How To Stop Gambling With Your Ecommerce Ad Budget — Adam Callinan | Why ROAS Lies About Your Profit, How Fixed Expenses Kill Brands, What Drives True Scalability, Why Vanity Metrics Mislead, How More Spend Can Mean More Profit (#466)

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00;00;00;01 - 00;00;23;01
Unknown
They don't understand the financial basis that all those things we spend all of our time on creating content, trying to go viral, doing impressions, click through rates, average order values, all those things. They're built on a financial basis and they don't understand that base. So they're effectively building a pyramid upside down. Hello, welcome to another episode of the E-commerce Coffee Break podcast.

00;00;23;04 - 00;00;43;03
Unknown
Today we're talking about something almost every online store owner has felt at some point. You turn on Etsy, you increase budget, you test new creators, you chase ROAS, and deep down it feels like you're placing bets and not building a system because revenue is coming in, but profit. That's a complete different story. So how do you stop guessing and stop gambling with your ecommerce ad budget?

00;00;43;05 - 00;01;03;15
Unknown
To break this down, I'm joined by Adam Callinan. He's scaled bottle keeper from a $10,000 investment to over 10 billion and revenue in just three years. And now he helps us understand the numbers behind the business so they can scale without fear. Adam, welcome to the show. Thanks for having me. Excited to be here. Adam Why do so many e-commerce brands feel like they are gambling with stare at budgets?

00;01;03;18 - 00;01;24;13
Unknown
The answer is simple. The underlying math is slightly more complex. We should talk about it, though. The answer is they don't understand the true understanding of how their business spends and makes money. They don't understand the financial basis that all those things we spend all of our time on creating content, trying to go viral, doing impressions, click through rates, average order values, all those things.

00;01;24;20 - 00;01;48;19
Unknown
They're built on a financial basis and they don't understand that base. So they're they're effectively building a pyramid upside down. Mm hmm. We spoke briefly before we get started about this. And I think it's an amazing topic because we talk a lot about ROAS and setting up ads and your ad budget. But what you're pointing on is, as is that completely different, understanding your business, finding the links in your business.

00;01;48;22 - 00;02;06;17
Unknown
Talk me through it. You have a huge background in business. Is that a learning curve that you went through or is that something that you learned from others? It's a learning. I mean, everything is a learning curve and most of it comes with pain and scar tissue. Pain is an incredible educator. You know, my last company, Bottle Keeper, we built it in a really specific way.

00;02;06;17 - 00;02;30;03
Unknown
It was my cousin and I. I wanted to build a company that could scale with no employees. That was a very specific guardrail we put on from day one, and that was from Scar tissue from my last company. That was a big, heavy medical device company that had 80 people in multiple states and delivery vehicles. And this thing that I was involved in, that it was heavy and we spun off a tech piece that got significantly bigger from a revenue standpoint with four people.

00;02;30;06 - 00;02;47;20
Unknown
So it's a it was a learning experience. But in the case of Bottle Keeper, you know, we put that guardrail in place and it forced us to solve problems in a different way. So I was running as the CEO of the business. I was running all of the paid ads. I built the website. I wrote all the copy, I did all the email.

00;02;47;20 - 00;03;03;20
Unknown
I did literally everything that a consumer would have would touch or see. I ran up to as you said, up to over 10 million in revenue in a couple of years. And I mean, most of that, let's be clear, was in the third year we did 8 million and the third year before it got too big for me to do all of that stuff.

00;03;03;20 - 00;03;22;09
Unknown
But, you know, we went from there, got bigger, got acquired, and that was good and great and grand. But the reality is, running the business as the CEO that's also doing the paid media and also doing the website optimization, there are all these questions that I had and I needed answers to and I couldn't find them. And I'm pretty good at math and systems.

00;03;22;09 - 00;03;43;12
Unknown
I have a crazy science degree, so I wrote math to answer questions and it and it drove the business entirely, you know, almost from the start. Mm hmm. Now, today, you're helping founders. Exactly with that problem. But I wanted to have a little bit more into probably the the mess that most founders are dealing with. It's like spreadsheets, different dashboards, different reporting tools.

00;03;43;19 - 00;04;03;17
Unknown
What's your take on that? I don't think we need more dashboards. I mean, the challenge with dashboards and reporting tools and and the way that they exist from an income founder standpoint, I speak from this from very personal experience, is they just give you information. They don't tell the whole story. And it's just here's some data. Go figure it out.

00;04;03;19 - 00;04;31;00
Unknown
And that's not helpful. It's just not. So the things that that my cousin Matt and I built at Bottle Keeper that helped me make decisions around running the company, they had to tell the whole picture because I we didn't we were bootstrapped. I didn't want to raise money, so it had to be profitable. So I had to understand how to build an ad budget that could be profitable and how that ad budget needed to perform in order to be profitable.

00;04;31;06 - 00;04;48;27
Unknown
And what happened if we were going to consider a discount? How was that a disaster? And if, you know, like where are the guardrails in that? But that had to be built on the underlying financials in the business, like what is our variable margin, which is like our sales related expense per revenue dollar that we earn? What are our fixed expenses?

00;04;48;27 - 00;05;06;24
Unknown
Because we had no employees for the first three or four years of the business. Our fixed expenses were fantastically low and that's it might be helpful. I go through a little quick math problem here to help explain why fixed expenses are so bad on businesses. But we were really lean through the end. We were an eight figure business.

00;05;06;24 - 00;05;23;08
Unknown
We only had four four employees in addition to Matt and I. So it was just a foundational piece of how we ran the company. Mm hmm. I'm not big on math, but I want to dive a little bit deeper into it because I have been on this very painful and long way that you have been to, so I can totally relate what you're saying here.

00;05;23;10 - 00;05;45;00
Unknown
What are the numbers or what shouldn't be the numbers that are people focusing on when they try to grow. I think it's important to set the stage that every single KPI can be used incorrectly or becomes a vanity KPI if there's no context. Mm hmm. For example, net profit, that's like the shining star. That's what we should be driving towards.

00;05;45;07 - 00;06;06;27
Unknown
But it can also be used as a vanity KPI. If you're doing $1,000,000,000 in revenue, $1,000,000 in net profit is a disaster for that business. If you're doing $1,000,000 in net profit in a $10 million business, it's an entirely different thing. So you need context. That's the really important piece. So like you can literally pick a metric. Obviously ROE as an MLR is a big one.

00;06;06;29 - 00;06;34;21
Unknown
I mean, clicks rates are big on like they all, they all don't matter. Your conversion rate can be ten, but if you're only driving ten visits to the website, it doesn't matter. It just becomes a vanity metric. So context is really important. Yeah, that's that's that's a good point. Traffic obviously is a huge problem for a lot of merchants out there, but I think a lot of people do not count in the running costs that often a counter to fixated on their marketing costs at some point and also there is costs that are outside of the online world.

00;06;34;24 - 00;06;57;21
Unknown
So how do you connect the data that you have? And with the real financial data that comes from outside sources? Yeah. So it starts with understanding the the underlying financial data in the business and the word finance freaks people out. And I understand why, like we don't start consumer brands because we want to get good at QuickBooks, right?

00;06;57;23 - 00;07;31;02
Unknown
We have a problem. We have an idea to solve the problem. We create the thing because it solves our problem, and it turns out other people have the same problem. And now we're selling that thing and like we're passionate about that part. We're not passionate about gross margins and variable expenses and all these things. But but it doesn't change the fact that every decision we make inside the business, again, whether we increase prices or we run a sale, we increase ad budget or we decrease it with everything we do on that customer acquisition side is built on the information it needs to be.

00;07;31;02 - 00;08;02;20
Unknown
The problem is it's disconnected, but it needs to be built on the information in that finance piece. So as an example, and I, I won't get crazy in the math, we'll keep it very simple. If a business is running $11,000 a month in fixed expenses, so they have, you know, one employee in an office and they're paying themselves a little bit, $11,000 a month and they're doing $40,000 a month in revenue at a for return on ad spend like for all intents and purposes, like, that's pretty good, right, for ROAS.

00;08;02;22 - 00;08;31;25
Unknown
So that means they spent $10,000 to earn that $40,000. Okay. That same business has, let's say, a 70% gross margin. That means that $0.30 of every dollar goes to pay for the cost of goods to get it imported to your country. Landed ready to go. Then there's another 15% cost to ship and fulfill the product to the customer and another 5% Shopify fees or credit card fees, like ancillary stuff that adds up to $0.50.

00;08;31;25 - 00;08;54;01
Unknown
50% of every dollar earned goes to pay for those sales related expenses, cost of goods, shipping, fulfillment of those things. That's called a variable expense. Are you with me? Absolutely. So that means of that $40,000, so does that company at a for return on ad spend, are they profitable or are they losing money? Well, obviously, that's a taxman at some point who won some money as well.

00;08;54;01 - 00;09;16;19
Unknown
And you need to pay yourself, which I think you haven't counted in. So I think you will be hotly pressed to just break even. Oh, I mean, just using that math, even if out of that 11,000 of fixed expenses they are paying themselves that businesses losing money and they have a full return on ad spend because they have $10,000 in ad budget, they have $20,000 in variable expenses.

00;09;16;19 - 00;09;35;22
Unknown
Remember, it's $0.50 of every dollar they earn go to expenses. So that 40,000 is now 20. We remove $10,000 in aid budget. So now that 20 is ten and they had $11,000 in fixed expenses. So they lost $1,000 through because they're they're like they're crushed like their ad agency is pumped. They got them a four year return on ad spend.

00;09;35;22 - 00;09;51;25
Unknown
But it doesn't matter because the underlying system is broken. So the reality in that case, without changing their fixed expenses, which is a thing that they should do, but they don't have to change or fix expenses, they don't have to go and renegotiate with their manufacturers, like they're not at a scale where they're going to be able to do that anyways.

00;09;51;28 - 00;10;12;24
Unknown
What they need to do is increase their ad budget from 10000 to 15000 and their MLR or ROAS can come down from 4 to 3 and a half. And the difference is with that situation, because they're there, they're creating more what's called contribution profit, which is what pays for the fixed expenses, which is what results in a profit.

00;10;13;02 - 00;10;38;02
Unknown
They go from losing $1,000 to making $250, but their efficiency came down and they put more capital at risk. The key is just knowing that. And that's that's the really important piece. That's where, you know, I say saying like scream to the clouds, all of those decisions around how we build ad budgets, how they need to perform all of that stuff is built on the underlying system, the math and things that live in their finance system.

00;10;38;07 - 00;11;00;16
Unknown
But that stuff is complex. So like my whole life at this point revolves around simplifying those things and building tools and systems that will just tell you the answer to the question, just go do this. I think there was a brilliant example, and I hope that a lot of our listeners know go back into their own numbers and try to follow this thought, and probably some of them will be shocked, which thought about this moment.

00;11;00;16 - 00;11;22;19
Unknown
It's like, Oh, I'm making money. And it's like, No, you don't know from your experience and from what you just told, you basically created a solution for that. And we want to talk and dive a little bit deeper into this. Talk me through it. What does it do and how does it help? So Pantene is the platform that I created out of that experience, a bottle keeper.

00;11;22;19 - 00;11;40;20
Unknown
It's basically a dramatically better version of the system that we ran that company on from start almost start to finish to make it short. What it does is basically exactly what I just explained it. It connects to your QuickBooks account or your zero, your final loop, or whatever it is that you're using. It collects the necessary data in order to create that foundation.

00;11;40;20 - 00;12;07;28
Unknown
Like how much of the fixed expenses, what's the variable margin before we spend ad dollars, you know, figure all that stuff out. And then it also connects to your Shopify and your Amazon and your Net and Tik-tok and all the places where you're spending and making money. So it so it's taking that data in and but it's reporting back to you based on how your business actually is built, how it needs to spend money and make money in order to be profitable, and then it just tells you what to do.

00;12;08;00 - 00;12;21;20
Unknown
It literally you can just say my ad budget is $10,000 a month. What's the minimum return on ad spend to get to break even or to generate a 10% in that profit? Because at some point we do actually want to make profit and have to pay the tax man right? I mean, that is the name of the game.

00;12;21;23 - 00;12;43;01
Unknown
So it gives you the ability to pull a bunch of levers and it will just tell you what's going to happen if you pull that lever based on how your business is structured. So it's really directed. It's not it's not a I mean, it has a dashboard reporting piece to it because it kind of has to. But it's it's very, very directive and guiding.

00;12;43;04 - 00;13;06;26
Unknown
Can you give me some examples of clients that you worked with and what kind of difference they saw in their business after they have implemented Pantene? Yeah, absolutely. One of the first companies that came into Pantene was $2 million eCommerce brand, great product, incredible founder. He was that, you know, he was like we all were at the beginning like invented a thing, started selling the thing.

00;13;06;26 - 00;13;24;02
Unknown
People started buying the thing and now he's CEO of a company but didn't understand any of the finance stuff. So they're losing $100,000 a month. They had a couple of months of runway left. They came to Pantene. What the math told them is that they were achieving an eight return on ad spend. Well, like an eight. That's insane, right?

00;13;24;04 - 00;13;53;05
Unknown
But they're losing $100,000 a month. So clearly it's not working. That's, you know, marketing performance wasn't the problem. The problem is that their fixed expenses were really heavy for the business. They were they were at about 40% of the revenue that they earned was being was going directly to payroll like they had gotten really heavy on payroll. So that was one thing that that's an easier thing to probably understand, the more complex that that Pantene told them is that they needed to three x their ad budget.

00;13;53;08 - 00;14;13;13
Unknown
They were not remotely spending enough ad budget to drive enough contribution profit to pay for their fixed expenses, even if they brought the fixed expenses down. And if they three x their ad budget, that eight could come down to a two and a half return on ad spend and they would be profitable. So it's this weird thing and it's like it's completely counterintuitive.

00;14;13;13 - 00;14;31;20
Unknown
It kind of makes our brains explode. You can actually spend more money, your return on ad spend can come down and at the same time your net profit will go up. The key, though, is understanding what those limits are. So so we did that over the course. Obviously you don't three x your ad budget in a month that takes time to do that safely and responsibly.

00;14;31;22 - 00;14;55;27
Unknown
So over the course of 45 days, maybe two months, this was during the holidays, they were they tripled their ad budget and on the third month they made $50,000. So it was just the system. They didn't understand enough of how their business was spending and earning money to be able to understand how to build an ad budget. They, like many of us do, look at ad budget purely as risk because we don't know.

00;14;55;27 - 00;15;20;08
Unknown
It's like gambling, right? We don't know what it needs to do or what it's going to do or I mean, this is a multi year old company. They had a lot of historical context. So when we take that out of the equation in and truly understand what needs to happen in order for this to be successful, to not be a disaster, we can start to think of ad budget more as fuel for the for the engine than just pure gambling risk.

00;15;20;12 - 00;15;42;13
Unknown
And that that's a huge, hugely important thing. Yeah, I really can relate to this. I was selling on Shopify for seven years long and steep and painful learning curve, but it's completely right that you have to spend money to make money, but the back end needs to be right. And for our listeners, you probably need to listen to this twice to understand it fully if you haven't, but it makes total sense.

00;15;42;15 - 00;16;06;19
Unknown
Now, one question, and that's coming from my practical side How does it work when you work with an agency? Because their spending habits might be different than what they need to do to really make your business profitable. What's your experience there? Yeah, the agency partners that we work with, which goes back to the very beginning of our first big partnership, was with a big agency called Hawk Media in Southern California.

00;16;06;21 - 00;16;29;20
Unknown
It was an interesting thing. Eric Huberman, who's a CEO there, who I've known for a long time, like even before the Ball keeper days when they were a couple of people in in an apartment, another way bigger. He really liked Pantene because they get into a situation where their their clients are telling them to do more with less, as in their clients that e-commerce businesses are just making up their ad budgets.

00;16;29;20 - 00;16;53;23
Unknown
They're just saying our ad budget is $50,000 and they need to make $1,000,000 in order to get to profitability. So maybe they know that, maybe they don't. And the ad agency goes and they crush an eight return on ad spend and the company gets their PNL 30 or 45 days from now and they hemorrhaged money. And it's the ad agencies fault.

00;16;53;26 - 00;17;14;11
Unknown
And the ad agency is saying, no, it's your fault, because, you know, maybe they're not saying this directly, but like it's your fault because we didn't have enough budget. They're both wrong and they're both right. And the reality is, because nobody understood the underlying structure that needed to happen, nobody knew that that $50,000 was going to need to turn a 20 return on ad spend in order to get them to break even.

00;17;14;13 - 00;17;34;16
Unknown
The whole thing was set up for failure. So so the agency partners that we have, like their clients being on Pantene because it clarifies the question and sets the stage for everyone on how we define good and how we're going to achieve it. Because if they come to them with that 50,000, Pantene is going to say, To get to break even, you need a toe return on ad spend.

00;17;34;18 - 00;17;53;14
Unknown
So either we need to increase that ad budget probably pretty dramatically. Maybe it needs to go to 200. And if that's unrealistic, don't we want to know that in advance? In order to get that ROAS down to five, maybe we need to work on pricing. If we increase prices by 20%, maybe that ROAS comes down to 12. That's a lever you can pull.

00;17;53;17 - 00;18;10;14
Unknown
Maybe we need to cut 27,000 a month out of fixed expenses and that ROAS comes down to four and a half. Like there's all these things that you can pull that impact, that outcome, but it's just it's being able to see them clearly without having to, you know, get out your, your slide rule or your Excel spreadsheet to try to figure it out on your own.

00;18;10;17 - 00;18;33;11
Unknown
I love this because now you have a neutral platform which provides you the data you need and also the data that normally an agency won't see or won't ask for, which is so important that they see the whole picture, the bigger picture. Now, who's your perfect customer who works with spending? Our typical customer is a Shopify brand from about 1000000 to 15 million in revenue.

00;18;33;14 - 00;18;57;19
Unknown
We have some true startups that are pre revenue that will come into it that are trying to get ahead of the game and it's priced appropriately for all of that. And we have onboarding today. We're onboarding a company that's at over 20 million in e-comm revenue, but they're just a small team and they want to consolidate the seven different platforms they have where they're getting three data points from each into to something that's a little bit more cohesive and profit focused.

00;18;57;21 - 00;19;15;10
Unknown
Okay. Walk me through the typical onboarding process of a new user. What steps are involved? How long does it take to get up and running? It's very quick. It said it's a ten or 15 minute max process right now. You do it with me because I want to make sure everything I want to be able to answer the questions, make sure it's done correctly, but it's very quick.

00;19;15;10 - 00;19;37;16
Unknown
I mean, you we create an account, you create an account, you connect the APIs that you have. You connect your you know, again, a typical is like a QuickBooks, Shopify, Amazon, Amazon ads matter tick tock, Google, Google Analytics. Although we're we're down regulating and going to turn that off because G4 is so bad. So we're going to start pulling all that stuff out of Shopify we're building expanding that Shopify API to do that.

00;19;37;16 - 00;19;58;01
Unknown
Right now we answer a couple of questions like, is this is the accounting on accrual or cash? It's simple, simple stuff. Imports the most recent panel. The answer it knows most of the things that will be in that, but there will be some outlier things that we just have to make sure they go in the right buckets. That's the part why I want to be involved.

00;19;58;04 - 00;20;17;14
Unknown
But it's really quick. It's 10 minutes, okay? It's fast and you get answers. I mean, the math is happening in the back. As soon as I get that stuff, those answers are selected. Things start happening in the background and then yeah, then you get answers. Okay, you already answered my next questions. Would would be is like, is there any kind of homework that immersions operator needs to do before they get started?

00;20;17;14 - 00;20;38;12
Unknown
Is there anything outside of having your APIs ready and European already? The big piece, if I were to call it homework is just the piano. And this happens much more on the on the younger earlier stage company. I mean we've had companies that want to come into ten that aren't operating in a QuickBooks account. I mean, they're quite literally like putting their expenses in a Google sheet.

00;20;38;14 - 00;20;58;29
Unknown
So we've built things to help solve for that, you know, built it look like in this world of vibe coding and everything, like I can pop up a solution to help them do that in my, my cloud. But Carl can do that, you know, in 15 minutes or whatever. So we have stuff to be able to help them where they can go in and answer some questions and it will pop out of my position.

00;20;59;02 - 00;21;20;11
Unknown
Like generally speaking, is anything is better than nothing. Like, let's not let perfection get in the way of progress. And I do see companies do that where they, you know, it's their panels at 98% and they want it to be just perfect and it has to be at 100%. It's like we're going to see you're going to spend a month getting something that's going to have no material impact on what the outputs are and what it gives you to do.

00;21;20;11 - 00;21;35;26
Unknown
And in the meantime, you're entirely just flying blind. It's like you're driving a car with a pillowcase on your head, so let's just do it. I mean, it's $199 a month for any company. There's no fees, there's no upsells like this. All the stuff that I hated while operating Bottle Keeper, we don't have any of that because I hated it.

00;21;35;29 - 00;21;52;18
Unknown
So, you know, you get the 30 days are no risk if you cancel in the first 30 days are going to give you your money back and which has never happened but it's there so it feels a bit like a no brainer to me. But I'm a I'm biased. I'm on the inside, so. Oh, Adam, you sound like a true interpreter.

00;21;52;20 - 00;22;07;29
Unknown
Just do it. I couldn't agree more to that than than anything else. Now, obviously, this is a perfect solution for every business. And he said it's four different sizes. Even if you just start as containers for, you know, before a coffee break comes to an end. To say anything you want to share with our listeners that we haven't covered yet.

00;22;08;01 - 00;22;32;13
Unknown
Yeah, I launched recently a profit masterclass, my whole next phase in life. I didn't get get this a bottle keeper in it and it always bothered me, frankly, is is to give back and be as helpful as I humanly possibly can. And yeah, that's why Pantene has $199 a month. I want the pricing to be like laughable. I want anybody to be able to come into the company because the stuff will be helpful.

00;22;32;15 - 00;22;50;25
Unknown
So I just launched a profit masterclass about two weeks ago. It's free. You can get you can get the link to it at Penn, Time.com. It's a 14 part exactly how I look at profit and driving profitability. It applies to honestly, every company on the planet because the systems are all the same, but it's really directed towards ecommerce.

00;22;50;28 - 00;23;16;24
Unknown
And so if you have that feeling that we have all had, we feel like we're a little bit out of control and, and doing the sort of like lick your finger and stick it in the air to make decisions, it will be helpful. It will be helpful for that. We've gotten just in the last couple of weeks that it's been like we've gotten a lot of really positive feedback that it's it's pulling the curtains back on something that that is scary and complicated, but it doesn't need to be.

00;23;16;26 - 00;23;36;15
Unknown
No, absolutely. Where can people go and find out more about you? So it's Pantene dot com. Any other channels? I spend some time on LinkedIn. I've been off the socials for a very long time, so I'm now back in the in the social world a little bit sharing. So yeah, LinkedIn is, is probably the best place, a little bit on Instagram, but mostly I'm on LinkedIn.

00;23;36;17 - 00;23;53;02
Unknown
Okay, cool. I will put the links in the show notes as always. Thank you. Just one click away. Adam Thanks so much. Experience, Overview. I think that was a deep view into somebody who was in the trenches, who has learned a lot. Being an entrepreneur and knowledge sharing. It was the e-commerce community out there and I hope a lot of people will reach out to you and just painting.

00;23;53;05 - 00;23;54;25
Unknown
Thank thanks so much for your time. Thanks to us.