Exploring The Concept Of Profit First Ecommerce | #224 Karl O’Brien

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Claus Lauter: Hello, and welcome to another episode of the e commerce coffee break podcast. Today, we want to talk about profit first e commerce and what that is. Now, a lot of merchants out there working on a revenue basis, and then they got a big shock at the end of the month when their accountant sends over the reports and then they see what the real profit is.

So we want to dive a little bit deeper into that and how to avoid pitfalls and mistakes along the way. With me on the show today, I have Karl O'Brien. He's the co founder of Store Hero at storehero. ai, a profit focused analytics tool for e commerce store owners. Karl previously founded Effector, a web and digital marketing agency based in Dublin in Ireland.

Let's say hello to Karl. Hi, Karl. How are you today? 

Karl O'Brien: How are you? Thanks a lot for taking the time. It's a delight to be here today. 

Claus Lauter: Hi, you're coming from the side of running a web and digital marketing agency. So you have worked with a lot of brands and probably saw a lot of pitfalls that they were running in when it came to Profitability to revenue, to reports, analytics, and all of that.

I think from there, you started with the idea of Store Hero. Give me a bit of an idea. How did Store Hero started? 

Karl O'Brien: Sure. I started uh, a vector, a digital marketing agency out of college. And I suppose with that, we worked with e commerce brands in the context of web and ongoing Web development, but also ongoing digital marketing paid social and advertising more broadly. So it was a great learning curve for me personally, and I know for our team, as it gives you an opportunity in order to get experience in numerous different industries and disciplines, with any commerce.

It allowed us to understand what the differences are, what the nuances are between different businesses, but also to certainly the universality in any commerce as well. We're all, typically operating on a relatively similar tech stack. We've maybe some similar. Problems, but also similar opportunities.

So as you said, that's really where the idea of store hero came about personally in the agency with the intention of maximizing the efficiency of our own team and growing their own business. I was always looking to try to find tech enabled solutions to increase our own and improve our own service and marketing reporting and efficiency of actually getting that data in one place was always a big part of that.

Now, ultimately having tried various tool that was available at the time it was again, very focused on marketing data itself but there was a couple of pitfalls there. So the platforms weren't necessarily e commerce specific so it was ultimately giving a sea of numbers, but not necessarily.

helping understand which ones were most important. And it also told us what happened, but not necessarily what to do about it. So we definitely saw a gap there whereby it's still involved. I can interpretation layer. I didn't really set out a methodology as to what, growth looks like in the context of e commerce.

One of the big portion we saw with clients was ultimately those reports were formatted in such a way that there may be a PDF export that a client that we would work with was waiting for an agency or somebody with some more expertise in order to interpret that, provide that maybe on a weekly or fortnightly basis.

And that's ultimately the same challenge. A lot of e commerce teams have, they may be center their work around the Monday marketing meeting. Let's say. Their time is spent in terms of aggregating the data. And I suppose that the key challenge I saw on the agency side was it missed a critical step in the process, which was profitability as an agency.

We were only getting a certain portion of the puzzle, and with that, we're making decisions with revenue in mind instead of profits. It's the same thing. My colleague and co founder Thomas from store hero also saw working directly with brands in Shopify. As a merchant success manager, a consultant for those plus brands.

So ultimately it's the same challenge. Again, a lot of individual marketing teams would have, they're operating through the lens of revenue, but at the end of the day, the standard of profitability is the standard by which business owners shareholders are holding them to account.

Claus Lauter: It makes perfect sense. You see always all over the internet, the seven, eight, nine figure business e commerce store, but they're all talking about revenue and what they're really making on money at the end, is really the big question. Now you said with store hero, you have developed a system that not only shows you the data, but also points you in the right direction.

How does that 

Karl O'Brien: work? Yeah. Okay. Sure. So really what it is from our perspective, we wanted to be very clear in defining a methodology around profit first e commerce. So really not just giving brands a sea of numbers, giving them a reference point or a blueprint, not to the extent where every you're waving a magic wand, but a practical.

 Beneficial tool in order to help brands run the day to day more effectively. And with that, it was really building on top of some of the challenges, maybe that some of those other reporting tools that we saw had. So they'd have different formats of aggregating, maybe the sales and marketing data, but it was missing that crucial element of profitability.

So ultimately what store hero is a profit first e commerce analytics tool. Which not only inputs that sales and marketing data in real time connects directly into those channels, but also allows you to input those product level costs your core product costs, packing, shipping, fulfillment, there's other things like taxes and transaction fees we can pull directly from each channel.

You might want to add in things like agencies, software expenses, operational expenses, staff costs. And what that allows you to do is get a view of your profitability and across any profit metric you want to use, whether it's net profit or contribution margin on a store level, on a product level, or also on an order level as well.

So really understanding what's working in order to do more of it and ultimately pull back and do less of what isn't. 

Claus Lauter: How do you address the different departments within a business? Profitability might look different to a marketeer who is interested, obviously, in profitability of, I don't know ad spend and all of that, than someone who is on the accounting side of things.

How does that work? Yeah, 

Karl O'Brien: definitely. And it's an interesting point because it's something we've seen consistently around where different stakeholders went in organizations gravitated towards store hero. see ourselves sitting in the middle between the kind of marketing function and the finance function, ultimately marketing.

In reality, in the context of e commerce e commerce is predicated on those marketing metrics and that's what they're using and then teams are using on a day to day basis in order to give themselves an indicator of success. And oftentimes that doesn't necessarily match the same kind of metrics, success metrics that the finance team are maybe using in order to give themselves an indicator of success.

So what we've done with StoreHero is allowed a user to really. Go from that kind of top line kind of total sales metric right away down to bottom line net profit and really contribution margin is the area that we see as a metric that helps balance those two areas of the business. The marketing team, for example, doesn't necessarily have control or context on the operational expenses of the business, but as compared to driving revenue, if they can use contribution margin, which again for the benefit of anyone watching With a lot of these metrics, there can be different definitions by different teams and different people in e commerce.

So really what we're looking to define there with contribution margin is gross profit after not only our product cost, but any of those variable expenses shipping, packing, fulfillment taxes, transaction fees. We're critically also factoring in that marketing cost about direct advertising spend, but also any other associated marketing costs like agency fees.

And I suppose you can be as direct as possible in terms of what you actually include in that metric, but in reality, it's going to give you a much better indication of how much are we actually generating form margin or a profit off the back of every order. And even in businesses where there's a really solid set of unit economics there, there's solid gross margins, there's low product costs, realistically, that CPA that sits in the center is going to be a massive variable that can really dictate whether a brand is profitable or not.

And I suppose that's something we've seen over the last number of years as the cost per acquisition and cost to acquire customers has risen, it's ultimately meant there's a lot of businesses there who don't understand or don't have the capacity to see that maybe they might be unprofitable on an order level, especially for a good chunk of their orders.

 It's easily done by nature, the fact that it's so difficult to get an understanding of that order level profitability from all those different variable expenses that I mentioned. To answer your question, ultimately, if that contribution margin can be the centerpiece on the Holy Grail that we use as a reference point, it can help bridge the gap between marketing and finance and also it's still a proactive metric that both teams can use in order to drive the business forward.

Claus Lauter: A lot of shops, online stores carry a lot of SKUs, a lot of products around, and there might be products that are hidden cash cows. And there might be some that are just unprofitable. How does your system help in finding these? 

Karl O'Brien: Sure. So ultimately, as well as seeing that overarching store overview piece, we also allow brands and businesses to dive in on both a product or an order level.

On a product basis, this can be really important, not only to see an extended version of maybe a unit sales report that you might be familiar with seeing in Shopify. But again, the critical challenge there is that it's only representing your landed product costs in the form of a gross profit. It's not including any of those other variable expenses and particularly not your advertising spend.

So the intention there is on our product screen, you can understand the profitability of each product, how much each of those products are contributing towards your overall contribution margin or gross profit. And, but as well, we can also determine what your breakeven point ROAS is for each of those products.

 It's often a sliding scale or a moving target in terms of understanding what success looks like in terms of Ross, but on a product level, because those margins are different, we can understand, okay, not only what's actually driving, profitability when it comes to what's contributing towards contribution margin, but also then as well what products are to it.

best set up to support digital advertising. They have solid margins. There's a good average order value there in order to mean that we've an opportunity for success. The same concept also applies there in the context of our order screen. So on an order level, we can also not only understand the.

Unit economics of each product within that order, but any of those order level expenses like taxes, fulfillment, transaction fees. So by understanding those, we're not only able to see what are the orders that are best contributing towards our gross profit, which are the orders with the largest margins, but often maybe more importantly, What are the situations in which we're leaking margin?

So there might be a perfect storm. There are particular orders that may have a free shipping threshold in which that maybe customer isn't covering the cost of that shipping. Maybe it's a single product purchase. Maybe it for a low margin product, maybe it's as a welcome 10 discount. There's an advertising cost associated with it.

So all these components cannot add together. And you can really, with story or identify what are the situations that I want to elicit more sales from or generate more sales. And what are those edge cases that, in reality are taking away from my hard work and driving profitability in my business.

Claus Lauter: I think there's a lot of moving elements in every business and it's easy to fall into the trap to just oversee something. Now we're going slowly into Q4, obviously that's the biggest quarter in the year when people sell the most. If you want to look into your numbers now and you start using Store Hero, how does the process work?

Can I import my data that I already have, or what's the process? 

Karl O'Brien: So with StoreHero, once you sign up, you go through a simple onboarding process, connect your marketing channels, your sales channels, and with that set your kind of product level costs. With that, we can get a historic report on your store to date and understand your profitability for last year, let's say.

So comparing any particular time period. against the previous period or the previous year. So that's again, particularly beneficial for kind of seasonal peaks like Q4. And ultimately, that approach is going to be slightly different for different types of businesses, depending on what their overarching goals are.

And one thing we consistently see there is that Q4 naturally with so many different things happening in the business can be a real time of kind of heads down. We get to work and it's only really in January and February sometimes where we come up for air and understand what actually happened, that our work, that our efforts actually contribute towards profitability.

So getting ahead of that and being very disciplined in terms of defining your strategies, not based on sales, but based on profit, it's ultimately going to mean that you're not getting any surprises in Q1, 2024. So maybe to touch on some of the specific pitfalls we often see with that one is maybe not having a clear goal as to what you want to out of Q4.

And as I mentioned, that's going to be different for different types of businesses. For some, it's going to be a case of maximizing customer acquisition. And on that basis, we might be willing to accept a higher CPA. With the knowledge that we're growing our customer base, and we can recoup that margin in the form of repeat purchases.

Now, realistically, that's not a given. It's important to make sure we're acquiring customers that are likely to come back again and again. And discounting is one strategy there that there can be pros and cons associated with that. Not only are we eating into our profitability margin in the short term, but the types of customers that are maybe repayments Purchasing on a discount may not necessarily be the customers who come back to us.

So there's also some other types of strategies you might have. You may be focusing on clearing inventory, for example. So again, that's a situation in which whatever we look at in the form of our cost per acquisition, you've a perishable goods, or you have a certain level of stock that you need to get out there by a certain time period.

And in reality, that needs to dictate the process to a certain extent. Or alternatively, you may be. Again maximizing contribution margin or net profit margin, maybe the immediate goal, and therefore you want to be a lot more maybe conservative in terms of, or limited in terms of what you're looking to spend when it comes to cost per acquisition.

So understanding what that goal is and making decisions on that basis would be one thing. Now from there once you define what that overarching objective should be. It should be really a case of setting some guardrails. So again, what am I willing to spend it to acquire a new customer? As compared to my broader CPA.

So which store here are we look at this on a kind of an overarching basis, not just what the platform is reporting. So how many new customers are you acquiring? And what was the cost to acquire them what was your overarching CPA for the business, not just your core advertising channels.

So again, that's going to really include not only your core ad spend, but any other marketing costs, software subscriptions, and a real much better indication of what that is. From there as well, you might want to set a contribution margin goal. Ultimately, what's the level of kind of margin you want to generate on a per order basis or, you want to generate overall from orders.

I suppose the main thing you need to keep in mind there is, as long as that contribution margin is above your operational expenses. Then you're in profit. So having a clear idea of those two numbers can be a big benefit. And one metric that is part of the store hero platform that we often recommend users pin to their dashboard.

And by doing that, they also get access to it in their daily, weekly, or monthly email reports. That metric is new customer contribution margin. So understanding what was the margin we earned on new, on any orders from new customers. Even after we factor in our advertising spend and all those various marketing costs.

So again, if that number is positive, we're really comprehensively first order profitable. And as long as we can focus on retention and we've acquired the right customers, we're in a good place to to grow that relationship over time. 

Claus Lauter: Oh, Kyle, you got just gave us a masterclass on things that a lot of merchants are missing out.

I just want to highlight a few, and I would recommend out to our listeners to listen to this twice because there's so much good stuff in there. Obviously, the first thing is don't do too much discounting. And now you highlighted that is that you train customers and properly you attract the wrong customers, in coming with discounts and that on the customer lifetime experience.

They're normally not returning customers. So that's a golden nugget. Really, really good. And then also knowing what your net profit is. I think that's very important. A lot of people are just focusing too much on specifically marketeers and I'm a marketeer. So I'm victim of that myself, but you just look on Google ads or Facebook meta ads.

And then you do your calculation in your head. It is completely wrong because all the other costs should be in the calculation. What I like is that you get that you provide email, reports because it's easy to forget to go into a system and check if you get an email report. It's right into your face and you have to read it.

Now, how does the onboarding process work? 

Karl O'Brien: You're so ultimately it's going to differentiate getting set up, getting all your data in there as easy as possible. That all happens within that onboarding process. So typically what will happen there is you'll connect your marketing channels, those marketing channels, again, whether it's SEO analytics, paid advertising, email.

We'll sync through and you can see that data straight away, pulling that in real time from all your various marketing channels, your store data will then sync through within a couple of hours, depending on the size of your store. And with that, again, we're going to automatically input any of those key expenses.

So your product costs have set within Shopify and it'll automatically pull through. We also support WooCommerce, BigCommerce, Magento as well. And then from there it will also pull in a couple of other. automated expenses, whether it's your advertising spend, whether it's your taxes, whether it's your transaction fees, whether it's your shipping charged, how much shipping you've charged customers.

From there, as part of the process, we jump on a quick call and really try to support merchants signing up to make sure they're actually getting full value of the platform. By making a couple of initial changes that will really help the experience long term. So again as not only your shipping costs charge to the customer, but what's that cost incurred is there a delta there and we're a free shipping threshold in which we need to take that situation into account.

Again, maybe it's key staff costs, agency fees, stuff like that. That's going to really drive that contribution margin. So. Typically that onboarding process takes place over 30 minutes on a call and it may be a case where really , what, you put in, you get back out from there.

 While it's extremely straightforward to get to your contribution point, you may have to put in maybe an hour or two in terms of getting your operational expenses in there. Now, we've ultimately designed the platform in a way that contribution margin is our goal. Some users decide not to actually go to the operational expense level, but the ones that do really see the benefit of it, because as part of our PNL view, you're getting a real comprehensive look at the health of the business.

Claus Lauter: Who's your perfect customer, what kind of size or industry vertical? 

Karl O'Brien: Sure. So we actually have been lucky enough to have on board quite a range of a variety of customers. I think both in terms of size, geography, and channels, ultimately, as I mentioned before, even globally, we've been users across both, UK and Ireland, the U S Australia, everyone's operating on a relatively similar tech stack has the same underlying challenges.

So with that, Anything over 200k in annual revenue, up to maybe 10 to 15 million, we've seen benefits in that the platform is beneficial in that regard are sweet spot for rounds is anywhere between maybe 300k to about 3 million. With that, there's a certain level of complexity that's been introduced within the business.

And as those additional costs have moved past, maybe one person operator. There's even more of a need in order to double down, especially we've seen interesting businesses, direct to consumer businesses who actually reached even higher levels of scale, but a relatively, simple or less complex stack.

So that's the situation in which we're really serving brands a bit bigger, but that would definitely be our 

Claus Lauter: sweet spot. Okay. What's your pricing structure? How does that work? 

Karl O'Brien: Sure. So store hero is tiered based on the annual store revenue. So ultimately that might range from 129 a month up to 1, 299 per month, depending on each of those kind of a number of different pricing bands.

Now, ultimately because we're holding ourselves at a standard of profitability, we ultimately are in the firing line to make sure we're proving our value and we're happy with that. And actually ensure we bring people through the process as we're giving that level of expertise and education that sits on top of the platform, not only to make the most of the platform, but actually help achieve those kind of profitability goals.

So that's definitely one piece we make sure to include within the ongoing subscription. By holding ourselves at our profitability standard. We want to make it a no brainer for brands. So in most situations, a couple of additional orders whereby they can better utilize their advertising spend a lot more efficiently or understand those situations in which we have kind of margin leaking is a very quick indication that we playing for the platform, within the first couple of weeks.

Claus Lauter: Yeah. I think it's a bit of a no brainer. I'm sure there's pretty much every business out there has some leaks that can be filled and will contribute to be more profitable immediately. Before we come to the end of our coffee break today, Carl, what's the one final thoughts that you would leave our listeners with?

Karl O'Brien: Any merchant retailer agency that's maybe supporting e commerce businesses should really look at defining what that contribution margin goal is. Everyone's busy. And again, as we said, there's plenty of vanity metrics that can be used in order to indicate the health of your business.

But in reality, Setting a clear goal as to what's it actually worth, to put in the long days and long nights and to finding that number and really building your plan off the back of that would be something that we'd really stress moving into Q4. So to any brands that are looking to do that we'd be more than happy to talk to them and hopefully show them how StoreHero can help.

Claus Lauter: Okay. On that note, where can people find out more about you guys? 

Karl O'Brien: Sure. So if you log on to StoreHero. ai, or email us at hello at StoreHero. ai as well. 

Claus Lauter: Okay. I will put the links in the show notes and you just want to click away, obviously profit first makes persons sleep much better than revenue first.

And I think story rule AI is a good tool to help us that thanks so much for your time 

Karl O'Brien: today. Thanks a lot. Great to be here.

Hey, Klaus here. Before you go, I would like to invite you to become part of the e commerce merchant pro community to get actionable advice from other Shopify merchants who already have achieved what you are aiming for. Our community is a safe place to actively grow your online retail business with the support of the most amazing and helpful group of e commerce entrepreneurs behind you.

Running a Shopify business is tough. Don't do it alone. Join us now. You will find the link in the show notes. Also, if you think your online store has conversion or marketing issues and you would like to have a fresh set of eyes on your business, then drop me an email at Klaus at Klaus Lauter dot com and let me know a little bit about your business.

It might be beneficial for you. To have me look over your store offers emails and ads and get an unbiased outside perspective and guidance to help you make most of your online business. Thank you as always for tuning in today. I appreciate you until next time. And I talk to you soon.