E121: How Ezra Firestone Spends Money Growing His BusinessesFebruary 15, 2018 in Ecom-Crew-Podcast
“If you think about the money as the fuel that drives the car, if the money is getting stopped up before it gets to the vehicle–meaning it’s not being organized properly–then you never get the vehicle to move forward.” – Ezra Firestone
Ezra Firestone is in the house!
That’s right, Ezra Firestone of Smart Marketer is our guest for today’s episode. Labeled as the first and leading ecommerce influencer in the world, Ezra runs multiple seven- and eight-figure businesses and has been working in the industry for over a decade. He is a very busy man and I’m definitely stoked to finally be able to talk to him on the podcast!
Today’s topic goes to the very core of any business–money. When you run a business, it’s only natural to try to lower your expenses as much as possible in order to maximize profits. That means trying to get the lowest cost of goods, lowering advertising spend, and crimping on employee salary. But if you’re trying to grow your business and want it to last for more than a couple of years, is that really the right thing to do?
Ezra shares his exact formula on how much he spends on all areas of his businesses. His goal is to grow his businesses aggressively, and that means he tends to spend a lot more on areas where most entrepreneurs tend to cut corners. For example, other people go ballistic when he mentions he spends 10-20% of his top-line on employees alone.
In a little bit more detail, here’s what we discussed:
- Who Ezra Firestone is (for those who’ve been living under a rock)
- How much to sell items for
- The advantages of selling higher-cost, premium items
- How much to spend on Cost of Goods Sold
- Why he spends 10-20% of his top-line revenue on his employees
- How much to reinvest back into direct growth marketing and how to allocate the money for ads
- Metrics for valuation
- What blended Cost per Acquisition is
- Lifetime customer value, repeat order rate, cross-sells and upsells
- When to take cash for equity and when not to
This episode is longer than what we usually do, but I didn’t even notice it because I enjoyed talking to Ezra so much. I even compared my numbers to his and will apply many of his principles on my business. He’s a very busy guy, but he was kind enough to spend more time on the podcast than most guests usually do!
If you want to learn more about Ezra and check out what he’s up to, just go to smartmarketer.com.
Thanks for listening to this episode! Until the next one, happy selling.
Full Audio Transcript
Mike: This is Mike, and welcome to episode number 121 of the EcomCrew Podcast. And today guys I have a very special treat. I have no other than Ezra Firestone on the podcast with me. He is someone that I finally got to meet at Ecommerce Fuel Live in 2016 when I spoke there and you being the way he is running the event took us all out to dinner the people that spoke there.
Andrew, being the way that he is running the event, took us all to dinner, the people that spoke at the event. And I got to meet Ezra and a couple of the other keynote speakers. And I’ve known Ezra as a person in the audience for a while. I’ve seen him talking at different events. I’ve read his blog, but I never got to meet him on a more personal level. And he is just a super genuine guy, lots of energy, got a lot of really big ambitions.
And behind the scenes he’s just as genuine as he is on stage, really enjoyed that dinner with him, and enjoyed getting him on the podcast. And getting on the podcast took a while. He’s a busy guy and I’m really excited to finally get him on here. And I didn’t really know what I was going to talk to him about. I thought he might have something to promote or whatever, and he didn’t.
We started talking right before recording this and he’s like, yeah let’s talk about money and e-commerce. And I made sure to talk about some of the products that I do use of his like Zipify Pages, which is just an awesome software. But the crux of this episode is to talk about money and how you should — from a proportion standpoint how much money you should be spending on employees, and how much on cost of goods, and how much on advertising and things of that nature. Very interesting episode.
The thing that I thought was awesome about it is I haven’t heard Ezra talk about this stuff before. So it was really cool having this conversation with him. I really enjoyed it, and I think you guys will too. We’ll get started right after the intro, talk to guys then.
Guest Intro: If you think about the money as the fuel that drives the car, if the money is getting stopped up before it gets to the vehicle, meaning it’s not being organized properly, then you never get the vehicle to move forward. So I see a lot of business owners who grow from under a million up to like close to five million range, people get a lot of trouble with not having proper bookkeeping practices in place, and estimated taxes practices in place.
Mike: Ezra, welcome to the EcomCrew Podcast my friend.
Ezra: EcomCrew ladies and gentlemen with Jackness.
Mike: Ezra Firestone.
Ezra: Michael Jackness out there just jacking things out in the best way possible.
Mike: That’s not what they say around the office though.
Ezra: Jacking things up like guys who lift a bunch of weights are jacked. You jack up a car and you’re jacked, that kind of like positive jacked, because you know jacked also has a negative sort of connotation in relationships, like oh you jacked that thing up means like you messed it up. So you could look at it two ways.
Mike: Yeah so like publicly I’m jacking things up in the right way and in the office we all know that we’re jacking things up and just chaos behind the scenes.
Ezra: Oh man I’ve been there.
Mike: So I always like joke with some people that come on the podcast. You’re like the guy that doesn’t need any introduction. But just in case people have been high under a rock, let’s tell people just a little bit about Ezra Firestone, what you’ve been up to, what you do.
Mike: And we have a fun topic for today we’re going to be getting into, but let’s do a quick intro.
Ezra: I was recently labeled the first e-commerce influencer, which I don’t know whether or not that is accurate, but I do know that I’m definitely one of the first. And I certainly got real popular before a lot of folks. I have one of the bigger followings of people. And so basically what I do is I run e-commerce businesses. I have 70 employees across four different brands. Two of them are e-commerce specific brands. That’s where like 85% of the revenue in my companies comes from.
We did 25.1 million in 2017 across our four brands, 21 million of that was e-commerce, and four million of it was selling information and software products to e-commerce business owners. So we also sort of document what’s working for us and educate people about what we’re doing in our e-commerce businesses. So it’s kind of our business model. It’s very permaculture for those of you that are interested in farming like everything supports everything else.
We innovate in the direction of e-commerce because we’re passionate about it and I’ve been doing e-commerce fulltime since 05. So I have been in it a really long time. I’ve seen a lot in that time. I sort of grew up in this industry, and I’m in love with this industry, and it’s what I do, it’s what I enjoy. And I’ve been fortunate enough to have people actually care to listen to what I have to say about it as well, which is kind of fun. So that’s a short little intro.
Mike: Yeah and I mean I remember when I was first getting started because I’ve been doing my own thing since 2005 as well, but it was in online affiliate marketing. And when I got in e-commerce and started reading stuff, your name was everywhere. And I think that there’s lots of places out there that have information. Obviously we put that out on our own blog as well, but some people are just like way better at communicating it. And I just always enjoyed your style. When you’re speaking or when I read stuff that’s out there, it’s got a hook to it, right, it kind of sucks you in, and that’s how they can be taught.
Ezra: That was a — dude here’s what I think. I think that conversion is communication. I think the better that you get at communicating your value proposition, the better you will convert in every area of your business. And one of the things that I’ve studied throughout my whole life is the art of communication, not from a persuasion and like sleazy like perspective of like I’m trying to like run game on someone and get them like, but from like legitimately what is it that I have to communicate and what’s going to be the most effective way of communicating that from the lens of like how do I add value and engage someone in a conversation or engage someone in some content and not just try to like sell them stuff.
Mike: Yeah definitely. Cool man, so let’s hop right into today’s topic. We were actually talking right before we hit the record button, it’s like what do you want to talk about? I don’t know, what do you want to talk about? And I said but you have some questions, and just got to go back and forth. And the cool thing is like both of us are so knee deep into e-commerce like day in and day out that we don’t probably need a whole lot of prep to do these types of things. And you came up with the first topic you had kind of suggested I loved.
And I was like let’s stop right there, let’s do that one because we’re in the same planning boat right now. It’s the beginning of 2018. You’re kind of planning out your year and everyone has their own I don’t know like thought process on how much money they should be spending on employees or advertising or infrastructure or whatever kind it might be. So basically the main topic here is money, like how much money should you be spending in your business.
Ezra: And I see most people just to start this conversation, I am very opinionated on this particular topic by the way. So just prefacing you listener that like I believe firmly in this. This has been my experience and it is really panned out well for me to frame money the way that we’re going to frame it in this podcast with relationships like where we allocate what for what department of the business.
And the first thing I want to say is man do I ever see a lot of business owners getting in trouble by not managing their money properly. If you think about the money as the fuel that drives the car, if the money is getting stopped up before it gets to the vehicle meaning it’s not being organized properly, then you never get the vehicle to move forward. So a lot of people aren’t doing monthly reconciliation of their books.
So they don’t see, at the 10th of the month they don’t know what their profit and loss was from the month before, what their cost of goods was, how much they spent on advertising, you know what I mean? They’re not doing quarterly reconciliation where they’re paying their quarterly estimates. So I see a lot of business owners who grow, specifically once you go from sort of under a million up to like close to five million range, people get a lot of trouble with not having proper bookkeeping practices in place, and estimated taxes practice is in place. It’s like a real, real common issue for people who make that growth jump.
Mike: Yeah and I can wholeheartedly admit that I was the same way. I mean like I said I got started back in like 2005. And this is now going to be our second business that we’ve taken eight figures, it’ll be our third or fourth that we’ve taken a seven. And I don’t know what it is about young entrepreneurs, at least when I first got started, accounting was like the least of my worries. It was just…
Ezra: Yeah, where you’re so focused on marketing and you don’t realize that a dollar that you make is only fifty cents because half of it belongs to the government. And it means like hard to wrap your head around that, you know what I mean?
Mike: Yeah definitely. I remember the first time I went to an accountant, at the start of my first business. I mean we were successful like right out the gate. And he brought up this concept of like you just said estimated tax payments, and I literally had no idea what the hell he was talking about.
Ezra: Yeah I mean I think it’s a tough thing to confront. But by the way it’s like one of those things where mystery causes fear and fear causes anxiety, and anxiety leads to paralysis. So you can’t be a mystery. The best thing you can do is to invest in the $3,000 a month that’s going to cost you to get a real solid bookkeeper, and have them really on top of it because then at least you know the situation really well.
And we’re going to go into how I think you can have your money be most effective to you when it comes to your e-commerce business based on my view of running an e-commerce business. Which is much like yours Mike which is we pay for advertising, we buy visibility, we amplify our businesses via a paid medium. And I think if you’re doing that, you really got to understand your numbers such as your cost of goods sold.
So one of the things that I’ve really been leaning towards, and I’m about to launch a new brand. I’ve been planning it for the last three or four months. We just started doing some product research, I’m done with the manufacturer, and we’re moving it forward in the direction of launching a new brand.
And I firmly believe that if you’re not a premium product, meaning like if your average order value is let’s say under 50 bucks, you need to buy for one and sell for four at a minimum. And ideally you buy for one and sell for five, meaning you buy for five and sell for 25. You buy for five and sell for 20, you buy for ten and you sell for 40 at a minimum to give you the kind of profit per order that haves you have money to pay for salary, to pay for advertising etc.
And I think as you move more towards the premium side of things, you can obviously buy for one and sell for three, then you could buy for 50 and sell for 160 kind of thing. It goes down as you move more premium, but like for most folks who are not selling a premium product, like boy if you’re not buying for one and selling for five, you’re going to have a hard time making a direct response business work in today’s environment.
Mike: Yeah, I couldn’t agree more. And this has been kind of a hard lesson that we’ve learned along the way, because I equate everything to online poker affiliate marketing when I was doing that. And when we were selling treadmills for 2,000 bucks and making 200 bucks off of it, I equated that to like the same thing as a poker CPM, like oh man, I’ll make the same money on per transaction as I did back then.
That’s just like the biggest probably like crap I convinced myself of, because like low margin does not work. I mean you’re going to end up spending it on ads and employees and infrastructure and all those things. So I mean we moved to two to one the first, and then three to one. Now we don’t do anything that isn’t four to one, and you’re even saying try to be at five to one.
Ezra: Well let me explain to you why because like if you look at BOOM by Cindy Joseph, by the way for those of you that are interested in my most successful brand, it’s a brand called BOOM by Cindy Joseph. It’s a skin care and cosmetics brand. And we only have one product that we can run direct response for. So 60% of our sales come from our BOOM Sticks, which are actually our stick product which we have the one for five margin on.
And then all of our skin care, the rest of our SKUs, the other twelve SKUs, we sell on the back end to people who came in and bought one of our sticks, and we only are buy for one sell for three on those. So they don’t have the kind of margin where we can really run direct response from and traffic. So we’re using those as cross sales and up sales. And it’s working really well; it’s like 40% or 30%, 40% of our business.
But we’re launching — one of my goals by the way and I think everyone should move in this direction is if you look at — I’m looking to how to go from 20 million to 100 million. And what I see across the board, and I know a lot of people who’ve have done this. I know most guys; I know a lot of people who’ve grown big brands.
And across the board, one of the things they’ve done is they’ve increased their product catalog by a significant — significantly they’ve increased the number of products they offer, because once you have a lot of buyers coming in, if they like you and they trust you and they know you and you’re following up with good content engaging them, you can offer them things that are in the same realm as the product that you sold them initially and they’ll buy it from you.
So as we’re rolling out new products, like we just finished one, we’re doing a big launch on Valentine’s Day, a really fun little anticipation building launch and the whole thing which we’ll detail on our blog, but that’s going to be buy for one sell for five. Every product we roll out from now on is buy for one sell for five, because our price point $30 to $50 price point, we need that margin in order to be able to advertise that on the front end. And I like to as much as possible build front end advertising sales processes for every new product not just having them being products that are only relevant to past buyers, subscribers and fans.
Mike: Yeah, because I mean the bottom line is that like you can’t get the cost per acquisition of a new customer down below a certain number. There just isn’t…
Ezra: Never only going up, it’s only going up.
Ezra: And so this is another thing by the way that I am now in the same conversation of like what you need your cogs to be which for me is 20% of top line. Your cogs should be 20% of top line basically. Do ten million, you shouldn’t spend more than two million cogs cost of goods sold if at all possible. And by the way I very heavily advocate for super high quality, well made products. I only sell really, really good stuff.
But what I was saying was that I’m now leaning more towards the premium end of every market I enter, because my experience has been that it’s just as hard to get a sale for something cheap, I mean unless it’s a real impulse buy kind of like 20 bucks and under product as it is a given sale for a premium product. I am now leaning more towards premium ends of the different markets that I go into.
Mike: Yeah and we’re the same way. I mean we focus on high quality stuff. We want — I mean our goal was to have nothing but five star products. That’s probably not completely realistic, so we actually have the goal at four and a half stars which is a tough bar in itself to have. And like you said if you can’t have a product that people are going to be happy with and tell other people about and you’re not proud of yourself, then you’re probably going about the wrong way.
Ezra: So I’ve got a little bit of a change of subject as we move on to like where you should be allocating your money. So that’s my viewpoint on cost of goods. It sounds like we’re good which is great.
Mike: Yeah. I have just one more quick follow up question. I’m just curious your thought on this, like what do people do that aren’t in this great position? Let’s say they have a store selling — they’re buying and reselling something, or they’re just getting into making their own products. And some industries the margin just isn’t there for that. I mean is it ditch that niche and move on to something else, or what do you do?
Ezra: For sure. I hear this a lot, like oh you can sit on your high horse talking about this, but it’s like dude I started drop shipping, but not like in today’s drop shipping environment. I started with no money, completely broke working a 60 hour a week job, living in a 400 square foot apartment, like you know what I mean, the whole mindset. I really can relate to the experience of the do it yourself entrepreneur who’s moonlighting their business. I fully know what that experience is like.
And drop shipping back in the day was not Alibaba, AliExpress drop ship from China. It was find a supplier in America who will give you a list of all their products on CD that you then upload, and you know what I mean. It’s a whole different thing. But here’s what I think you should do is whatever your moneymaking system is, use that money that you’re making to invest in a white label brand, or white label product that fits your current store or your current product line that you can get those margins on.
I mean this is why we saw the supplement industry take off so much is because they buy a bottle of pills for three dollars and they sell it for 30 or 40, right? So their margins are such that they can really be aggressive with their advertising and spend more, and that’s why that is really the first kind of e-commerce industry, and also everyone just wants to take a pill and solve their problems. I mean that’s a cultural thing that we have going on.
But the point is that that industry has really great margins, and it’s easy to white label those things. And so it took off as an industry for do it yourself e-commerce entrepreneurs to be a part of. And I think that if you’re making money and you’ve got some product or brand or dropships in the area, or whatever that’s generating revenue, then save some of that up and invest it in white labeling a product where you can get this kind of margin because it just makes your life so much easier.
Mike: Yeah I think that just so everybody knows, we did not talk about this ahead of time. I think that’s incredibly awesome advice. So that’s exactly like the path that we’re on, because we’re making money, we’re doing well with what we’re doing at these lower margins. But I’ve also seen the light and we took that money and we’re investing it into a product for our baby brand that has the four to five to one margins, and doing exactly that. We won’t throw away the rest of our business because it’s still good business, but moving that way…
Ezra: And you’re kind of – what’s beautiful about what you have is you’ve got a brand where you could just be like, hey, past customers check out this new product. Boom it’s your new white label product that’s still from your current brand, but you just have better margin on.
Ezra: Yeah that’s what we’re doing with our new products. I mean all of our products we’re manufacturing, but we’re just making sure that we have the kind of margins that allows us, because here’s the other thing about good margins is it gives you the opportunity to have better customer support, better creative assets that you can invest in like sales videos and sales copy and things like that, manufacturer videos. You then have profit to actually make your brand better across the board. It’s better for your customers actually.
Mike: Yeah I agree, and it also allows you to make mistakes.
Ezra: Totally. Here is what is controversial.
Mike: Cool, let’s move on to the next [overlapping 00:18:48]
Ezra: What was that?
Mike: I was just saying move on to the next one. Go ahead and finish your…
Ezra: Okay so the next one is very controversial. People really disagree with me on this one. I get a lot of flak from people in our industry about this particular viewpoint as it relates to money and as it relates to where you should be allocating your money in your e-commerce business. I think that the minimum that you want for your salary overhead is one to five, which is such a crazy viewpoint, because everybody is always like pay people as little as you can, don’t invest a lot in your team, really minimize the amount you’re spending on labor.
But I’m like dude, you should be reinvesting. I don’t say it like that obviously that is to you. I would speak in a much more professional [overlapping 00:19:32] on a podcast. But my point is that I very heavily invest in my team. I pay them well, I make sure they have great benefits; I make sure their work environment is really good. I give them access to education. I give them courses that I want them to go through.
Because what people want is a feeling of purpose more than they want money. And I’m like listen; within 18 months I want you to be the best social media manager in the world. Here’s how we’re going to get you there, we’re going to check in once a quarter, you’re going to go through these courses, you’re going to go to this event. I really invest in my team because ultimately like I don’t want to build a business where I am the guy doing everything. I want to navigate rather than drive.
And for me that’s been – I now have 70 people on my teams. I’ve really learned how to do this well, and it’s been the best thing I’ve ever done. And I think framing that, what you’re doing is buying help for your brand. You’re not spending money on salary, you’re buying help, and help gets better over time. The more you invest in the help, the better it gets. The first month that you buy 40 hours a week, it’s not worth much. But by the fifth month, it’s worth way more.
And so I would recommend that your cost of salary be 10 to 20% of your top line. So if you make ten million, I’d be spending a million on salary, maybe two million particularly in Trump’s America, because I don’t know if you saw this tax bill. But I mean this is not meant to be political or to give a — I’m not like big on making a political statement about this is good or bad. But there is a favorable thing and this is the description in this new tax bill.
One of the things that is being incentivized is that of hiring a team. You can write off like 50% of your salary or 20% of your profit, one of those two on your tax returns. So you’re actually being incentivized to hire people in 2018 if you’re an American. But this is real controversial in our industry because most people you talk to are really trying to minimize salary. And I’m actually trying to maximize salary because I’m playing a long term game.
I’m trying to build the team because here’s the other thing Mike, when I sell my company; you know what doesn’t go with it?
Mike: Your team.
Ezra: The team. The team is about – the A team is the valuable part, right? The team that knows how to run product launches, do product research, run Facebook ads, run e-mail campaigns, do social media. When you buy my company you get the brand, you get all the digital assets, the e-mail list, all that kind of stuff, but you don’t get my direct response marketing team. And they’re the asset that I’ve been building up over time, the people who know how to do project management and YouTube and all that stuff.
That skill set that just comes with me as I go on to my next brand. It doesn’t go with the brand. And you’re not usually going to find a buyer who even wants your team.
Mike: Yeah, a lot of times they’ll just fire them off, which is pretty awful.
Ezra: So look at where we are now in Ezra’s ideal e-commerce business. Ten million in revenue, we spent two million on cost of goods and we spent two million on salary. Now some people might go three million on cost of goods, one million on salary, whatever. Between salary and cogs, we’re at 40% of our total top line. So now comes — so by the way where do you fall on salary?
Mike: I think I’m a crazy person. Well I actually want to look it up, because on the fly here, so we’re at six percent. I don’t think you’re crazy.
Ezra: Six percent?
Ezra: You’re running a lean machine.
Mike: So a couple things on that. I mean this is a great conversation. So first of all I don’t know if you know Bill D’Allessandro is.
Ezra: Oh yeah. He’s real smart; he’s on all the Andrew Youderian podcasts.
Mike: Yeah he toured here a lot, and we just talked again when he was at ECF and he came down and spent a couple days. And he said the same thing as you do, like why are you making so much money man? You got to make less money; you got to put it into the future of your business. And one of the things that he was talking about is actually pretty funny. So we are actually looking to hire smart people this year.
Ezra: I would bump that to twelve without even blinking an eye. I would not even look twice. I’d bring on a project manager, I’d bring up a really solid direct response advertiser, I’d hire just a killer copywriter, like I would just go all in. And by the way, here’s the interesting thing about me and my salary is as you well know because you know my story, I just hired all my cousins and sisters and brothers and their friends.
I mean I just hired all my friends’ family; because I didn’t have any money, and I was getting people that I could train, bring them up. But then over the last two years since we’ve been like I’ve had a lot of money and my business has been going really well, I’ve started hiring A players, like the best in the industry.
And if you want to get the best project manager in the industry, it’s going to be $150,000 salary ish or more. You want the best copy writer in the industry; you’re looking at six figures. So for the real, real top of the industry people, you’re looking at six figure salaries. And once you have a business like yours that’s making real money, you can bring in top level people and it just really makes a difference.
Mike: Yeah I agree, and the only thing that will help us get there is just having some of these higher margin products. We haven’t had the four to one or five to one type stuff to really be able to justify the salaries. But I think as we’ve been modifying our SKU list and launching new products in 2017 and in the stuff we have on the map for 2018, the margins are there. So I think that this stuff will catch up with that over the next year.
Ezra: Yeah for sure, that makes a lot of sense with margin, you got to keep that lower. So now let’s get into — so that’s cost of goods and salary. We’re ten million in revenue; we spent four million, so we got six million left over. Now here’s something that people try to battle me on quite a lot, but check this out. When I look at how much of your top line you should reinvest back into paid amplification i.e. direct growth marketing including the creation of the creative assets for your brand i.e. your product videos and things like that right, so this is inclusive of the creative assets that you will be amplifying via paid media.
So just to give people who are maybe a little less expert level e-commerce, what we do is we invest in creating high quality creative assets such as pre-sell engagement articles, story based product videos, things like that, and then we amplify those using paid advertising as the means to engage people about our products and get them over our product pages and all that kind of stuff. So I think that the minimum you should spend on that endeavor is 15% of top line and what we spend is 30% of top line, which is a massive number.
However, here’s what people don’t take into account. They’re like, well if I spend 30% of top line i.e. I spend three million dollars of my ten million on paid advertising and creative assets and whatnot, so 2.7 million on paid advertising and 300 grand on the creation of the assets, it’s going to eat in all my margins. But here’s where I ask you the question, are you intending to try to make as much profit as you can today, or do you want a business for five to ten years. Because what people don’t take into account is that every year that you do this the bigger your retargeting audiences get, the bigger your customer audiences get, the bigger your e-mail newsletter gets, the more organic halo traffic you have.
Fifty percent of our business came from what I call organic halo, meaning people on our email list, the people who knew about us who came back, because we invest 30% of top line and paid amplification year over year, which continues to grow and obviously we’re still profitable doing that, and I’ll give you the rest of our numbers. But it’s a very aggressive number, and a lot of people aren’t willing to do it. I think at a minimum 15% of top line should be invested in growth marketing.
Mike: So I’m looking, I’m comparing notes with you. We’re at nine last year.
Ezra: You got to double that. But you got lower margins.
Mike: We have lower margins.
Ezra: Imagine with the one to five.
Mike: And I think that for our margins we’ve — I think that we’re eye to eye here. I think that if you kind of compare apples to apples when you like I don’t know what — not compare apples to apples, but adjust for margins, like adjusting for inflation or whatever it might be, I think that we were pretty aggressive with those. And it’s something that I completely believe in as well. As you know I spoke at your event about list building. And this is something I’m just big into.
And the analogy I was thinking in my head as you were just saying that, at some point it becomes really tough to stop a tsunami, right? I mean you keep on building momentum and growth and people, and that becomes very difficult to stop. And I agree that we all started out looking for what are we doing today. We weren’t thinking five or ten years down the road, and we’re definitely aligned there. And I hope to be able to spend a higher percentage of this as we get better margin.
Ezra: Yeah it’s really been a big winner for us. And here’s the other thing about that, that people don’t understand is — so here’s what you do. You take that 30% number, which in our case from the example is three million, right? So we had ten million in revenue, we spent 20% on cost of goods. And let’s say we spent 30% on cost of goods and 10% on salaries, that’s more likely to be someone’s numbers, okay?
So we spent four million between cost of goods and salary. Now we spend 30% on marketing. So that’s three more millions. We are now at seven million of our total ten, right? Now check this out that we bought our products obviously, it could be at the cost of goods numbers. The way that people screw this up is they turn it off, turn it on, turn it off, turn it on, run a launch, turn. So what you have to do is of that 30%, you take 80% of it and you divide it up into a daily budget.
So for example in this case we have three million. Let’s just make it easy and let’s say 66% of that two million. You would divide that two million over three 365 days, and you would literally commit to spending X amount every day.
Mike: No matter what.
Ezra: Consistency, no matter what. And then that forces you to make your ads better, to optimize your ads, to optimize your imagery. It forces you into optimizing your ongoing ad process because you know you’re spending six grand today, you know what I mean, that kind of thing. Then you take the other 33%, in this case one million dollars of that three million, and you use it for launch events, product releases, holiday sales, that kind of thing.
Mike: Got you. Yeah it makes perfect sense.
Ezra: Daily versus yearly spend.
Mike: Yeah we’ve been a little bit sloppy on that part. But yeah I think that’s a brilliant and really smart way to approach it. Because I mean as we grow up in our business so we have to have a bit more of a budget and a strategy, and I think that that’s a really smart way to approach it.
Ezra: And it also — this is part of the thing about looking at your numbers on a monthly basis is you’re like, okay, sweet like last month we spent this much, we did this much in revenue, we bought this much, we put this much into product for next month, and we know that next month we’re going to spend X amount on ads. You have real numbers at that point because you have a real system and strategy.
And the way that you get these numbers is based off your last year’s revenue, your last — you do this calculation, add the ten million in 2017, 2018 three million is going to ads, this much going to cost of goods like you just do that calculation. Obviously you can adjust as you need. And if you don’t have historic numbers, then you just do your best.
Mike: Yeah that makes sense. We’re in that planning phase right now. We’ve actually been going through Traction, I don’t know if you ever heard that book, and working on ten year, three year, one year, quarterly goals and stuff like that. Definitely something I throw into the conversation out a plan and forecast.
Ezra: Yeah, it’s super fun especially when you get a project manager who’s doing all the stuff, it’s like really great.
Mike: We have that now which is great. That stuff has been one good move for us. We definitely have that.
Ezra: Did you go through my course on that or no?
Mike: I haven’t no. I didn’t actually even realize you had a course on.
Ezra: Such a good course man, best course we’ve ever done, I think one of them on how we run project management for our brand.
Mike: You will find real quick so they can go get that.
Ezra: If you go to smartmarketer.com, and you click on courses in the top menu button of my website, when you get to the courses page you’re going to see one called Smart Project Management where you can then check it out.
Mike: Perfect and we’ll throw a link to that on the show notes just so people can get to if they need to.
Ezra: Yeah for sure.
Ezra: So let’s keep going on the numbers, okay? So we had ten million, we spent seven million so far between cost of goods, salary and marketing, right? So we have three million left over. So my experience of that three million that’s left over is 10% of it it’s going to go to just random who knows what, computers and office supplies and travel, and like just who knows, just the whole nine, right? And then the other 20%, you’re going to spend on buying inventory for the next couple of months and paying yourself, and putting aside for taxes and all that kind of thing. So that’s kind of generally how the numbers look.
Sometimes that last 30% is divvied up in a different way. But by the way by spending 30% on marketing, you end up paying less taxes because you’re reinvesting more which is good because then you have more capital to reinvest in your business now rather than more profit to pay taxes on which then you lose that working capital to grow your business.
Mike: Yeah definitely.
Ezra: So basically that’s my breakdown of how our numbers look, and we’re real proud of that and we worked hard for that to get those numbers. I also have some metrics for valuation that I think people need to be looking at, and some other thoughts on money if you’re interested.
Mike: I am. I want to be respectful of your time but if you’re up for it let’s do it.
Ezra: Yeah, so just a couple of things is your blended CPA which is your marketing cost divided by your total customers. So that is the real number. It’s not your advertising CPA, right? Most people think that their cost per requisition is like I spend $80 to buy a customer on Facebook. But this is not what someone who values your company looks at. They look at your blended CPA because your blended CPA takes into account the power of your machine, meaning your email list and your organic traffic and the people who know about you.
So for example if you look at Boom oaky, Boom by Cindy Joseph to give you our real numbers, you ready for this?
Ezra: Our total Facebook ad costs for this twelve month period, this is an old numbers, it isn’t this last year, it’s pretty good stuff but to give you an example. So our total ad costs between Facebook and Google were $566,318 million. Our total customers were one 161,087. So if you divide five million sixty six thousand by one hundred sixty one thousand, you get thirty one dollars and forty five cents. That’s our blended CPA, that’s the CPA that you want to know.
Yeah your advertising CPA is great, but your blended CPA is what gives you the health of your brand. And that’s what you want to optimize to be better. More repeat customers gives you a higher blended CPA, things like that. So you’re blended CPA number, total marketing cost divided by total customers for a trailing twelve month period.
Mike: Yeah, I think it makes perfect sense, because I mean the attribution from Facebook or whatever is 100% accurate. You have like you said there’s a halo effect, you get people that come in through a Facebook ad but they end up buying through an e-mail. I mean so this way you’re getting a much more realistic picture.
Ezra: For sure. And then another number that you’re going to want to optimize, and I’ll give you some ideas about it is lifetime customer value. But here’s the interesting thing about lifetime customer value is people conflate this with revenue rather than profits, let me explain. So if I calculate that my revenue in a twelve month period is roughly $18 million which is about what it was in 2016, so that’s my revenue, right? Now I multiply that by my average gross margin. So let’s say in this case it’s 50%, so basically profit after cost of goods, right? That’s eight million left, right, or not –
Mike: Nine million.
Ezra: Nine million okay. So then you divide that by the total number of customers, 161,087 which gives you $54 as a lifetime customer value. So LTV means profits not revenue. So get rid of your cogs out of your cogs and you’re like just take your gross margin and then divide that by number of customers not your top line revenue.
Mike: Yeah and then do you look at this modified like LTV number to your cost acquisition and compare those two, is that how you guys do it?
Ezra: Yeah that’s what you want to be doing, get those and work on getting that LTV up through win backs off the kind of things you already teach.
Mike: Yeah very cool.
Ezra: So let’s look at a few more numbers. Just the numbers that you want to be tracking, look at them once a quarter and see if you can improve them. Obviously conversion rate that’s total transactions by total visits, everyone knows that one. Your repeat customer rate, so the way to get that Jackness which people are real confused about their repeat order rate, but I want to give you a real simple analysis for it is your total number of customers divided by your total number of orders.
So for example, I had 226,000 — maybe it’s at around 226,000 orders, and 141,000 customers, order frequency 1.6. So it’s total orders versus total customers, right? So that’s how you get the order frequency or essentially an easy way to get your repeat rate. And then what you’ve got to do is work on getting that number bigger over time. So to make that simple for people, it’s basically let’s say you have 100 customers, but you get 200 orders, that means each person on average order twice, then your order frequency is two which is insane, really good, right?
Mike: Yeah 1.6 is good.
Ezra: Yeah 1.6 is crazy, but we work super hard on that number because that’s crazy for valuation. I’m giving you numbers to work on because here’s the interesting thing is like at some point you might want to sell a percentage of your business, you might want to sell your business, or you want to be like every six months or so look at these numbers and see if you can improve them a little bit, because these are numbers that improve your valuation.
Mike: Yeah, I completely agree obviously. I mean people investing want to see a higher order frequency because it like lowers their risk and they know that the pent up intrinsic value of the business is worth way more than people are buying an average of one point zero one times.
Ezra: Yeah and that’s doing things like running launches to your email list and having automation sequences that cross sell and up sell, and doing win back campaigns, all the stuff that I’m sure you already teach Michael.
Mike: Yeah we talk a lot about them, and we get like 48% of our revenue through email. So a lot of that is win back. I had to go back and look at calculating things this exact way that you’re doing. I haven’t done it this way.
Ezra: Cool. Obviously things like average order value, new [inaudible 00:37:47] returning revenue just like letting people know the power of retentions, check this out. People who returned and bought again spent on average $187 versus one time customers, meaning total who spent 71. So basically returning visitors have like a triple value.
Mike: Yeah that’s where the money is at.
Ezra: Yeah it’s like you got to be working on that. And then there’s other numbers like your latencies, meaning your average time between your first and second purchase, like the shorter you can get the better. So that’s why we work really hard in the first 14 days to get a second purchase, because it just immediately improves all your numbers. So that’s the more of a cohort analysis kind of thing.
Mike: And are you – in that first 14 days you’re trying to sell more of the same, or up sell them across all the different products.
Ezra: Both. I mean mostly basically we do a post purchase, one quick up sell. That’s for more of the same in general and then like we’re doing cross sell sequences and up sell sequences via ads and emails with content interspersed.
Mike: And just another quick plug there, one click up sell that’s an app that you guys developed for under the Zipify apps, is it Zipify.com or what’s the…
Ezra: Yeah Zipify.com and it’s called One click up sell for Shopify and man it’s about to get so much better. It’s really great as it is now. I think we process about two million dollars a day through that app for all the different Shopify stores on it. We’re one of the biggest Shopify check out apps out there besides the recurring billing apps which are even bigger because there’s way more people who use recurring billing than who use up sells.
But as far as up sells go we’re definitely in the top three if not the number one. And we I think we process like $150 million in revenue through the app thus far. I’ll give you the actual numbers; hope that I’ll find them.
Mike: Cool. While you’re looking for that, I’ll give everybody a quick overview of why this is important. Ezra is talking about all these stats here, and I mean this one click up sell app helps you increase your average order value at the time of them actually placing that initial order. Or not even initial, it could be a repeat purchase or whatever. But you can tag a product and say, if someone buys this one product and they haven’t bought this other product after they’ve given the credit card information and they’ve paid on the thank you screen, there is a up sell page.
And so basically one click up sell hijacks your thank you page, and presents you with a thank you page that you customize. And you can say hey Mr. Customer, thank you for buying widget number one. Today only if you buy widget number two, we’ll give you 20% off of that, or you can just say, buy more of widget number one for 25% off right now, and click here to buy and they just click, and there is no more credit card information or other things to do
So the barrier to getting that sale is very low, and the barrier to getting your average order value up is also low, which is really important because you’ve already spent money to get that customer. You’re not going to alienate them by putting a message in front of them at that moment by offering them something else to buy at a discount or whatever it might be, and it works as Ezra is saying. And as he has this number now, he’s going to share how well it works, it’s pretty sick actually.
Ezra: So since we started, I think we started this app like processing like almost exactly a year ago maybe a few months before that, we’ve processed one hundred ninety one million one hundred fifty seven thousand seven hundred twenty four dollars and ninety six cents. And we’ve made Shopify store owners an additional fourteen million four hundred and ninety six thousand and six hundred and fifteen dollars. So basically on average a store who installs one click up sell immediately is 10% more profitable day one.
Mike: Yeah, which is crazy. I mean just think about when we had to do…
Ezra: Yeah, you had to send to your profit, to your bottom line. And here’s the thing, we’re in the process of doing this whole revamp on like what the offer page will look like and it’s like we’re making it way — but it still is really good as it is. It’s fast, it works. I mean a cool thing is I have the top ten list all time of stores who made money with one click up Sell, and the number one store that has made the most revenue is my store, Boom by Cindy Joseph. I’m really proud of that being number one store owner on my own app.
I got this other guy who’s biting at my heels here though he’s getting at…
Mike: I wish it was me. I like from the competition want to figure out another competition that doesn’t include you wrestling me.
Ezra: You know if I’m going to rough it about wrestling him, I’m kind of like I don’t know man, he’s a real good wrestler.
Mike: Yeah, that sounds dangerous. I’ll come buy a ticket for that.
Ezra: So yeah so it’s a good app, not to just pitch my apps, but like we work really hard on these apps. And I’ve got a 26 person development team and I’ve got a seven or eight person support team and a content marketer and some — I got a whole business around these apps, and it really is a joy to work on Shopify apps, we just love it.
Mike: Yeah, I mean we normally don’t let people come on the podcast and do that, but you know I’m a fun boy, I mean I use Zipify pages a ton. It’s kind of completely changed our business. It allows us to — I’m an old school guy, I’m like you, like 2004, 2005 whatever when you first started trying to make a landing page you had to start to sketch out on a piece of paper, and then scan it on my like big flatbed scanner and sent off to a designer, and then they come back with something that was ugly.
And then I had to like redo it and then it was like I’m pressing Yahoo or something. You’re back and forth and it’s like 10,000 hours later and months later, and you’re just like not even passionate about that project anymore, or you moved on to something else. With Zipify again not just sound like a troll here for Zipify, but I mean within 20 minutes, 30 minutes at the most like whatever is in my head is just now on the screen, and you can be testing. And it allows you to do this intuitively like really quickly.
Ezra: The new bill there that we’re working on because right now Zipify is phenomenal for templates, like we just build really great templates in there. And we’re constantly testing pages and adding new templates. And what we’ve been working really hard on is like make our builders good, but it’s not — I wouldn’t say it’s like the best builder in the world. I think it is probably for Shopify stores, but just like when you think about all the builders available for every type of platform, our builder needs some additions.
And man we have this new builder that we’ve been working on for like six months, we’re actually in the coding phase of it right now. It’s been so cool like for people who really want to just super easily build pages from scratch. I mean you can do that in Zipify pages right now. But there’s some things like what we’ve done to the image editor and cropper, and what we’ve done to the ability to drag and drop different elements and like we’ve just added a lot of really cool stuff to the builder that’s going to roll out pretty soon here.
Mike: Yeah, definitely looking forward to that. I mean like there’s definitely times like we’re in the office or just kind of cursing some of the stuff that the page builder does. But again you look at the alternative which is doing it all manually and it’s a godsend. So I can’t even begin to imagine what version 2.0 is going to look like. And we’re going to be working on some point on some type of collaboration we just talked about on that, so…
Ezra: Oh yeah, we need to get that going man?
Mike: Yeah, I’ll throw that in the show notes whenever we do whatever.
Ezra: Let me finish this money conversation around why you should take money, and why you shouldn’t. So we just talked about valuation. And valuation only comes into play with relationship to taking money in exchange for ownership or your full business ownership equity or full business. So here’s my viewpoints on — a few points on when you should or shouldn’t take cash.
Number one; never take cash — so here’s why you take cash, okay? So you take cash for strategic connection and advice, meaning like you want someone who can connect you up and help you get retail visibility or television visibility, and some big venture capital firm has the partnerships or some big company has the partnerships and the distribution channel, and they can buy 20% of your company and help you with strategic advice and connection and get you to that growth.
Mike: They have a good Rolodex.
Ezra: Yes. Another reason to take cash is to fund risk growth marketing. So you sell 20% of your company for three million dollars, and now you can go spend that money on risky growth marketing. Not growth marketing that you know how to do like Facebook ads, but risky growth marketing like television or newspaper or international or retail or whatever, and you’re not spending money out of your own pocket. You’re spending money that you got from someone for 10 to 15% of your business. So risky growth marketing could be a reason to take money.
And by the way when I say take money, I mean silent partners who don’t have any directional control or voting rights. You sell 20% of your company to someone you have zero — you still get to decide everything. You’re taking advice, but you’re not giving up your ability to make the direction of the company, what it needs to be for you.
Another reason to take cash is to take risk off the table. Say you’ve got a brand that’s worth five million, you could sell 20% of it for a million dollars, take your initial risk off the table, set yourself up, and be in a position to where you own 80% instead of 100, but you’ve got a million liquid sitting in the bank.
Another reason is startup capital. So for example, I do a lot of advising for venture capital private equity firms that are going to buy 20 to 300 million dollar e-commerce brands. They’ll be like, hey, create a growth plan for us, or what do you think about this deal or whatever, right? So often times when I’m looking at those brands, I’m thinking man if I had $100 million or $20 million, I could buy this thing, make some tweaks to it, make it work better, and then flip it, which is something I’m very much considering doing.
And so when, I think when, I’m probably going to do this, when I buy a brand for 10 to 50 million that I intend to flip, I’m going to take capital for that. I’m not going to use — I don’t have 10 to 50 million sitting in the bank to do that with. But someone will give it to me for 70% ownership in that company, and I take 30% for doing the flip, for taking it, running it, and then growing it. But I don’t have the risk of that being my own money. I just have the risk of the sweat equity.
So startup capital is a reason to take money or to buy something, right? You can borrow money or take money to buy something for whatever. So those are the reasons why you would take money. So let’s talk about why not to take money.
Mike: It sounds good.
Ezra: Don’t ever take money for inventory, that’s a ridiculous reason to give up a percentage of your company. You can borrow that from the bank, or Amazon or PayPal or Amex, right? So don’t take money for inventory. People do that, and it’s like that’s a bad idea. You don’t want to give up ownership just to buy inventory. You don’t want to give up ownership to do current marketing or team growth i.e. growing your team, hiring new people.
People take money for their current marketing activity and for their team. It’s like you know what, borrow money at 5 or 10% for that, don’t give up ownership. And then I would say never give up ownership that passes over any level of control of the direction of the brand. So never take money that includes voting rights unless you really are sure about that. And those are just some notes on money.
Mike: Yeah, I fully agree. That’s why we haven’t taken outside money. We don’t need it to fund more inventory, we just go like you said through Amazon or through a bank and get that, same thing with growing our team. If we had a strategic connection, I mean something like Bill D’Allessandro did do that recently. He’s got some really influential people in the retail sector that align perfectly with his business. And so yeah I agree. I think that makes perfect sense. Is this something that you guys have done with Boom, or are you planning on doing or thinking about doing?
Ezra: You know we thought about it, but we decided we don’t really need money, and we think we can probably approach these additional — we’ve been approached by a lot of venture capital firms, like everybody is throwing money at us, they want a part of it. Like six banks, the big VC funds and stuff like that approached us, some of the biggest companies in the world have approached us about investing. And at this time we’re not really considering that because we kind of feel like we can do the growth marketing on our own at this point.
But it’s something that maybe if you look at some of these brands that have gone from 20 million to 100 million to several hundred million. I mean they all took VC capital to fund that kind of growth. So who knows.
Mike: Yeah, and we’re talking about valuation just like all these different numbers going to valuations. I mean if you were to sell Boom today or sell a stake in it, what valuation do you think a business like yours that has all these things kind of figured out that we’ve talked about, you have really strong numbers in a lot of these sectors, I mean what do you think the valuation is, a multiple, not what you might sell it for but the multiple?
Ezra: Yeah I would ballpark us at a five to ten multiple profit. And I think that some people might think that’s high, but I really don’t. And I think that if you look at a traditional e-commerce business, like let’s say your e-commerce business bank in 150K a year in profit, the most you’re going to be worth is half a million dollars, you get three and a half multiple. I can imagine you’re getting more than three and a half multiple on profit, right?
Ezra: On a brand that’s doing a million bucks at 200K profit, right, a million bucks in revenue. But as you get bigger, the stakes get much higher in as much as like you have so much more. For example Boom has a wind down period. Turn off all the ads, we still have years of multi-million dollar profitable years with no paid amplification that you could wind the business down with no growth, you’ll still make a bunch of profit. So it’s like it’s such a big operation and there’s so much going for it, it’s got such a strong brand and such a big community and things like that, like we’ve done a lot of stuff right to maximize our valuation.
Mike: Yeah, I mean it’s exactly the answer I was expecting. I mean it was kind of a — it was a loaded question, because like we have had Joe Valley for instance on the show with us before. He’s a broker at Quiet Light. He’s a friend of mine who does a great job. But like the average e-commerce business is selling for like three X. And because you’re not doing all the things that you’re talking about, you’re not keeping an eye on all these numbers, you don’t have the same type of margin, you’re not spending 20% salaries and 20% on advertising and doing the community building and list building and stuff that you’re talking about.
So I mean the proof is in the pudding that it makes it a much more valuable company and I couldn’t agree more. I think you’re definitely obviously going in the right direction I mean with everything you’re doing.
Ezra: Yeah man I’m pretty excited about it. I also like I love running it, like I’m not trying to exit, I’m trying to keep running the brand. I like running the brand, like what did I build all this for, not for a cash payout. I mean that would be nice at some point for sure potentially, but I like running the company. I actually enjoy what I’m doing; I want to keep doing it.
Mike: I mean life’s short, I mean why be going in there and doing this every day if you don’t like what you’re doing. I think people get themselves in that situation, that’s the first and they should change.
Ezra: Hundred percent.
Mike: Before you hang up, where can people find you? You already mentioned Smart Marketer and Zipify.
Ezra: Yeah that’s it, just I have a blog called smartmarketer.com just like it sounds, and I do blogging about e-commerce over there and I have courses and stuff. And I have Shopify apps that I’m really excited about as well called Zipify.com. You can also go to Shopify App Store and search for Zipify, you will find us. Thanks man, I appreciate you having me on the show.
Mike: No worries man, we’ll catch up hopefully soon, and best of luck this year.
Ezra: All right man, talk to you later.
Mike: And that’s a wrap folks. I hope you guys enjoy this interview as much as I did doing this with Ezra. I actually found this interview to be fascinating. It’s definitely something that we’re going to try to incorporate more into our business. As I mentioned, we’re already working on much higher margin products. I couldn’t agree with Ezra more that that is one of the most important things, because if you’re going to be doing direct response advertising, it’s going to cost you money. And if you don’t have margin to spend that money, it isn’t going to be successful. So if you have any questions or comments, go to EcomCrew.com/121 to get to the show notes for this episode. And until the next episode folks, happy selling and we’ll talk to you then.
Michael started his first business when he was 18 and is a serial entrepreneur. He got his start in the online world way back in 2004 as an affiliate marketer. From there he grew as an SEO expert and has transitioned into ecommerce, running several sites that bring in a total of 7-figures of revenue each year.