is awesome. So let’s break this down. From the top here, all right, to summarize everything, because this is super valuable, even for myself like, this allows me to say, oh, maybe we’re weak here. But maybe we’re crushing it over here. So you have your top line revenue, the next thing we have is you’re going to have your cost of goods sold, right? So with your cost of goods sold, you said the average is about 30 to 35%, is what you’re seeing right now,
Tyler Jefcoat 21:49
landed costs, if you kind of think about what it costs you to satisfy your Chinese PIO and then do the duties freight into the states. But think across the board, we’re seeing literally pretty close to a third 33 34%.
Josh Hadley 22:02
So if you’re below 30% or so that’s a good indication then Right. Okay. Looking good. All right, then next, you have your Amazon fees that are going to come up, right. And I think I’m going to split these up with the advertising separate. So with the your Amazon fees that your 15% Commission plus the pick and pack, all that goes into the Amazon ecosystem, you’re saying 30 to 35%? Is what you’re seeing there. Is that right to
Tyler Jefcoat 22:31
keep the numbers easiest, probably another third. So you got about a third customer foe got about a third and normal Amazon fees.
Josh Hadley 22:40
Okay, cool. And then so All right. So at this point, we have 66%. Right of our revenue going to cogs and Amazon. And so what you’re saying is that the last remaining portion for that pug number that you’re talking about? Is your advertising expense, specifically on Amazon. So with your advertising expense, you said ideally, you want to be between that 20 to 25%, you know, net gross margin and including the advertising costs in there. So that means you’re going to be needing to sit around somewhere between 15 to 20%. Correct?
Tyler Jefcoat 23:18
Well, Sophie, if you think about it, we’ve got a split into thirds, a third and cogs, a third and Amazon fee. So we’re, we got 33 points left, I can spend between, you know, roughly 10% on tacos in that model, let’s assume that your cost of goods sold model that I’m really going to so right, take another 10% away for ads, that leaves me with a 23% Pag or post advertising gross profit. And I would say that’s a really good target. Like again, I would rather aim for 25 and hit 23 then really flirt with 20 constantly. But yes, so that would be that would be a fairly prototypical private label or kind of brand building seller on Amazon is 30. Amazon fees third product cogs about a dime, about 10 points go into tacos, and then I’ve got 2223 24% After ads that I can put towards my overhead and Mama wants a boat, you know, whatever it is, that’s the one.
Josh Hadley 24:08
Make sense? Make sense? So with that, and then the other thing you mentioned is pay if you have really good cost of goods sold, right? You know, you might be 10 to 20%. Right? Well, then you could ramp up your advertising spend, right? So you can kind of offset those things. But the more profitable you are, the better like you said, Some people were 30 to 35% that were really getting some premiums with all the acquisitions that were going on. So this is awesome. This gives us a lot to think about and great targets to shoot towards, especially like net profit margin, you said, you know, 10 is kind of the average you said, right? 15 means that you’re really good, you know, looking good. You’re a good candidate to be acquired. Is that correct?
Tyler Jefcoat 24:56
Yes. And honestly coming out of like 20 22 I would actually say that, you know, 10% was actually probably pretty good, because we did see a lot of headwinds. So give your give yourself some grace. Like, if you’re looking at your p&l right now, you know, you’re in the middle of 2023. And you’re like, Well, boy, I got 5%. Last year, I must be dead. That actually might be more normal than you think it is. But don’t don’t think that that’s going to be normal forever. I think we are we’re sewer, we’re continuing to want to see the market get better. And we want to, we work too hard. And we risk too much to take a 2% profit margin for too long. And so getting a 10% is really crucial. And then I think if you’re going to exit getting closer to that 50% net profit, yeah.
Josh Hadley 25:34
Awesome. Awesome. super valuable content. Tyler, thanks, again. All right. So with that, let’s talk about maybe some of the levers that people can be pulling, you know, as they prepare to exit, right? If people are wanting to exit, and maybe they’re sitting at that five to 7%. Net Profit Margin right now. But they want to increase it, what’s been kind of your advice or recommendations, or ideally, let’s talk about maybe some case studies of clients that you’ve worked with, to really kind of help them prepare to exit well in advance of saying, hey, guess what, Tyler, I’m exiting, I’ve got a loi on the table, it’s like, well, it’s kind of a little too late. Right? So maybe walk us through that process? What should people be doing now.
Tyler Jefcoat 26:22
And this is a great time to be investing in your business. And so one case study, we’ll call we’ll call him Don, they were already doing a million a month in sales, but they had no accounting systems. So they were a spreadsheet napkin and a prayer, you know, that kind of thing. But the thing that they were doing really well, Don and his team, were, first of all, they had a mission that mattered, like their products really solve problems, they really were doing good things in their community. And so they were actually literally a real brand with a real mission, they were really gifted leaders, I want to give these guys they made a ton of money, because they’re really good at what they do. And so some of the things that helped obviously, just getting a cruel bookkeeping done for as many months as we could, so that, you know, a year later, when they went to market, they were ready, it was pristine. That’s kind of the first blocking and tackling, let’s get bookkeeping, from zero to something. Number two is inventory management, they really invested pretty heavily in being able to put a date a pretty complex catalog. So being able to put a number on their inventory each month, keeping up with it. People think that’s an accounting problem. It’s partly accounting, but it’s mostly operations do I have does my lowest level warehouse worker know how to properly receive an inventory, you know, container when it comes in, right, that kind of thing. And so don made those investments. And then the thing that kind of hits on what you’re talking about, let’s say that the profitability wasn’t where Don wanted to be, which it wasn’t with some of his catalogue, he started measuring what we call return on capital. So I don’t want to get too nerdy, geeky, although we can dive into this as much as you want to. But think about this, Josh, if you and I bought a house, we bought a piece of real estate. And then somebody told us, you’re gonna make a million dollars when you sell this house, we actually don’t know whether we’re happy about that until we know what we invested to buy the house, right? In other words, a true return on investment calculation is requires both variables, what was the happiness divided by the inputs? Happiness divided by input? Right? So when it comes to a product, I want to know, like on a 12 month basis, what was that pack number? What’s that true contribution margin gross profit for product A, but I want to do that divided by how much of my money or my borrowed cash or Mama’s money that I have to have tied up in that product. And that’s a little trickier to get our hands around. But we can kind of estimate it, right? How many, how many dollars and so that profit divided by working capital for SKU A, is the equalizing KPI for every product in the world doesn’t matter if you’re a direct consumer or a marketplace. If you’re international. If you’re not, if I can calculate that return on working capital. For every product in my portfolio, I’m going to immediately see oh my gosh, I’m getting like five cents a year return on investment in this product that I thought I loved. Don’t look because even though I have good profit margins, I never move it it has really slow velocity. So I’m sitting on that cash forever. And you might be surprised to find, wow, I didn’t even like the green one. The Green was my favorite one down, we end up that baby is really generating high returns. And so something that I was really proud of Don and his team for doing is looking at their pretty robust catalog and saying, oh, boy, these 10 products are below the line, we’re gonna give them we’re gonna give them a nurture sequence to try to get them back. If they can’t get back and I have to kill them. And we don’t feel great about it, but they’re not our children. We’re gonna have to let them go. We’re gonna have to redeploy those capital resources into products that are generating a strong annual return. So I think if you’re looking for that super great benchmark, if you by the way, here’s the easiest way to do this. Forget about on a SKU level, if you pull up that p&l, that profit and loss statement for your last 12 months that are completed, in give me a real number for that post advertising gross profit, what was the real profit after Amazon fees after advertising for my entire company, and then divide that by whatever my average inventory balance was, for that 12 month period. I mean, you just may have to eyeball what was the balance sheet, January, February, March, April, May June, about 250k. In inventory, I don’t need this to be exact profit divided by that average inventory balance is going to give you that return on capital for your entire portfolio. The guys that got the seven and 8x multiples during the like fever of aggregator including Donald by the way, they were getting about a 4x return on capital for the year. So that means that over a 12 month period, if they made a million dollars in profit, they only had to have $250,000 tied up in average inventory to make that million a profit. That’s a really productive capital allocation. The average across the board is about 1.8 to two for a year. And if you’re below 1x, you may be feeling this happening. Yeah, really difficult because it means you’re having to borrow a lot of money to stay afloat.
Josh Hadley 31:14
Fascinating. That’s really interesting, as you focus on, you know, I honestly haven’t heard that much from many accountants that we’ve worked with that focus on that, you know, return on capital, right, even at a SKU level. But you can roll it up just like you did in that example, just to give yourself a general idea of where you’re at, because I think this then correlates 100% into your cash flow needs. And your working capital needs. Correct. Tyler, I know you have another case study, why don’t you share another case study with us?
Tyler Jefcoat 31:49
Yes. Another one was, was Ricky so another client that came in had a really again, this kind of started from, he knew his customer. Sometimes by the way, ecommerce, we kind of forget that these are real people buying our products. And so this idea of how can I really become an expert at what her needs are or what his needs are? And actually engineer products that are really just cool, right? So I think, I think the premium exits are still going to flow towards people with just great products, right? I mean, we can talk all day about engineering a few cents. But that’s number one. And so Ricky had done that really cool lifestyle kind of outdoor brand, had this kind of niche following had done a good job of going multi channel where Amazon was still kind of king, but that had a wholesale channel and a really thriving Shopify site. And again, came to us now he had bookkeeping. But it was a hot mess. It wasn’t really clear, he was a little confused. And we identified pretty quickly once we corrected his accounting that oh, you know, you’re getting this model that you have is crushing you and storage fees, why don’t we have a warehouse, we’re overspending on our ads that that tacos number and a few of our core products that we thought were Hearos were bad. And so again, you made this comment earlier, Josh, what if I’m at that five to 7%, I want to really get up to 10%. Net profit. The reason that whole discussion on return on working capital is even pertinent is that it gives you the power to try to identify which of your products are killed. Because in almost every catalog, lets you have like five products, you may know this, if you have like five skews, you already know this. But if you have more than 10, you may have a product that sneaky hurting you and you’re not paying attention to it. And so for Ricky the ability to again, get the macro, we’re mostly happy. But these are an area areas storage and in tacos that we’re concerned with. Now we deep dive into the product level to say, wait a minute, oh, it’s only tacos on these two products that are killing us. Go to our marketing team and say, Hey, why are we bidding on these keywords that have nothing to do with this product? This customer is never going to convert? We can fix that. That’s a fixable problem. And then when it came to storage, you know what now it’s time to look at three PL what was his comment a couple years ago, because the five people I have employed in this warehouse aren’t I’m not able to keep them. I’m not good at that. I thought I was gonna be good at it. But I’m not. Yeah, right. And so simplified his operation. And then the second question he had that I think was so crucial going towards his exit was taller. I’m growing fairly organically. My wife’s kind of over me taken out debt, how fast can I afford to grow and internally fund the cash flow. In other words, I don’t want to have to take out too much more debt. And so the cool thing is that that net profit number actually gives you a budgeting tool to say hey, my business after everything that I need it for gives me the ability to grow my inventory needs by X number of dollars per month, because I’m going to make that profit. And that allows me to internally fund and so after looking at it closely, he did decide to go get alone. He kind of was fortunate, right because a lot of these SBA programs were coming out during the pandemic, but he didn’t. He was willing to take the foot off the gas a little bit and prioritize profitability, plus a little bit of growth and then he I’m just getting another just monster exit from an aggregator. And I think what was so satisfying? Is he just a regular guy, wife, kids, works hard does things the right way. You know, for him to get a five plus x multiple exit on this business that he works so hard was really it was really meaningful for me. I mean, don’t get me wrong, I love making money. But I think seeing, seeing these heroes are really designing great products really want to make the world a better place. So think it was super awesome, honestly, to get to see him succeed.
Josh Hadley 35:27
Yeah, I love that. I love that. You know, one of my favorite things is Amazon has leveled the retail playing field in so many ways, right? You go back in the day, and like, how do you how do you create a new brand or a new product, you have to go try to get it into the stores, right? And then you’re paying slotting fees, and it’s like, all of this upfront capital, where now somebody from their basement could be like, Hey, here’s my product idea. And for maybe 100 bucks, you’ve tested out your idea, and maybe you’ve sold out of your first 20 units, and then you’re like, Alright, I’m onto something. Let’s double down, right, so you went from a, you know, hundreds of 1000s of dollars in investment down to you know, $100 investment. So, I mean, it’s game changing for many people that see it as such, and have that vision, like these case studies that you talked about that a normal everyday, you know, guy with the but with a lot of hustle and grit envision can do some phenomenal things. So I love those case studies. My one question that I’m going to ask you here, Tyler on this is for larger sellers, like myself, who have large portfolios of products, right, we have 1300 skews. One of our challenges has been with our outsourced accounting team, they don’t offer SKU level profitability, right. And so being able to track I totally hear you that I guarantee you I have some losers, but I’ve just never taken the time to you know, lift up the hood, because it’s like, I’ve got 1300 I’m just gonna keep launching products. Right? That’s, I’m I’m good with that space. So how do you go about like, if you have a large portfolio? How do you go about measuring SKU profitability SKU by SKU?
Tyler Jefcoat 37:09
Yes, I think if you are predominantly Amazon, so actually don’t have this. Josh, are you more than 50%? Amazon in terms of your say, Oh, yeah.
Josh Hadley 37:17
Yep. Baby. Daddy plus, yeah.
Tyler Jefcoat 37:21
Okay, so. So you’re the profile that I think we feel most comfortable. So almost every one Josh that fits into your category is already again, paying for some kind of a tool that is has an API connection to Amazon, and can pull the data. And so that you just need to make sure that you’re using that tool. And so I think, a 30 minute or 20 minutes a week exercise of, honestly, Helium 10 is not a great tool. It’s not the most user friendly on the SKU level. But what I can at least do is download the CSV or have my assistant download that CSV. And now that I’ve uploaded Atlanta constitute sold, I can kind of do management by exception, right? If I were to imagine this 1300 line spreadsheet, I can sort it, and which of the ones are getting me unusually bad, like I’m going to have a red line if they’re below 15% profit. Or maybe if they’re some other issues, I’m going to by the way, I want to make sure I say this, especially when you use a tool like helium 10, you can be tempted to overreact because of a child parent relationship. So just be careful, you guys don’t know this. But some accounting boys out there don’t know this, just be careful to be okay, if one of the variants has a lot of ads, and the other one has zero just because of the way there’s child parent relationships. So if you have a tool that can help you organize my parent, that’s ideal upload that landed cost of goods sold very high unit, and then just you need to monitor it needed monitored every week. And and it’s the moment it’s one of the most important things you can do. So there’s no excuses to have to do it. And the nice thing is, you’re already paying 100 bucks a month for Hillington. Or for taking metrics reporting this other tool set lets us use the tool. So I think that’s the first you can do a manually you can pull a UTR from Amazon and you can pivot it. And boy, that’s a whole heck of a lot of work. And the thing that you guys all know this is that these tools just have a slight onus. And here’s why. Since Amazon is still deleting that add data after whatever it is 60 or 90 days, we are never going to be able to get through due diligence and put together a compelling argument that our advertising and skew a was this versus unless we continue to database that advertising campaign data, which means we have no choice but to go pay someone to build a Google Studios back in and we’re going to go ahead and database that ourselves, that’s fine. If that’s what you want to do, or just don’t want that credit card or helium 10 Go out, I’m going to keep paying those guys. I don’t have choice because they’re going to warehouse that data forever for me and give me that compelling picture per SKU that I can. And so to your point, like you have 1300 skews, I want to do some kind of a macro glance that helps me identify the 10 that deserve my attention. And then I want to spend a few minutes on each of those trying to diagnose what the problem is. problems could be excessive refunds, that’s actually a thing that still happens. There difference ratio on product A is higher than my, the rest of my portfolio. Let’s go look at the reviews. Let’s go make sure there’s nothing confusing in my listing that does happen, somebody, maybe, maybe change the wording on our listing that happens with large catalogs. And so I want to start at refunds I want to look at if Amazon’s attributed inbound freight, maybe that’s unusual, it only goes in twice a year, I’m gonna not be too panicked about that one. And I’m gonna take a close look at tacos, right? And that fat factor related to advertising? And then I’m gonna have to make a judgment call to say, Am I really worried about skew a? Or is it just kind of a short term things is no big deal. If I’m really worried about it, it kind of goes on to my issues list where my team needs to solve this. And it either gets solved by getting we call it keep cuddle or kill, right, either if something’s clearly a keeper, that might need to be nurtured a little bit. And if they can’t be nurtured to health and may need to be cut.
Josh Hadley 40:54
Interesting. I love that. And I think you gave us a good framework to work off of there. A follow up question I have on that is How accurate do you see the Amazon attribution data for ads? Not in regards to sales? But in regards to spend? Because I know for people with larger portfolios or catalogs, you will have multiple skews running in one single ad campaign? Right. And so being able to to attribute Yeah, my campaign spent $1,000 a day, right. But I had 20 different skews in that campaign? Do you see any issues? Or have you run into any issues with that, where, you know, Amazon’s not really attributing the right amount of spend on a SKU, or we just don’t know, whether they are or not, because we’re just going off of whatever they give us?
Tyler Jefcoat 41:45
Yeah, I think it is. I think if you’re running one campaign to 20 variants, again, it’s probably just important to look at things on a parentage, you may kind of be zipping up those 20 skews until one picture, since you don’t have a separate campaign for each. Because you’re exactly right. It’s not uncommon at all. For me, I’m talking about Tyler as a consumer to go to my Amazon app to a search for something and then go ahead and click on the green one, because I like the way it looks better than the blue one. Like that’s not an uncommon buyer path. But I think to your point, Josh, the reality is that Amazon still builds us on clumps, we get a clump from Amazon either day, right? Monthly, and that clump billing doesn’t always match it never. They’re never giving us that granular data. And so, you know, when it comes to sales and refunds, we get to take Amazon’s orders API data, and then finally reconcile it against the payment. But when it comes to cost of advertising, we’re trusting that that attribution is pretty close. Yeah, this kind of sucks, doesn’t this, the reality being with Amazon is that you’re almost always trusting Amazon degrade its own paper, and it doesn’t feel good at all. But I think I what I found is I think that attribution, especially on a parent level, is 95% accurate, which means it’s enough now to directionally make choices.
Josh Hadley 43:01
Yeah, that makes sense. And I think that’s a good way to look at it. Because that’s always been the question, that debate is like, How real is the attribution? I think they’re their brand, you know, referral links, you know, there’s attribution issues there, too, that people keep talking about. But I digress. I think the other thing that you could point out here, if you’re looking at things at a SKU level, just as I’m thinking about it is Amazon often will remeasure your product and put you in a higher FBA tier, like fulfillment fee, right? And so you, if you’re not looking at that month over month, you could think that all as well, but Amazon jacked up your fulfillment fee, and now you’re in the oversize, you know, fulfillment for no reason, right, except that somebody, somebody measured incorrectly. I mean, there’s a lot of software’s that go through that process and automate doing that for you. But I think that’s a big mess. We started correcting that in our business about 18 months ago, and oh, my goodness, I can’t I couldn’t believe like we I think have now captured what more than six figures worth of just like crap that Amazon had remeasured incorrectly. It’s like, no, Give us our money back. Like, this is a mistake. So that was something we were sleeping on. For a long time. Do you see that often as well?
Tyler Jefcoat 44:23
Yeah, same? Yeah, we see the same thing. And so again, we kind of think about that framework that we’ve mentioned a minute ago, just looking for things that are losers. And now the question isn’t, should I kill this loser? We don’t know that. Yeah. Well, the question is, let’s try to determine why and whether its refunds or FBA fees have doubled all of a sudden, that may be a flag that says we need to dig in and yes, we do see that actually question for you, Josh. Because he goes managing a big portfolio. Like how often are you doing that kind of analysis for your portfolio? Is this like, tooled up where it’s pretty automated now? Or is this something that like every month you do it manually or what does that look like for your team?
Josh Hadley 44:59
Yeah, so right Now with the FBA fees, specifically, we have, you know, the gota tool is going through and creating those cases, we originally had, you know, V A’s that were going through and manually doing that. But it just became so numerous. Like, we’re always creating remeasurement cases. And so we’re just like, you know, we can set this up. Now, it took us a lot of time, it took us about a month to be like, with 1300 skews here, the exact dimensions for every single one of our products, right. And here’s how much they weigh. Like that took a lot of setup time. But now we gave we gave it all to get Tita. And now they kind of automate that for us.
Tyler Jefcoat 45:37
I think you just described probably the best practice there is I think this is one of those tasks that unless your catalogue is really straightforward, finding a software plus a competent service provider, it gets seen as one of those really good ones out there that just pick someone you trust in try not to burn too much of your internal RAM chasing Amazon cases, because it will run out of time if you do that.
Josh Hadley 45:59
Yeah. So true. Tyler, we’ve shared so much value. Thanks so much for all of your information and content that you’ve shared with us today. One of the final questions, I know, I’ll ask you more final questions. But one of the things I’d like to kind of wrap up here is inflation, right? You talk about a lot of margin compression happening right from Amazon raising their FBA fees, the cost of advertising is going up. We know all of those things. So what are sellers to do? And what are you seeing as effective strategies? I mean, the one thing that we do have control over is raising our prices. But maybe we can only do that to a certain extent, or hey, maybe it’s at least worth testing out increasing the prices. What’s been your perspective? And what’s your advice in the inflationary environment that we’re in where I anticipate the same thing, Amazon’s only going to continue to increase these ad costs are only going to increase? What’s the seller to do?
Tyler Jefcoat 47:00
Yeah, so this is this is so important. And I think the the biggest mistake that you could make is to kind of stay asleep at the wheel. And this is very dynamic. To the first point, you have no choice, you have to AB test some pricing increases for your products and try to test. You know, if you remember from your intro to economics class, that price elasticity, you gotta test it, because you don’t know and so many of our clients have been pleasantly surprised with how much the volume didn’t dip when they raise the price by a couple bucks. So I think you got to run those tests, you got to measure them. And then the second thing you have to be aware of, I think, at least where we’re coaching our clients is the feds are raising interest rates, specifically to slow down demand to stave off a recession. In other words, if you just kind of put yourself in the, in the kind of mindset of the Feds right now they have a mission. And the mission is to try to make the recession, shallow if you know, or stave it off as much as possible, not sure that they’re doing that, but like, and so understand that that is going to work, eventually that will work. And you’re either going to have lower session counts, like we saw in a couple of quarters and 2022. Or we’re going to see cus our competitors choose to over invest in ads to push inventory out so that they’re not sitting on it. My point is, is I just want you to make a strategic decision on purpose and not an accident. If this is a product that you are concerned, maybe losing its viability, okay, my edge is eroding because of additional FBA fees or because my supply chain is more expensive to manage. Now, I don’t want you to double your tacos for that product, I want you to be honest enough to say this may be a product that’s moving towards obsolescence within my catalog. And I need to put together my plan instead of paying an extra 100k. And abs. Let’s invest that 100k to go ahead and develop something new. But Alternatively, if I look at the market, and I say no, no, no, I’ve got a couple of key competitors that are blowing through too much inventory. They’re paying double the tacos. Now I’ve got to make a decision whether I want to continue competing with them or not. It is an acceptable choice as the CEO to say I want to continue to compete to keep my ranking. But do it on purpose. Like put a name on that dollar. See this is going to be a $50,000 bet that I’m placing in by placing this $50,000 bet. I am hoping to gain X amount of profit in the next two years because of how much better this product is going to perform. And then guess what? You’re you’re on board if you’re convinced that that argument makes sense, invest with confidence and measure it. But if you have to look at it, because here’s what happens a lot of times like well, my competitors are raising prices. I’ve been number two on the first page for a year, I’ve gotta maintain ranking. But when I forced them to actually articulate what is the back end of this look like when you burn 50k in ads over the next year. They don’t have a compelling argument. And so it’s a negative ROI. And that means unfortunately, they may have to accept a slowdown in sales in order to protect margin and not really create a catastrophic harm to the business.
Josh Hadley 49:59
Yeah, I think I’d definitely lean more towards the camp of taking that extra amount of inventory or that, you know, $100,000, as you mentioned, right, you have two choices, do I continue to, you know, keep a product on life support that it’s getting a lot of margin compression. People continue to reduce the prices, even though you know FBA fees continue to go up? Or do you go reinvest and say, Alright, maybe this product is just gonna die, right. But let’s go look for some better opportunities. And that’s where I lean more towards. And that’s why we’re always launching, we launch 20 to 30 new skews every single month for that purpose, because certain categories, just all of a sudden, you got a bunch of overseas manufacturers that are okay, making a penny a sell. And there’s like, good luck. I’m out, though, right. And on the flip side, I think what I have seen, you talked about this, I have been pleasantly surprised, as we have increased the prices of our products. Now some of them did go down in our sales velocity. But there have been a good number, I would say, honestly, the majority have maintained their exact same sales velocity, same organic ranking. And now I’ve been able to increase the product on some products $5. Right. Now I’m even more profitable. And for me, it was when my back was up against a wall, right? Our supplier, increase the cost, the manufacturing costs for the product, right? And then FBA fees were going through the roof. And so I was like, I ain’t just going to I’m not just going to take it, I’m going to increase my prices. But it was a mental mindset shift for myself, because I thought we were already, you know, one of the leading, you know, I guess we’re already one of the most expensive options in that product category. And so in my mind, we’re at 9099 at the time, and I was like, oh, man, like, once you hit that $20 And something cents, like, it’s going to be this huge mental barrier for people and they’re just going to be out, right? But we tested, we did $20.99, nothing changed, let it go for a week. All right, 2199, nothing changed, we kept go like the velocity stayed the same, our organic ranking stayed the same. We went all the way up to 2499, which allowed us to get better margin than we had even prior to all of the FBA fee increases in the manufacturing increases, as well. So I think that that would be my, you know, input to our listeners, as well as like, like you said, ad test, right? Just increase it. It could be just a mental mindset shift. I know for myself, it was more often than not, it’s like, oh, I don’t know if I would pay this, like, doesn’t matter what you think, and see what the market thinks. So Tyler, I also want to dive into real quick, you mentioned that you have a mastermind group sellers roundtable. Tell us more about that,
Tyler Jefcoat 52:57
yes, it’s pretty small, I’m getting some pressure to turn it into maybe more of a business that there’s there’s 15 of us, we could get together a couple of times a month in zoom, and then we get together twice a year live normally just north of Atlanta and just do some planning. I think for me, to be honest, at Josh, this was I was in a CEO roundtable for the healthcare business I built. And it was such a godsend to be around other thinkers, you know, the so I don’t know that we’ll have although if you’re interested in celuk Roundtable, you know, reach out to me, I’m happy to tell you more about it. But even if we don’t have a seat, find a mastermind, I think that’s the big picture here, find a group of, you know, men and women that you can trust that don’t have a dog in the fight, except that they want to grow and they want to grow with you. And that they’re okay if you need to come in one month and just like cry, right? Because things are hard, or it’s a conversation that’s more difficult to have with your spouse. I think having that kind of support group as a CEO, because a CEO can be a lonely place. Sometimes it’s just meaningful. So make sure that you surround yourself with thoughtful people that you trust that fit your culture that fit your vibe, maybe it’s seller’s roundtable, if you think that might be the case, reach out to me, but even if it’s not fine, simply because this is important. It matters.
Josh Hadley 54:03
Awesome. I love that Tyler. All right. As we wrap up this episode, I do love to leave the audience with three actionable takeaways from each episode. So Tyler, here’s the three takeaways that I noted. Let me know if you think I’m missing something. Number one is you’ve got to get the basics down. And you mentioned this earlier, you know, you’d be surprised the number of seven and maybe even eight figure sellers that don’t even have their basics down in terms of accounting, they’re doing things with spreadsheets, they don’t even have an accounting team, or they’re not even looking at their numbers. So first and foremost, if you’re in that camp, like oh, I would highly recommend that you you know, get on board with one of these outsourced accounting solutions. Because my goodness, it’s gonna give you a lot more confidence and clarity, and especially in the environment that we’re in with inflation and Amazon fees going up. You need to get very clear in making those strategic decisions as a CEO, like Tyler mentioned, that, Hey, am I going to invest my 100 grand to keep this product on life support, because I see it a huge return down the road? Or is it better to take this 100 grand and go invest it in new product opportunities, you only know that when you’re looking at the financial data. So that’s number one. Number two, is starting to manage the profitability of your business at a SKU level, approach. So look at things and start killing the products that literally are just eating money away from your business. And you have to emotionally detach yourself from some of those products. But that’s the beauty of the data is that it’s just going to be black and white, maybe even red. But black and white to show you this is this is who you should be, you know, focusing your time and attention on. So that’s takeaway number two. And then TAKEAWAY NUMBER THREE is kind of piggybacking off of our last conversation is I would encourage everybody to AB test your prices, especially in the environment that we’re in, overcome some of those mental barriers, but increase your prices. And you know, my example and experience has been some of the competitors will start following you and raising their prices as well. But they’re waiting for people to kind of start, start making those moves. And then you’re going to end up in a more profitable situation, targeting again, that net margin, you know, when all of a sudden done at around 15% means you’re very healthy. And you know, you could be looking at potential exits down the road. So, Tyler, what are your thoughts as we summarize those three takeaways for the audience? Anything else you would add? I
Tyler Jefcoat 56:50
think you nailed it there. Those are great. Don’t do those things. Guys, you’re gonna be really
Josh Hadley 56:53
awesome. Well, Tyler, the final three questions I want to ask you here. What has been the most influential book that you’ve read and why?
Tyler Jefcoat 57:02
Okay, so the one I’ve been geeking out on the last couple of years, I do, I do read a lot. If you search my website, and if I have a book report and about 55 of my favorite books there. So I’m, I’m a reader nerd, but the one I keep chewing on is James Clear as Atomic Habits. So he’s a fellow bald guy like me, former I think college athlete that really pivoted into performance coaching and his his take on how to get 1% better each day how to do how actually, I guess his mantra is, you’re not going to rise to the level your goals, you’re going to fall to the level of your habits. And I have found that to be so true in my life. So that’s the one that’s really impacted me the most here in the last year,
Josh Hadley 57:41
I 100%. Echo that book, Fantastic book, it’s one you could reread every single month and take a lot of insight from very good. What’s your favorite software tool that you’ve been using, or you’ve seen other sellers using that you think people need to be paying attention to
Tyler Jefcoat 57:59
the one that’s been, we’ve talked a lot about the most popular ones out there. The one that I’m want to shout out to today is a tool called Merchant Spring. These guys are I think they’re based in Australia. And if you have a multi channel approach, and are looking to integrate to all of your Amazon International, I think plus eBay and Walmart and being able to like pull those sales in in a way that you can kind of aggregate it. We use it because we are able to kind of get a bulk for all of our CFO clients. So we can kind of try to help create some of that SKU level. It doesn’t solve the row as problem for Shopify. So it’s still a little bit, you know, doesn’t solve the full problem, unfortunately, but merchant spring, I think it’s dot io is one that you should check out.
Josh Hadley 58:42
Awesome. All right, final question, who is somebody that you admire or respect the most in the E commerce space that you think our listeners should be paying attention to?
Tyler Jefcoat 58:52
Every time I’ve ever had a conversation and he called me about a week ago, we were talking every time I talked to James Thompson, I get smarter. Somehow I get better talking to the guy every time he gives me a call. We’re friends. He’s a good dude. He’s the guy that founded Prosper Show he was one of the founding partners of Buy Box Experts and had a strong exit of that company and now he’s an investor heard a consultant and yeah, I just feel like it’s really great to have friends like that that are always seem to be thinking at a level higher than I am. Like, I consider myself kind of a deep thinker, and then talk to James like, wow, that guy’s like, around the next corner and over the hill, and I’m not even close. So he’s, he’s definitely somebody if you ever hear him at a conference or hear him on a podcast, I would definitely stop and listen,
Josh Hadley 59:31
we’ve had James on the podcast, I think, I think 10 episodes prior to you hear Tyler, so people should go check that one out because he did great, lay a lot of great insights, especially as it relates to what acquires right or private equity companies, venture capitalists what they’re looking for when they’re looking to acquire you. So he shares a lot of great tips in that episode as well. So thanks for sharing that. Now. Tyler to wrap it all up. Where should People follow you tell us more about seller, accountant and how should people reach out to you
Tyler Jefcoat 1:00:04
the websites the easiest selleraccountant.com We have a lot of great resources there. A lot of them are free, easy to get a hold of. I also have a little fledgling podcast that we’ve just finished season one of called Return On Podcast, get it on clever return on investments that is return on podcast. So if you want to kind of think through investing and profit on a little bit of a deeper level, that might be a pot worth putting in your stream and your feed.
Josh Hadley 1:00:29
I love it. I definitely recommend everybody, you know, reach out to Tyler if you’re in need of some accounting services. He shared a lot of great insights. He has a lot of great experience here. So Tyler, thanks so much for joining us on the episode today.
Tyler Jefcoat 1:00:43
Thanks, Josh.
Outro 1:00:45
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