Episode 72: Turnaround Secrets, Pt. 1

Listen and nerd out on: Apple Podcasts | Spotify
‍

30 Turnaround Secrets Ebook By Drew Sanocki: DOWNLOAD NOW
‍

Transcript

Announcer:

Welcome to Nerd Marketing, an original podcast for e -commerce operators and marketers looking to level up. Drew Sanocki and Michael Epstein will bring you actionable strategies from their decades of running eight and nine figure brands, along with interviews and insights from the leaders of some of the most successful brands in the world.

Drew:
It is Drew Sanocki, Nerd Marketing Podcast. I released a 30 day series called My Turnaround Tips in March. It was fairly well received. And so this next couple episodes, we go deep on the turnaround tips. So I'm joined by Michael Epstein, who worked on many of these with me, these turnarounds. And we're just going to go through each one, offer a little bit of color, some things to avoid, some stories. So we're gonna give you a two-part series on turnaround tips. I think they're pretty universally applicable because really they're not just about turnarounds, they're about how to get a D2C brand profitable quickly or more profitable quickly. So I hope you enjoy.

Yeah, you were silent for those 30 days, just kind of observing my tips. So I'm curious to see what you think if you agree with them having been a part of it.

Michael:
I loved them. And people were coming up to us you know, on the street, we're recognizing you on the street, Drew, saying, I saw your turnaround tips on LinkedIn.

Drew:‍

Yeah, which was, I mean, if you mean by street, you mean that ecommerce conference in LA. But I'll still take it because it did go viral, like in the right way. The right people saw it. CMOs out there, CEOs, operators, you know, within our little community, it's not going viral to like the mass market, but it was just.

The right people were into it. I think what made it sort of had a bit of a universal appeal was that it's not really just about turning around a busted business. All the tips were just about how to get profitable quickly. And so are relevant to more businesses than just the ones that are struggling and bleeding cash, right?

Michael:‍

I think you're exactly right. So today we're going to run through the first half of those tips and we'll do it live. See what you have to say about them, summarize them for everybody.

Drew:

Yeah, there are 30 tips. A couple of things before we dive in. They are in no particular order. They were literally whatever tip I sort of pulled off my shortlist that morning and wanted to write a LinkedIn post about. So it's not like we're starting with the most important ones. And there are probably more than 30 tips, but these just happen to be the 30 that I thought were most interesting and the most appropriate for LinkedIn.

Michael:‍

So. Awesome. Let's dive in. And I think actually the first one is something that you think about first when we step into a turnaround before we can execute. We got to do this one thing. What's that Drew?

Drew:
I would say set the culture. You always say culture eats strategy for breakfast.

Michael:
I do say that. It's like the Michael Scott, Wayne Gretzky thing. So it's like Michael Epstein, Peter Drucker.

Drew:
Yeah, may or may not have taken it from Drucker. But the general idea is you can have the best strategy in the world if you can't execute on it. It's not worth anything. So it's important to go into these turnarounds day one and establish three things we talk about. Number one, urgency, their turnarounds, their bleeding cash. If you don't have cash, cash is oxygen. The company is going to go under. Right. So everything's urgent. Number two, we're going to establish a meritocracy at the company, new sheriff in town, and we're going to promote people who deserve to be promoted and who perform really well. Because a lot of these companies lack that for some reason, or maybe that's why they got into trouble in the first place. But you get these situations where you just got a lot of legacy cruft throughout the business. And then the third thing is like, we're going to have a culture around profits. Like profits are good. We need them. Yeah, businesses exist for a lot of different things. We all want to make an impact on various things and various causes. But the reason this is a turnaround is because we haven't been generating profits. Our mission is to generate profits right now for the investors of the business.

Michael:
Love it. Yep. Before we execute, we start to change the culture first. Usually takes anywhere from six months plus to really get things moving. But to your point, got to always focus on the urgency.

Second thing, in a turnaround and in businesses today where growth has been valued over profits, they have to make some sharp pivots and that leads to some pretty tough decisions around costs. So how do you think about breaking up costs Drew?

Drew:

Yeah. And this is with a serious hat tip to this guy, Bob Pfeiffer, who wrote a great book called Double Your Profits in 30 days or less or something like that. HBS professor, a lot of private equity companies love that book. It's sort of a Bible. So Pfeiffer recommends breaking your costs into strategic and non-strategic costs.

Strategic costs are the ones that drive profits, drive the top line. You know, a good example might be like advertising, direct mail, stuff like that. Non-strategic cost has nothing to do with the top line or bottom line of the business. It is more, I don't want to say non-essentials, but it's things like staff functions, admin, IT, and just realize like on the financial level, you've got these strategic costs and these non-strategic costs and as a business, you want to spend up on strategic costs, you want to maximize those, you want to minimize non-strategic costs. So just start doing that mental accounting.

Michael:

You hear people say like, you can't cut your way to growth and people who just start slashing ad spend because business, you know, they're not that profitable, starts to put you in that death spiral. You're not going to turn the top line around by slashing all marketing. You got to just get profitable by getting more efficient.

Number three, kind of in the same vein of cost cutting, you got to jam people.

Drew:
You got to jam a lot of people. But number three is starting with your suppliers. We think back to our previous company, Mike, this was the job of JP, our CFO, really good at jamming suppliers. So these would be, you know, your your office paper suppliers and maybe your landlord and, you know, anything that the business kind of consumes.

Typically, you can negotiate a lot of that down consulting contracts, right? And you're going to all these suppliers and saying, hey, business is in tough shape right now. We've been unprofitable. We're teetering on the edge of bankruptcy. You got to hook us up here. You got to cut costs 20%. And in a lot of cases, it works. I think a lot of agencies out there don't want to hear this. And I wouldn't want to hear this having run agencies myself. But everything's negotiable. You know, what are you paying your paid person? What are you paying your SEO person? Usually you can negotiate that down 20, 30 percent.

Michael:
Yeah, or at least get some concession start out of it. So might as well ask. Yeah.

‍

Drew:
Longer term contracts. Great lever to use. I don't we didn't bring that up in the turnaround tips, but hey, if you knock 20 percent off, we'll we'll sign a longer term contract. Usually a great lever to use.

Michael:

Yeah. Good point. Good point. Different type of cost. Subsidy Cost. That's number four. What's Subsidy Cost, Drew?

Drew:

Yeah, you and I talk about subsidy costs all the time. It's like the hidden cost of every business. The money that they pay to incentivize a customer to take an action when the customer would have taken it otherwise. So classic example is an entry pop up on a site for 20 % off. You know, you go to buy the new shoes, you know what shoes you want, you go to the shoe store and boom, the first thing you see when you land on the site is a 20 % off coupon. So of course you're going to take that. But the brand's just giving away margin unnecessarily. That's called a subsidy cost. It doesn't show up in the financials. And yeah, so many DTC businesses have this cost. So start by cutting that, start with that initial entry pop-up. If you're immediately giving away 10 % or 20%, maybe change it to a sweepstakes to win a couple hundred bucks every month, you know, or maybe make it an exit pop, and allow those people who show up to your site with the credit card in hand to buy at full margin before you even start discounting.

Michael:
Yeah, such a lever. So many other options you can test out. Sweepstakes, tiered incentives, ratcheting it down. And to your point, if you're making 50 % gross margin on your product and you're offering up 20 % off your purchase, it's not 20 % off, it's not decreasing your profits by 20%, it's decreasing your profits by 40 % because you're only making 50 % margin on that. So really, really big impact, outsized impact to profitability by optimizing those incentives.

The other lever kind of go in the other direction is pricing. I know you talk a lot about 3G capital and increasing pricing. How do you think about applying pricing strategy?

Drew:
I think most entrepreneurs undervalue their offering they're afraid to charge more. I am. I know we're always afraid to charge more at our companies, Mike. Yeah. But I think try it. Careers have been made in private equity by individuals who buy companies, increase the price and then sell companies. Like, really, that's it. And, you know, if you're selling a commodity product, it might be hard. But I think in DTC, you see there are plenty of brands out there where there's some wiggle room. Try it for a week. See how it works. If it doesn't work, you can roll them back.

Michael:

Yeah. Try on a few SKUs. It can be easier for D2C brands, particularly if you have a bunch of SKUs. Test it on a subset of SKUs. See what the elasticity looks like. If it looks good, then you sort of can roll it out more broadly.

Drew:

Nothing juices revenue faster.

Michael:

All right. Number six we're on. So going back to cost cutting, this is kind of similar to for that price negotiation, but this is a move we've pulled before that can be a little drastic, but actually can be super effective, zero-based budgeting. So how do you do zero-based budgeting, Drew?

Drew:

Yeah, this is something we did early on at Auto Anything. And it's basically everything goes to zero. You know, most budgets are made looking at the historical spend on a category and you sort of project it forward maybe with like a five or 10 % increase. Zero-based budgeting says no, everything goes to zero every year or every quarter. We're gonna zero it out. And then if you wanna spend on that category, meta ads or a certain consultant or a travel budget, you gotta go to the CFO or to the CEO and justify it and show what the ROI is gonna be.

At the end of the day, that zero base budgeting, nothing kind of gets your expenses down quicker because nobody wants to go present to the CFO, but we recommend it.

Michael:
The other thing we've done is cut everybody's credit card off at the beginning of the year. That's one way to zero-base budget is like if you got a platform like Brex or something like that where you can control everybody's credit cards, you just kind of flip them off. Somebody's going to figure out really quickly if one of their important tools just got shut off. And they're also not going to notice if they had something on there that they aren't actually using. That's one way to do it.

Drew:
Everybody subscribes to so many little like SaaS things for like 20 bucks a month that they don't realize exactly shut their credit.

Michael:

You know, maybe don't do it on like your Shopify hosting bill or something like that.

Drew:
But, but, you know, like, yeah, Brex makes it easy to which I enjoyed when we rolled over to Brex, you know, you could put like a deadline on a credit card, essentially when the spend stops. This podcast is not sponsored by Brex. It just is. I just noticed that feature and it's kind of cool. Yeah. So that's zero based budgeting. I'll ask you about the next one, Mike. Sure. Turnaround tip number seven was learn to love the discount ladder. Can you tell us what the discount ladder is?

Michael:
Sure. So you were talking about subsidy costs and that's giving margin away before you have to. So the discount ladder is really a great strategy for reducing your subsidy cost by saying if recency is a strong predictor of someone's likelihood to buy again, don't offer them like the maximum discount early on, like right after they make a purchase. You know, let them buy at full price first. If they don't, give them a little bit of an incentive. Maybe you start at 10 % and just give them a little bit of a nudge because as more time goes by, they become less likely to buy from you again. So give them a little bit of incentive and then escalate those incentives over time as they become more and more unlikely to come back and buy from you. Again, you don't need to start with a 30 % off incentive to come back and make a second purchase. Maybe you get to 30 % six months later or a year later when they've really defected from you and you have a very low chance of ever seeing them again, you can afford to incentivize them a little bit more to come back.

But discount ladder is a great strategy to say, roll out those discounts more sequentially and lower discounts upfront and then escalate them as they become less likely to take the action you're trying to get them to take.

Drew:
If I had to generalize, I would say just a general 30, 60, 90 day discount ladder. 10%, 20%, 30%. Works really well for most retailers, right?

Michael:
Most brands. Good rule of thumb to start with.

Drew:

OK, eight, redo compensation. We have both been at companies where you go in and you look at the census, what everybody's being paid. Typically, you see this during diligence before you take over the company and certain individuals stick out like a sore thumb, because they're making so much money. And it's like, this is this woman in finance has been there for 20 years. So naturally, she makes, you know, half a million dollars a year more than your top salesperson. And there's a bit of that phenomenon. And so I think as point number eight, we like to rework compensation so that it reflects value to the company over tenure. You know, and this gets to our culture of meritocracy. We always say, pay your top performers above market, your top salespeople, your top marketers. And then this gets to our strategic and non-strategic cost. And the non-strategic part of the business, pay market rate.

Michael:
Next one. man. We felt this pain at AutoAnything, which was, you know, a hundred and something million dollar brand, but not on Shopify when we came in. So the advice here is don't become a tech company. And we felt like we were a tech company when we stepped into that, because it was how many, 50 engineers to run that site, something like that at the time. $6 million in IT spend.

Drew:
It's indicative of a lot of turnarounds because you had these legacy brands started in the early aughts before Shopify. They all had custom stacks and they never migrated. So, I mean, Karmaloop had a server rack in the corner that powered the website. And you're like, well, what happens if you own .net or something? And it's like, what happens if you pull that plug or somebody trips? It's like the site goes down. There's no backup.

And AutoAnything, same thing. There's a server room you could go in. It was really hot and the site was on the servers in the server room in the office. We would not recommend this. The byproduct of this is you need engineers and sysadmins to support the tech infrastructure. And you end up with a head count that looks a little bit more like a software company than it does a DTC brand as fast as you can get out of that.

Michael:
10 is fixing your one-time buyer problem. This is sort of the dirty little secret in e-comm that we talk about a lot Drew. What's the one-time buyer problem?

Drew:

Most brands have the 80 -20 rule going on in their customers. So 20 % of the customers drive 80 % of the revenue and the profit. And those 20 % are your repeat buyers. They're people who have come back again and again to buy. 80 % are one and done. So they come in, they order once, they never come back again. And they don't drive a whole lot of revenue. And certainly, a whole lot of profit because the first order for most brands tends to be sort of marginally profitable. It's not the most profitable purchase. Profits are made on repeat purchases because you don't have to acquire that customer again. So the one time buyer problem is when you go into a brand and you see a wide swath of one time buyers come, they purchase, they never buy again. And so it is a small lever that swings a big door to focus your retention efforts on turning a one -time buyer into a two or more time buyer, right? Versus say like focusing on people who buy 10 times or 20 times, right? Just that one lever from one to two is huge. Mike, what's in our playbook for how you turn a one-time buyer into a two-time buyer?

Michael:
You obviously try and do it by email first. And if they don't, you gotta hit them through other channels to try and get them to make that second purchase because to your point, Drew, it's huge for profitability. You're not paying up to fully reacquire that customer again. It's such a creative, profitable purchase that you need to get them to make that second purchase via sort of any means necessary. And when you do that, it allows you to pay more for customer acquisition because you're increasing the LTV of every new customer that you buy. So big opportunity there for most brands.

Drew:
Just be proactive and engineer that second purchase as best you can. So you can look at your customer data and see when the natural point that a one -time buyer becomes a two -time buyer is. There's a report in PostPilot called the Intra-Purchase Latency Report or Time Between Purchases. It'll show you like, hey, most of my one-time buyers, if they buy again, it's after 30 days. And so you should start thinking, okay, like at 30 days, now I wanna start incentivizing a second purchase, showing more things to buy. Maybe I experiment with what you talked about in number seven, the discount ladder to try to get people to buy a second time. So just get proactive and engineer that second purchase. Don't just let it happen.

Michael:

Engineer the second purchase. Key takeaway there.

Drew:

Number 11 is be okay with letting people go. So unfortunately, turnarounds by their nature, not making a lot of money, often bleeding cash. You need to just cut costs early to get profitable, really to start generating cash flow. Our one piece of advice here was told to me by Irv Grossbeck, who was a great professor at the business school at Stanford. And he said, you know, you got to cut once and cut deep when you are looking to take costs out of the business. And unfortunately, a lot of those that cost is in people go as deep as you can. You know, if you say you need to cut 20 % of the cost, go to 25%. Push it because you never want to do it again, right?

You got to do it once. It's a very traumatic thing for the organism, for the body. It's a shock to the system. And then you got to focus on building a team out of the people who are left afterwards. And the worst thing you can do is come back is you didn't go far enough. Maybe you only went 5%. You said, let's hope we'll dig our way out of this hole. Let's hope revenue turns and it doesn't. And then 30 days later, you have to have another cut. 30 days later, you have to have another cut.

Michael:
Bleeds out morale.

Drew:
It does. Like you can't build a team. You can't build morale. You can't build trust if you're in the scenario of like constantly cutting head count.

Michael:

Yep. There's one other angle that you touched on in your post Drew, which is also something I think a lot of businesses don't do particularly well when it comes to cutting. And that is letting people go far too long when you sort of know that this isn't a good fit. And for whatever reason, it's not working out with an individual and just thinking, we're gonna turn it around, we're gonna turn it around, we're gonna give him, you know, give this person three more months, six more months, a year. I know, and I think you agree, and I've heard this from a lot of other founders, it's very, very rare when you make that decision to then come back after the fact and go, man, that was a bad decision. More often it's, I wish I had done that earlier. I'm not saying this to be callous. It's good for both parties. Like if it's not a good fit, move on for the sake of both of you. This is a business, you have to do what's in the best interest of the business, but you also don't want to string someone along who's clearly not meshing well with the organization and not delivering great performance. Help them find something else that's a better fit for them. Do it with grace, but make a clean break and don't let it fester for months on end.

Drew:
I feel like we can do a whole series of podcasts on people management or team leadership and letting people go and when to make the call, but... you're absolutely right. I think it's like when you first start asking that question is usually enough to go on and we've never regretted it's never been the wrong call.

Michael:
Yep. Number 12 is one of the frameworks that I think you're most well known for Drew. It's the three multipliers. What are the three multipliers?

Drew:
It's kind of sad that I'm known for this, but the three multipliers are three ways to grow revenue for an ecommerce brand purchase frequency. In other words, the average number of purchases per customer.

Number two is AOV, the average size of each of those purchases. And number three is the total number of customers. And I think most brands blindly go after number three, let's go acquire more customers to grow the top line. When in fact, there's lower hanging fruit on the other two, improving purchase frequency or improving AOV. You know, it's sort of a mental exercise, but the key of sort of breaking your revenue into those three buckets is that you realize you don't have to double any one of them in order to double the business, the results multiply. So if you only increase purchase frequency 30%, if you're able to increase AOV 30 % and the total number of customers 30%, you've more than doubled the business, right? Because you multiply them out.

Michael:
So we've done the math for you. It pencils out. Done the math.

Drew:

Take it for me. It's like 220. Yeah. So that's it. Break your revenue into the three multipliers. And I think we get into that in some of these other turnaround tips.

Michael:

And we also talk about maximize, then multiply. One piece of the framework is increasing your AOV. So next tip is how do you do that? What are some ways to increase your AOV, Drew?

Drew:
Yeah, this is where like bundling comes in and just kind of looking at your products, putting products together. This is also where your upselling and cross selling kicks in. Post purchase, you can really get granular with a lot of different Shopify apps these days, but you know, we've all had the experience you go, you check out with something and then you're hit with a one time offer for another product. All these things are just ways to increase your overall AOV. If you don't sell any other products, sell someone else's product. Put an affiliate link in there after purchase or come up with a premium service upsell, which is where you might get on the phone with a customer and do some advisory work for another rate. So a lot of ways to juice your AOV, but just do all of them. Try some of them, you know, in order to get that AOV number up.

Michael:
14 is increasing that frequency lever as one of the three multipliers and related to focusing on moving those one time buyers to two, it's using a bounce back campaign. So, you know, you've used some really effective bounce back campaigns. What's the bounce back?

Drew:
Bounce backs are great. I mean, they come from old school retail where you'd go into a store, you know, you go into a J.Crew or something to buy a pair of pants and at checkout, you check out and often on your receipt, they give you a coupon for another department. You’re like, OK you know, men's shoes or our swimwear is on sale. And they know that you came into the store to buy pants. You may not know that there's a deal going on in swimmer. You may not even know the swimmer category exists. So it's called a bounce back coupon. You can do the same thing online. I mean, we all assume that every customer is everywhere on our site, surfing every category and knows our complete offering. They never do. Right. They're directed. They come in through a product page.

They want one thing or one category, they wanna buy it, and they may not know you sell a zillion other things. So at checkout, after checkout, triggering that bounce back campaign, it can be in the order receipt, it can be via postcard that goes out immediately after order. Just with a little coupon or a little incentive to check out another category is a big win.

Michael:
All right, I think this is the perfect one to end on for this part one of our 30 tips.

The other framework that you're probably most well known for is whales versus minnows. So hunting whales is something that has, it's a mental framework and it's a strategy that really has changed a lot of people's thinking about how they operate their business and has a real outsized impact on how they operate and how profitable their business is. Tell us about whales versus minnows, Drew.

Drew:
Yeah, I mean, we all assume that a customer is a customer or a customer. They're all the same, but they aren't. Customers are different. They spend more, they have different lifetime values. We've seen this data from Bonobos where, you know, maybe it was 2010 or something, they looked at all their customers. There were customers that came in and bought once and they bought from one category like swimwear and they spent 50 bucks total over the year. And then you had customers that came in and ordered six times, they bought suits and they spent something like $10 ,000. And so, you know, you've got minnow customers and whale customers. So that's a key insight.

First, that all customers are not created equal. You've got minnows and you've got whales. But it's helpful when you start thinking in terms of growing your business, hey, I want to double this year. What you realize pretty quickly is that the cost of acquisition of a minnow is often the same as the cost of acquisition of a whale, which means that if you wanted to spend the same amount of money, you want to double, wouldn't you spend that budget on acquiring whales versus minnows? Because you require fewer whales to grow than you do minnows. So it's sort of eye opening, realizing that growth can be a lot easier if I focus on acquiring these whale customers.

And so the next question is, how do you do that? Well, you start to look at your channels and you realize across channels that each channel is different in terms of how many whales versus minnows it produces. We're talking to somebody the other day about Google Shopping and they were telling us that like, yeah, minnows come in through Google shopping. You know, they shop on price. They buy the lowest price offering on Google shopping. So lowest lifetime value, a lot of your minnow customers, whereas maybe your whales come in through brick and mortar, or maybe they come in through direct mail, which we also see is like a lot of the customers acquired through direct mail tend to be these higher lifetime value whales. And so just by shifting your budget to higher producing channels, you're going to grow quicker. So that's just the general idea. Even within a channel, if you compare Meta AD A to Meta AD B, you often see a difference in what kind of customers are produced.

Michael:
I love that. I think that's the perfect one to pause on for today, but that's one of the most fundamentally strategic and sort of mental shifting recommendations that we have here. So excited to hear the next part too.

Drew:
Yeah, we'll go over the next 15 next time we talk. And you're off to a D2C conference in LA, so have a good afternoon and good drive up there and we'll record the next one soon.

Michael:
Awesome. See you guys soon.

Announcer:

Thanks for listening to Nerd Marketing. Don't forget to check out all of the other great episodes, some of which include interviews with e-commerce marketing masters working with Mr. Beast and Joe Rogan, plus Drew and Michael's experiences in private equity, advice from VC firms on what they look for in investments, and so much more. Like, share, subscribe, and tune in every week for a new episode.

‍