Episode 43: 80-20 Your Business: How to Maximize Revenue and Profitability, Part 1

80-20 Your Business: How to Maximize Revenue and Profitability

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In this episode of the Nerd Marketing Podcast, co-hosts Drew Sanocki and Michael Epstein discuss the key growth secrets of nine-figure e-commerce companies. They start by explaining the concept of "whales and minnows" and how focusing on the 20% of your business that moves the needle can help your business grow faster. 

They also discuss the importance of segmenting and targeting your customers and share tactics and strategies for boosting your brand's revenue, operations, and profitability. Looking for trusted advice to grow your DTC store? Subscribe now and stop leaving money on the table.

More About Drew Sanocki and Michael Epstein

Drew and Michael have successfully turned around three nine-figure brands, including Karmaloop, worth around $100 million. They now are the co-CEOs of PostPilot, #1 Shopify app for direct mail. This season they’re sharing their expertise on how to grow your ecommerce store to profitability on the Nerd Marketing Podcast.

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Today we're discussing a webinar which is one of the more popular ones I've ever given. I was on this show 10 years ago at ECF Live. The presentation is about whales and minnows. We'll explain what that's about. I figured just because so many people asked me about this presentation, I should touch it up, and update it. I'm going to give a more modern take on whales and minnows. So without further ado, let's dive in.

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What we want to talk about today are the top growth secrets that we see coming out of nine-figure e-commerce companies. So first, I want to start with a question. Is your business growing as fast as it could be? The answer is probably no. If you're not segmenting and targeting your customers like we're about to show you today, you're probably leaving money on the table, and we'll explain why. 

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The essence of this presentation, this webinar, and this idea of whales and minnows is about the 80-20. So we're going to talk to you about how to 80-20 the heck out of your business. Basically find that 20% of your business that's going to move the needle, focus on that, and then use that as a lever to grow the business. If I had to sum it up in one slide, you want to hunt whales. I'll explain what that means. To take a step back, who am I? My name is Drew Sanocki. This is Michael Epstein, who's my co-founder at Postpilot. And I'm here, we're here, because we've turned around three nine-figure brands. So these are the three. Carmeloop was, call it $100 million. Streetwear retailer went into bankruptcy, probably losing 10 of that, and bought it out of bankruptcy, turned it around, and sold it. The second nine-figure brand was Auto Anything, probably around the same size, also losing money. We bought that out of AutoZone, turned it around, sold it, and we'll throw Morris 4x4 under there. It wasn't nine figures when we acquired it, but acquired it and shortly thereafter got it up there. So those are the three. 

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We didn't set out to be turnaround artists, but I'd say we sort of landed there looking back at our 20-year e-commerce career. But there are a lot of lessons in that. I think on the Carmeloop deal, we got some good press about how we went about the turnaround. And that's really where we cut our teeth and figured out this approach that we're going to share with you today. And so it's hunting whales. What does that mean? Well, to know what it means, I got to go back to my first business, which was DesignPublic, a furniture retailer. I started in 2001, 2002 out in San Francisco. We were going to trade shows, finding brands to carry, getting them up on the website, and selling them. As you can imagine, in 2001 or 2002, there wasn't a lot of stuff online about e-commerce, let alone marketing in general. I dug up some old Google history, and this is probably like the evolution of my thinking about how I became an online marketer. You hit Google up, and you start talking about how to sell online or you start asking that, then, okay, how do I market an e-commerce website? There's no Shopify. There's no Magento. Like, how do I market this thing? How do I get eyeballs on my site? And then those searches kind of led me to this world of catalog marketing. 

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And what I didn't realize was that the catalog industry has been doing online marketing really for about 100 years. They pioneered this concept of RFM: recency, frequency, and monetary spend, different ways to kind of cross-cut your customer base and to mine that data. And then those searches there led me to database marketing and bingo. That's kind of where I found this sort of Whales and Minnows technique that I want to talk about today.

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I came away with two big takeaways from database marketing. The first is this idea of customer heterogeneity. What does this mean? It basically means all customers are not created equal, right? This customer doesn't equal that one. This visitor to your site doesn't equal that other one. You have different kinds of customers. You know, you've got very good ones. Well, let's call them your whales, who take up very little customer service time. And they order a lot, and they order frequently and they order from you for a long time. Those are your whales. On the other end of the spectrum, you've got your minnows. These ones come in, they order once, and it's a low AOV product. And then they never come back again. And or they take up a lot of customer service time in the process. So the first realization that really comes through loud and clear in all the database marketing literature is that all customers are not created equal, right? You got good ones, you got bad ones, and you kind of got everything in between. On the first row, I'm comparing a whale segment and a minnow segment from a nine-figure men's apparel brand. So the whales, we see that their first purchase AOV was between 13 and 14 thousand dollars. 

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They then go on to spend about twice that throughout their first year. So this brand is acquiring these whales. The whales roll in hot, order 13 thousand dollars on their first purchase, and go on to double that spend throughout the year. And for the year in question, this was 2012, six total orders from five or six different categories. You see the whales ordered pants, denim, suits, knits, and shoes. 

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I just got my bonus from Goldman Sachs and I'm rolling in and I'm ordering a suit. They come in, they replace their whole wardrobe.

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And then you got the minnows. Then you got the minnows and the minnows are they on the other end of the spectrum. And the data from this brand shows they roll in, they order one item for the entire year, not six. And that item is 37 bucks. And it's a swimsuit. So obviously, there's a lot going on. And you can see the difference between these two segments. But when you compare the top to the bottom, this is pretty amazing results. And it's I mean, we saw this at Karma Loop. We saw a lot of anything. I see it at Overtone, at Morris. You know, it's just every brand we've ever dealt with has this sort of disparity between whales and minnows. So on the next slide, you can do this yourself at home. I would encourage you to do it to kind of prove to yourself the existence of whales and minnows. 

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Google Analytics creates a very simple segment. I think you can do it in Klaviyo too, or in your CRM. But what I like to do is set a segment and just show me everybody who's ordered at twice my AOV, twice my average order value. Right. We're going to anybody who has ordered that or above, we're going to call it the whale segment. And then, I want to look at their behavior throughout the site. And this is a screenshot from Karma Loop over a one-month period or week period. I can't remember, but it's essentially showing like one percent of the sessions on the site during this period of time drove 43 percent of the revenue. It should be eye-opening to you. It's like, wait a minute. There's a big disparity going on between my best customers, my worst customers, and between generic traffic and my best traffic. Start to realize that I might want to play around with this disparity and look at the different behaviors and use that to my advantage. 

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On the next slide, if you're listening at home, we'll put this in the show notes. But I share a spreadsheet where you can kind of mess around with this yourself. So the whales and minnows spreadsheet is pretty basic. You know, you could enter your user data for a whale segment for your the rest of your business. And in this case, I think this is the Karma Loop numbers. I see that whales are one hundred and sixty-six times better than my average user. Right. A whale user just just kills it for me. So I would encourage you to play around with that. Just prove it to yourself. 

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We've looked at the data and this isn't always the case, it's the second big takeaway from database marketing. You see that the cost per acquisition of a minnow is often the same or comparable with the cost of acquisition for a whale. You've got two very different groups of customers. One is far better than the other, and it might cost the same to acquire both. Right. Light bulbs, I think, should start going on when you say that. And if you can't see the slide, I'm asking here about this apparel brand. What does it take to get another 50 million dollars in revenue using the data I put up there earlier? And you can see the disparity. Like if the cost of acquisition is the same, this is where it kind of gets interesting. If they only went after whales, that whale that spends, you know, $14,000 on their first purchase, they need another $9,000 whales to get 50 million in revenue. If they only went after minnows, the minnows that were spending $37, they got to go out and acquire three hundred and fifteen thousand minnows. So nine thousand versus three hundred and fifteen thousand. So assume that the cost of acquisition for each of these is a dollar. Right. You're talking about spending nine thousand dollars versus three hundred and fifteen thousand dollars on getting that other 50 million dollar in revenue.

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Yeah, let's just pause there for a second, Drew, and let that sink in. So many brands think I need to acquire so many more customers to hit this revenue goal I have or to double my business. When you think about this, literally a tiny fraction of the number of customers is going to drive such an outsized amount of revenue. It brings so much clarity. It makes things so much easier and it's so much less daunting to think. If I can find these customers, I have to get so many fewer of them to hit those goals. A lot of brands or CMOs have one-dimensional thinking. You just kind of think a customer is a customer. I just got to go out and acquire X to get Y in revenue. But it's a little bit more nuanced. You know, once you start realizing that all customers are not the same, if you could focus your acquisition efforts and oh, by the way, it costs, you know, just about as much to get a whale as a minnow. You get there faster. 

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So Mike and I have done this at every brand we've sort of taken over. This is the exercise we literally do on day one. You know, as you pull all the customer data, you lay it out, you get a sense of which customer segments are driving the business. And then you go figure out how to go get more of those whales.  

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In the show notes, I can put a spreadsheet where you can really just work out the logic yourself. I mean, you put your cost per acquisition in here and use the data from the first tab of the sheet, which I shared earlier. In this case, again, this is Karmaloop. Like hypothetically, if we're going to acquire only whales versus only minnows, doubling the business, I think I saved 96 million dollars. If I can double the business by only going and getting whales. Now, extreme example, you can never just get 100 percent whales, but play around with the sheet. It's a great thing to show the CEO, show your board just really to get people thinking in terms of going to get whales, getting the whole team focused on that.

Yeah. Even when you think about your OKRs, your priorities for the quarter and helping translate that across the business into the goals and priorities that the team has in their marketing and customer service. Again, orienting the business around that customer is going to make things a lot easier. 

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To recap, database marketing and 100 years of catalog data show us that all customers are different. They're not all the same. You've got whales, and you've got minnows on either extreme of your customers. And the whales are better than the minnows. And you want to try to grow the whales. It's the quickest single way to grow your business. OK, so that brings us to the question of how you do it. Right. How do you get more whales, fewer minnows? How do you start rejiggering your customer database to grow the business? And that's the subject of part two of our podcast and webinar series, which we're going to hit next week. 

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