eCommerce Australia
Why AOV means nothing, and what to do about it- Nathan Perdriau from Blue Sense Digital
Ryan Martin, host of eCommerce Australia and Founder of Remarkable Digital, an eCommerce SEO agency based in Melbourne, interviews Nathan Perdriau, Co-Founder of Blue Sense Digital, a paid performance agency based in Melbourne.
Listen in as we talk to Nathan Perdriau, co-founder of Blue Sense Digital, about the critical importance of technical marketing skills and maintaining e-commerce hygiene.
Nathan shares his expertise on understanding customer behaviour and the resilience required to succeed in today's market, we take a deep dive into why AOV is rubbish, and the need for brands and eCommerce experts to go much deeper into AOV, with the example being first time purchase AOV being far different than returning AOV.
This episode is packed with actionable strategies and insights that are essential for achieving success in the e-commerce landscape.
Download our Ultimate eCommerce Checklist to improve your eCommerce results.
Join 'A Remarkable Newsletter' for weekly high performance marketing and content actionable tips.
Ryan Martin, host of eCommerce Australia and Founder of Remarkable Digital, an eCommerce SEO agency based in Melbourne, interviews Nathan Perdriau, Co-Founder of Blue Sense Digital, a paid performance agency based in Melbourne.
Listen in as we talk to Nathan Perdriau, co-founder of Blue Sense Digital, about the critical importance of technical marketing skills and maintaining e-commerce hygiene.
Nathan shares his expertise on understanding customer behaviour and the resilience required to succeed in today's market, we take a deep dive into why AOV is rubbish, and the need for brands and eCommerce experts to go much deeper into AOV, with the example being first time purchase AOV being far different than returning AOV.
This episode is packed with actionable strategies and insights that are essential for achieving success in the e-commerce landscape.
Download our Ultimate eCommerce Checklist to improve your eCommerce results.
Join 'A Remarkable Newsletter' for weekly high performance marketing and content actionable tips.
Welcome to the Ecommerce Australia podcast. For those of you seeking direct assistance, remarkable Digital is just a call away. Our mission is to be remarkable, doing great things for great people and great businesses. I understand how much choice you have and how many podcasts are out there, so I'm truly grateful you've tuned in. Please let me know if you have any questions, comments or topics you'd like covered. Let's get started.
Speaker 1:Welcome to eCommerce Australia. I'm your host, ryan Martin, founder of Remarkable Digital, an eCommerce SEO agency. This week's episode, or this episode, I'm joined by a previous guest, nathan Perdreo, co-founder of BlueSense Digital. Paid performance marketing specialist. Absolute elite agency got a lot out of their last podcast, so we had some fantastic feedback on board. Met the guys at the retail at the recent retail fest on the gold coast and got dwarfed by them they're both about a foot taller than me and met the um what would you call him, the character of the group in anthony as well. So, yeah, looking forward to having another chat with you and learning some more great insights around ecom yeah, thank you for having me on appreciate it.
Speaker 2:no, it no problems.
Speaker 1:So, mate, how are things at BlueSense Digital? Firstly, how's 2024 been? Yeah?
Speaker 2:it's good. It's good. It hasn't been, at least on the agency side. It hasn't been like what we might be seeing on e-com with the pullback in revenue. We're still seeing a lot of clients coming on board. A lot of clients are coming on board. Clients are doing pretty well across the board as well. I think the fact that times are getting a bit tough at the moment, particularly over the last six to eight weeks, I think it's actually a really good opportunity for us, because it's where you can start to shine, because you have to have more of a technical ability and know what you're actually doing, whereas if you're just trying to put some ads together and run a digital marketing service, it's a tough time to do that.
Speaker 1:Yeah, are you finding that? Like, are you noticing from some of your clients, are they down a little bit in revenue? Is the AOV down? Like how would you sort of generally sum up the year across your client suites, but even the ones that aren't clients that you speak to, that don't come on board, what are you finding so far?
Speaker 2:Yeah, I think it's a little bit biased, because majority of the clients that we work with are in rapid growth at the moment, and so the majority of our client portfolio isn't $100 million brands that have tapped out, and now, when you hit a recession, they're the ones that are going to get pulled back. We're working with these like $2 to $10 million brands who are rapidly scaling because they have product market fit and they have their marketing dialed in, and so 60% to 70% of our clients are up year on year by like 20% to 40%, okay, and so I could look at that and say everything's all good, everyone's doing well, but then the larger ones that are at the top end they're seeing the pullback, and so it's those that have sort of gotten close to the total addressable market or they are out the other end of their growth peak to where they're seeing a pullback, and then all of their shipping logistics providers are giving them supposedly information that everything's down across the board. So apparently the actual shipping providers are seeing pullbacks.
Speaker 1:Okay, yeah, that's interesting, isn't it? Yeah, I see clients in two buckets. Some of the pullback is more around that average order value. So I mentioned I've got a couple of florists and they're not huge, they're not doing multi-million dollar e-commerce stores, but it's just interesting to kind of note. Looking at the AOV across Mother's Day, it was down a little bit same amount of orders, but people aren't spending as much on some of those things. Yeah, but across the board, yeah, I think it's.
Speaker 1:I think since the pandemic we've been, we've been lucky in that pandemic. Obviously, the e-commerce was the only thing open, especially in melbourne, um. But as we start to come out of it now, the brands that are doing well are doing those one percenters right or two percenters right. They're. They're not skimping on, you know, understanding their customer better and they just have good hygiene. I know Brendan Gillen talks about e-commerce hygiene a lot and it rings true. The brands that are doing those 1% is right, that are actually listening to their customers, that are investing where they need to across their numbers which I know you guys are really strong about as well they're the brands that continue to fire.
Speaker 2:For sure. I think, even on that average order value point, there's like, if average order value is pulling back on majority of brands which is typically what happens if you go into a recession and there's a pullback in spending because people still want to buy but they don't want to spend as much, they'll take the less premium product over the higher one, or they'll put less items in cart. They'll buy one instead of two. The brands that better understand e-commerce analytics at a deeper level, on all of those metrics, I think they're the ones that'll actually shine and also think that they're the agencies that will do well and like, on average order value, pull me out here if I'm about to go way too deep, because I could talk about like any metric for 20 minutes. Yeah, but any metric in the back end of Shopify sort of tells you nothing, because you don't see the data that's being used to aggregate the metric at the top level, and so you can't infer any decision-making that's actually going to swing that metric in the right direction. And so, on average order value, average order value derives down to new customer average order value and then returning, yes, and so they're two very, very different audiences with two different buying behaviors. Generally speaking, returning customers will spend more because they've experienced the brand. That's why they came back, yeah, and so they're willing to buy two or buy three or buy the higher end product, whereas mostly, when we're talking about increasing average order value, we're talking about increasing first-time customer average order value, and then you can drive that down further and you can go into well, what does the cohort look like over that pricing range? Because most people have an $80 average order value, but the average order value isn't $80. They have a peak at $40 and they have a peak at $120. And so if you're trying to move the $80, you're trying to move people that don't even exist. No one's buying at 80. Everyone's buying at 40 and everyone's buying at 120. And so you need to move one of these two and what you'll end up finding and we've done this with clients where they have an $80 average order value we'll set the free shipping threshold at 60. Average order value will go up to 100. It's like how does that make sense? We set a threshold to deprioritize people down, but it's because we moved that 40 dollar peak and we moved it up to 60 to 70. Yeah, yeah, okay. And then you're like you can keep going deeper and you can go.
Speaker 2:How do you even make average order value? And average order value is average unit retail times units per transaction plus one, minus return rates, plus one, minus discount rates, plus shipping collected. And so if you start to look at the five levers that underpin average order value, you can take out shipping collected, you can take out returns, you can take out discounts. You don't really have much control over it as an operator. You have a little bit of control, and then you've got units per transaction, so that's how many items are in your cart, and then you have average unit retail, which is average price of a product. And so they're your two levers.
Speaker 2:And so if a brand is looking at the average order value number and they're going this is going down because we're going into a recession how do we improve it? It's not, how do we make a decision based off that $80. It's, firstly, where do the cohort peaks sit on new customers, and then how do we increase either prices or units per transaction? Mostly, people can't increase prices because of the elasticity of demand and most brands just don't want to even try it. They're like I don't want to see what happens. Yeah, so you just need to be focusing on how can you get people to add more to cart yeah, and then you can go a step further and pull me out.
Speaker 1:Oh mate, I love this. This is fantastic. So I think, as as said, there's some really great learnings here already around AOV. As a rule, it's something that I use quite a bit just as a generalization, but it's interesting to know the next level down. Yeah.
Speaker 2:Like you can do that with every metric, but there's also looking at the customer database and the skew across Unispro transaction, and so this is a really common mistake. I imagine some people listening right now will get value out of this point, which is if, let's say, you have an average upt of 1.3, so on average, a customer has 1.3 items in their cart. Yeah, and you're thinking, okay, if we can bump that up to 1.5 or 1.6, our average order value will go up 20. So that's what we now need to focus on after listening to Nathan Ramble for the last five minutes about why we need to do that.
Speaker 2:I love it. And so then they go into their website, they go to their marketing team and they say how do we incentivize people to spend 1.5? But that's once again you're looking at the wrong thing and you're optimizing for the wrong thing, because to get you from 1.3 to 1.5, the hardest way to do that is to get majority of people to buy two items. The easiest way to do it is look at the top 10% of spenders who are already going to spend a ton with you. They have high disposable incomes, they love your brand, they love your particular industry, and get them to buy six. And so now, if you can just move the top 10% of people and give them the option to buy five or six, it'll skew your UPT up and that's where you'll see outsized returns.
Speaker 2:Most people don't have their discoverability, they don't have their website, they don't have their offers structured in a way that even enables people to spend that much. If I went to an average like website and I said could I add five things to cart and would that make logical sense? The answer is probably no, and so it's. How do I enable a customer experience to where they have the capability to buy five or six items. Yeah, because if you enable that, then you're really leveraging that top 10 to 20% of customers and that's where you can see a big move in the average mean and your average order value will go up 20% to 30%. Yeah, fantastic mate.
Speaker 1:That is so good. One website that comes to mind I was literally on it last night was Culture Kings, I don't know, since we went to Retail Fest and I heard Simon Baird do the keynote presentation and I was on his website last night because I wanted to see. He was talking very much about in-store experience and I wanted to see whether the website matched that and it does, and I think that's one website that would absolutely be plugged into those sorts of features to help get people to buy more and more. I added a couple of t-shirts to cart and then it's like on the cart page it's like spend an extra $30 and then it gets you to free shipping and there's all these different ways that they're trying to bring up that AOV. So, yeah, it's fascinating to hear that. Yeah.
Speaker 2:They're super sophisticated and I think that, as demand goes down from consumers to buy online, this is a really good opportunity.
Speaker 1:To get smarter.
Speaker 2:Yeah, for people to get more sophisticated and get a really good understanding. It's even like in the fact that a lot of people optimize for increasing average order value. But average order value also, despite everything I just said, doesn't even matter what really matters what really matters is contribution margin on first order.
Speaker 2:Yeah, because at the end of the day, you're trying to make money on the first order, you're not trying to just gain arbitrary revenue, and so what you can do as an exercise is you could take all orders, you could export it. You could then minus cogs on each individual order in a Google shape. You could then minus average shipping and fulfillment and you would then get profit per order on every single order. And then what you can do is just do an equals sort and bucket all the orders into $10 orders, 20, 30, 40, 50, 100. And then look at what happens at your free shipping threshold, and what you'll end up saying for most brands is that, let's say, their free shipping threshold is at $100. At $90, they're making $30 profit per order, and then, as it goes to $100, they're now making $28. And so they've incentivized people to spend more, but they're making less money because they now have given away the encouraged shipping collected at checkout.
Speaker 2:Yeah, and so is that a trade that anyone wants to make? Someone out there could argue that no, it is a good trade because now there's more product in that person's hand, and if they have more product, then they're more likely to come back and purchase from us, and there's other people that are more likely to see that product in their house and then buy. But that is such like a high, risky out there idea to be operating on Like. At the end of the day, it's just how much profit are we driving on first purchase, and so the operators as well that can understand contribution, margin and profit at an order level are going to do really really well over the next one to two years, and it's those that got away with just taking a product, marking up by two and trying to figure out how to sell it during COVID. They're the ones that their P&L is just going to get squeezed.
Speaker 1:Yeah, and so would that be the same. Even if you've got a subscription model or consumables, would you still offer that same advice to? Obviously look at contribution margin, which I'm sure you would offer that same advice to but can they take more of a risk in terms of offering that free shipping threshold at $100? Knowing that they've got a subscription model? They can pay a little bit more to get a recurring customer through. Or is your advice and take, I'll probably know where you're going to go with it. Still, you don't want to be losing money at any stage.
Speaker 2:Yeah, it's a good question. If you asked me this 12 months ago in fact, if you asked me this 12 months ago, in fact, if you asked me on the last podcast, I would have said cpg brands are the best brands to run because you have repeat purchase rates that are really high and so you make a lot of money on second and third purchase. There's a lot more nuance and intricacies in the business model of cpg brands and repeat purchase rates that I didn't know at the time or understand that now I think I have a bit of a better understanding of, and that's that if you need to be profitable on second or third purchase, it's such a high-risk model, particularly due to the cost of capital, because if you're not making profit on first order, if your LTV to CAC is below one, you need to self-liquidate that customer acquisition from somewhere, and so that's either going to be in investors, which a majority of brands don't have, investors in early stage startups, and so that's sort of like 1% of brands, and then it's you need to self-fund or you need to get loans, and then what is the cost of capital on loans and then self-funding? And then what is the cost of capital on loans and then self-funding and then what is the degree of risk that you are going to self-liquidate profitability on second purchase? It's such a risky model to run, yeah, that the only people that should really be running it are 15-year econ veterans yes, people that really know their numbers and they can watch everything on a day-to-day basis. They know everything down to the cent, yeah, and so they can watch everything on a day-to-day basis. They know everything down to the scent, yeah, and so they can reduce the risk in that kind of model. But a lot of, in fact.
Speaker 2:I was saying this the other day how many brands do you think during COVID came out that were consumable products in supplements and like beauty products? Like thousands. It'd be a lot.
Speaker 2:Like thousands, Pretty much yeah and then the question off the back of that is, of all of those business owners that started those brands, how many of them had experience in e-commerce analytics and financial operations prior? Yeah, like none. Yeah, and that's why all of them, to this day, still do 5 to 10k a month in rev, because how dialed in you have to be on financial operations and just understanding e-com analytics and how to structure offers profitably so that you can be profitable on first purchase, or how to be profitable on second purchase. It's just, you're trying to learn so much. It's such a hard model to go down when it's like you could just sell a 500 chair, have 400 margin and now you get a lot more to play with. Now you just have to figure out how do I spend $400 on Facebook to get a customer and I'll still break even, but instead you're trying to sell a $50 supplement where you have $16 of margin after shipping costs, after fulfillment costs, after transaction fees and it's. How do you sell a supplement for $16?
Speaker 1:Yeah, it's pretty competitive in that market as well.
Speaker 2:Yeah, you've started in the toughest e-com business model that you could possibly start in.
Speaker 1:Yeah, and they don't have. Obviously, if it's just a startup, they don't have the capital, or generally don't have the capital, to invest in brand over a long period of time to get, you know, I guess, some efficiencies of scale around that as well. So let's bring it back a step then, in terms of you mentioned off the top that Shopify analytics are rubbish. What should the audience that are listening to this podcast, and what should they, do about it? It's okay to sort of, can it? What's the solution then for them? Do you look at GA4? Do you export all of that and then run your own analytics through it? How do you suggest that they approach their measurements?
Speaker 2:Yeah, it's a good question. The first thing is Shopify analytics is the best out of all of the website platforms, so, even though it is not as helpful as you probably think it is, it's better than the other. And if you're on a different website hosting platform for Ecom, your analytics are even worse. So you better be on Shopify as like a starting point. But the really good thing about Shopify is their ability to aggregate reports and then export them. So we do a lot of report exporting and then we have our own consulting models that we've built out in Google Sheets where we can track and it's pretty insane the level of detail that we've gone to here. But I think it's immensely valuable for having these deeper insights, which is we track month-on-month unit economics. So most brands average. People love averages. I hate averages, yeah, like they're not useful that's why I hate average order value.
Speaker 2:That's why ltv I hate like these are all just averages with no specifics constraints put on them, and so unit economics change month on month, because discounts change month on month, because individual product SKUs change month on month and they all have different cogs. And so we track gross margin month on month. We track lifetime contribution margin across cohorts month on month, and so we can say, okay, over the last six months, what was our first order contribution margin? How much did we pay on CAC to acquire a customer? So we can see how profitable all of these audiences are. Yeah, and then we can go back and say, okay, in august we had an incredibly profitable month where our 90-day ltv to cac was a four. Okay, what did we do there? How can we hone in on that? What was in the retention strategy? Oh, it was because we ran a discount. Should we try that again? And then we do this pretty much across every single metric. So AOV, and you can build these like rudimentary versions of these models just by, for example, with an AOV cohort distribution, just export all your orders and then just do a pivot table, auto sort and then just graph it and then you can see the graph.
Speaker 2:With unit economics that's a little bit more difficult, but the difference between first-time and returning is really important.
Speaker 2:A lot of people don't consider how different a first-time customer is to a returning customer and because they average it, all of their KPIs are wrong all of them. Because a returning customer has a significantly different UPT, which is what we talked about earlier. They'll generally put more items in cart, but also discount rates will generally be much, much higher. And so when you look at first-time unit economics first returning you'll end up seeing that on returning, average discount rate is like 30%, and the reason for that is that brands love to get customers back through just sending discounts and emails and sending discounts and emails. And then what they don't realize as a subset of that is that when you're looking at lifetime value which is something that a lot of people like talking about now because of the rise of CPG brands yeah, you see $200 in lifetime value, $100 AOV, and so you go. Okay, so on average, we're acquiring a customer. They spend $100 on first purchase, which is incorrect because you're not breaking it down correctly but then the lifetime value is $200.
Speaker 2:So we can probably spend a little bit more to acquire a customer, and that's, I think, the line of thinking that a lot of e-com operators and agencies are going down. But all of that is wrong, because your lifetime value that extra $100 that you unlocked you would discount and get a 30% rate, and if you have 40% gross margins, you just took 75% of the margin out of it, and so that extra $100 wasn't an extra $40 of profit, it was an extra $10 of profit or an extra $15 of profit, and so you really unlocked almost no profit on the back end For a returning customer. Not to mention how much did it cost you to send all the emails? Like, were you using an agency? That was costing $500 to $600 an email? Did you have an in-person person doing that? And then, off the back of all of that, most people these days structure their Google and Facebook ad accounts in a way where 30 to 40% of their budget is just going towards existing customers anyway, and so you take that tack into consideration too, and you'd made no money. You had $200 LTV, but there was no profit on the LTV.
Speaker 2:And so now when your agency or you as an e-com operator see these two numbers and you go okay, we should just spend more on acquisition. Go and spend more. Your P&L drops to negative next month. Yeah, you wonder why I was baselining on these two metrics that I thought I understood, but there were all these layers underneath that. Unless you had the intricate details of them, you wouldn't have been able to make an educated decision as to like what next step to take. Yeah, brilliant.
Speaker 1:I love it, mate. It's so good, all right, so is that why you're starting to, you know, with your clients? Now, I think it was a LinkedIn post the other day you posted around you know, basically just working with clients on a P&L level, as opposed to sort of analytics. And then what does that sales process look like? In terms of like, when you're onboarding a new client or you're pitching to a new client, you obviously need to uncover. The more details you can the better, but will they give you access to their P&L at that point in time? Or how do you kind of what's the conversation like, just out of interest, in terms of sort of bringing them onboard and getting them to a point where they can sign on and you can sort of, I guess, most accurately forecast results, or where they're going?
Speaker 2:wrong? Yeah, that's a good question. Starting at the audit level, we took all the consulting models that we built and we now build them into our audit process. Yeah, and it takes ages. It takes so long. I end up spending like three hours on audits these days. But Is it a?
Speaker 1:paid audit. Do you do paid audits?
Speaker 2:No, they these days. But is it a paid audit? Do you do paid audits? No, they're free, okay, yeah they're free, and so we we need a value in that oh yeah yeah, like yeah, because I record a one and a half hour video over our consulting models and our free audits. Yeah and go and I point out stuff that they would have never known, because I'm pulling out all the stuff that we just talked about first you first time auto economics, returning customer auto.
Speaker 2:And the reason why we do it isn't to increase our close rate even though of course our close rate is through the roof because of how much value we provide up front. But the reason why we do it is so that we don't take on the wrong clients.
Speaker 1:Yeah, I think that's important right For any agency or for any client that's looking to bring on board an agency, is there are certain agencies for certain types of businesses and certain types of people, and I don't know if perhaps you've learned that the hard way. I certainly did bring in on a couple that I thought I could help and I thought I could change their ways, and you just can't. So, yeah, I think it's really important for both parties For sure.
Speaker 2:There's a lot of clients that I wouldn't have taken on now. If I did the audits that we do now, 12 months ago. Yeah, because even just the basics of looking at are they profitable on first purchase Even that information alone I would have seen the brand and gone oh wow, they're losing $10 on first purchase and they're suggesting that we should 2x spend next month. We're just going to 2x their losses. Yeah, but at the time I wasn't looking all the way down to the P&L level, I wasn't looking in this kind of detail, and so we were looking at the brand overall and going well, historically they did $600,000 a month in revenue. So, yeah, we could probably get them there. We're better than the other agency. Yeah, and like we probably are on paper. But we didn't understand, like, the level of detail in terms of the finances behind it, and so that's the reason why we built all of that into the audit process. But then, when it comes to bringing a client on board and actually looking at the P&L, the funny thing is and I don't think most prospects or clients realize this but if you do a basic order export out of Shopify, you pretty much get the whole P&L except operating expenses. Okay, and so I can aggregate. And this is why it's funny. Bought out of Shopify, you pretty much get the whole P&L except operating expenses. Okay, and so I can aggregate. And this is why it's funny is because in an audit video I'll start the audit with.
Speaker 2:So, anyway, this is your P&L and I can see last month you did $3,000 in profit contribution and they're watching it going. How does he know? And my accountant hasn't even given me the P&L for last month and how does he have it? Yeah, and it's because you can get all of the data, because it's all there in Shopify. The only thing missing is like how much you're spending on staff, warehousing et cetera. And so I just make a base assumption based on the size of the business and put it in there, and then, once they come on board, we get the actual figures. So we request for your actual operating expenses so that we can build it into the model. And then there's a few other numbers that we need to complete some of the models as well. But funnily enough, we don't really need zero access or QuickBooks access. We have it for some clients. They just give us an invite and we're in there.
Speaker 2:But it's not really necessary for us to get all the information that we need.
Speaker 1:Yeah, that's so good though Like to go to that level of detail. I don't think there's too many agencies that are doing that, so you know, credit to you.
Speaker 1:It's fantastic Thanks. Do you want to touch on contribution margin, which we did touch on earlier around that, but it's something that you know I've learned a lot about. We had Carla Penkarn on who's you know's in the beta testing. I'm not sure if you're plugged into that with Profit Peak, but I know a few people that are on that beta test at the moment and are pretty impressed with it all. Is that a takeaway tip that you can give e-commerce business owners is to really know their contribution margin. Is that the metric? I know there's no one metric, but if they have one takeaway from this podcast, it's to know their, their, contribution margin. That's going to inform a lot of their decisions and they can start to question either their own team or, uh, question their agencies on terms of, you know, actual profitability. Is that contribution margin kind of the, the metric?
Speaker 2:yes, probably yes yes, yes, but no yeah, I've done a lot of work with the Store Hero team, so very similar to Peak Profit. I believe it is Profit Peak, profit Peak, not sponsored. But yeah, yeah, they've got a similar SaaS product, which is that it essentially just goes down to the contribution margin level and you can report on it on a daily basis. I think that is probably a good starting point to improve financial operations within an e-commerce brand, and I think it's also a really good North Star for a marketing team as well. And this is where I think marketing isn't where it should be across the board.
Speaker 2:On the agency space, where the whole point, in fact, you could simplify the entire business and this might be like a big statement, but this at least applies to e and the agency model, which is that business is number one how do I drive down cac as low as possible, so the cost to acquire a customer? And then number two, which is the other side of the equation how do I maximize contribution margin over the lifetime of each customer? Yeah, and then if that is bigger than that, you make money, and and if it's the other way around, you don't, and that's just how it all works. And so We've got our takeaway clip right there. And so if the marketing agency, if their whole role is keep cash as low as possible, but they have no idea what the contribution margin is on the other side of the equation, how are they meant to know what they're doing?
Speaker 2:Because they could say, okay, cac's at 20, and then we tripled spend, so there's always going to be an erosion in efficiency, and so maybe CAC goes to 30. And then they're like, okay, that's pretty good, let's double spend again. And then CAC goes to 35. And they're like, well, that's pretty good. As a marketing agency, as an e-commerce operator, looking at just that equation, which is exactly what all these SaaS products allow you to do, it's what you should be looking at, because it's just going to tell you okay, how much money am I left with at the end of the day, every single day, and do I have enough of it to cover operating expenses? And then it allows you to not over inflate operating expenses as well, which is what so many startup e-com brands do. I think.
Speaker 2:I don't think it's even e-com, I think it's us, I think it's agencies, it's everything which is that there's this ideology of you need to reinvest in the business. Yeah, and people believe that that reinvestment comes from reinvesting into operating expenses, when I think that is fundamentally the worst way that you could reinvestment comes from reinvesting into operating expenses, when I think that is fundamentally the worst way that you could reinvest into a business because operating expenses are so difficult to cut. And this is the funny thing, which is now that we get OPEX from clients. I was talking to someone the other day and I think they said to me on a podcast they went oh, that's fantastic that you can now operate. You can look at operating expenses, because now you can look at clients and say, okay, just cut your operating expenses. And I said I wish. But like, what's the OPEX? It's people and it's warehousing costs that are on lease terms of two to four years. How do I tell a client, yeah, just cut your lease that you've agreed to for four years. And you just cut your staff cut Sally, get her out. Lick years. And you just cut your staff, cut sally, get her out. Like some people, yeah, like you just can't.
Speaker 2:And so you need to be so careful anytime you're adding something to opex, you better be very, very sure that that should be added to your pnl, because if it's not, then don't add it. Yeah, you want to be operating at the lowest percentage opex in total proportion to revenue as possible. Really, you shouldn't have opex above 20. So if you're doing 100 000 in rev, opex shouldn't be above 20k at a max.
Speaker 2:Now the thing is is that operating expenses do democratize at scale in proportion to total revenue, and what I mean by that is, logically speaking and people always make this sell is that as revenue increases, opex won't increase in proportion.
Speaker 2:It'll increase a lot slower. And so, as a percentage, opex maybe when you're a tiny brand is 40%, but then as you start to scale, it'll go down to 10. Most brands don't do that. They just keep increasing operating expenses linearly because they are under the assumption that they should back operating expenses into future growth, and so they're like, yeah, we're increasing linearly, but that's because we're going to have exponential growth later, once again like a super flawed assumption, because you're building in growth that doesn't exist and I think building a and this was like a Jeff Bezos quote that I heard once, which I thought was great which is that the life cycle of a company is based on how slow it takes them to get to their peak revenue, and so if it takes you 10 years to reach your peak, it will take 10 years for you to die off the back of that. If it takes you one year to reach your peak, you'll be gone in a year.
Speaker 1:Yeah right, Interesting.
Speaker 2:And I think that was like a good metaphor for sustainable growth and not just rapidly reinvesting in OPEX, because if you do that, you'll be the brand that one year later they're at 1% net profit, they drop 10% top line and the whole business goes under.
Speaker 1:Yeah, have you made that mistake? Because I've made that mistake as well, as an agency owner as well.
Speaker 2:Yeah.
Speaker 1:Is that a mistake you guys made, or weren't aware of early days, or?
Speaker 2:Yeah, you can probably tell I'm talking from personal experience.
Speaker 1:Well, that's it mate, like you know, at the end of the day, like you know, you're fairly new to running your own business, as am I, and those are mistakes that are easy to make. I think people that have been in business a lot longer than us probably making them right now as well. Like it's just, yeah, you sit back and question some of those things. Then it's bloody interesting, yeah.
Speaker 2:Well, the thing is with the agency model as well. It's way more cutthroat than e-commerce, and this is probably good context for any e-commerce brands listening as well, because I think it's important to understand the agency model, to understand number one, probably why there isn't that many good agencies yeah, but number two, if you're going to work with them. Number one, probably why there isn't that many good agencies yeah, but number two, if you're going to work with them, which I fundamentally believe that you have to work with agencies yes, if you're a business, because an agency is a conduit of the most up-to-date information within their specific domain, and so if you ever try to hire someone in-house, unless you're an enterprise brand and you have like 100 employees in that domain, you're never going to be up to date on the forefront, and so if your competitor works with a really competent agency, they will just beat you in that domain. You're never going to be up to date on the forefront, and so if your competitor works with a really competent agency, they will just beat you in that domain, and so there's always going to be this relationship of client side with agency if you're growing rapidly, and so understanding how the agency works is important, and tying this back to what I was actually starting off with is that the agency business model works, that there's no variable costs.
Speaker 2:In e-commerce. You have cost of goods sold, which, based on accrual accounting, your cost of goods sold will change month on month if your revenue drops. If your revenue drops 50%, great, your COGS dropped 50% because you didn't have to fulfill as many orders. So what ends up happening is that if you're a healthy e-com brand and we have we actually do this in the audit process. I have an analytical model that pulls their P&L and then showcases how much of a revenue dip could they take in top line before they start going into negative EBITDA. And a really healthy e-com brand can drop 70% in top line revenue and still be profitable, which is crazy. That's a really good position of air An agency. There's no variable cost, it's all fixed. So if an agency is operating at 20% net profit, which is a typical agency at scale, if you drop 20% on top line, you're negative EBITDA and then all of the negative externalities from that start to arise and you start to figure out why a lot of agencies are bad. Yeah, and so if a big agency right now dropped 20% on top line revenue. They dropped to 0%.
Speaker 2:What do they do? The solution is we need to sign more clients. We have no money to hire more salespeople, so we can't hire more salespeople. What do we do? Well, we're already getting a thousand leads a month. We turn 600 of them down because they're not good businesses and we shouldn't really work with them. Start signing them, yeah. Start bringing them through the door, and so then they start bringing through all these clients through the door that aren't ICP. And then what happens? Churn goes up, employee satisfaction goes down, because now all of your employees are getting shouted at by businesses that you can't drive results for. So now your employee churn goes up and you start losing employees. And then it's just this death spiral of every agency. Yeah.
Speaker 1:I was listening to, as I mentioned before we started recording. I listened to a previous Blues Brothers podcast episode, which you and Sebastian do and do a great job with it, and yeah, I heard the analogy of that sort of taking on water, of that leaking. You know, the boat starts to leak, they take on more and more water, you get more and more drag, so it makes complete sense. Yeah, I think that's a good takeaway that you've got to take the time to know the agency before you just sign up. Agencies get such a bad rap, and maybe for good reason, a lot of the time, but it's probably because they're not in that level of detail and to get to that level of detail they have to spend a bit more on an agency, I would imagine.
Speaker 1:I don't know what your prices are, but you can go and get the cheapest quote out there for an agency, but it turns out to be the most expensive. And then you try three or four different cheap agencies and you go. None of them are any good. So actually it's just because you haven't really taken the time to get to know that agency, know what they can do, know where they specialize in, and I think, too, there's just a lot of generalist agencies out there, which is why I've just focused on SEO and Google ads and why you guys are sort of focusing on paid is because there's just so many generalists out there and they get smoked by elite operators such as you guys in the market. So, yeah, it's an interesting space, you know. I've worked for, you know, generalist marketing agencies and learning so much more on my own and just focusing on on a couple of areas in particular.
Speaker 1:Yeah, yeah, for sure, we could talk about this all day yeah exactly, but I think it's helpful to e-commerce brands to understand that the different levels of agencies and some of the mistakes that you see and I'm quite happy to mention that I brought on a couple early days that I thought I could help, I thought I could change their ways, I thought I could improve their website and their thinking, and sometimes you just can't and then they walk away. They've had a bad experience, I've had a bad experience. I'm frustrated. No one's singing anyone's praises and it's not good for anyone and no one wants to take on a client that they can't help. I think, yeah, certainly, from my point of view anyway.
Speaker 2:Well, it's different when the sales team is disconnected from the delivery team. Yeah, and I think that's where like-.
Speaker 1:That is spot on. That is spot on. Yeah, I've been with an agency where it agency whatever where you know it's just sales, and then you handball it over to the technical guys and the technical guys are like we can't do that. You know what I mean. What have you done here? It's like oh you know, do your best, yeah, anyway.
Speaker 2:Yeah, well, I think there's. Like there's two truths, which is truth number one all e-commerce brands at scale quickly require at least some import from agency side. Yeah, because, as I said before, to get the highest degree of technical competence within a domain that will usually only be found at an agency. And then the second core truth is the agency model is unbelievably difficult to scale. I think it's way harder to scale than e-com. As someone that's worked with over 250 e-commerce brands and scaled my own e-com brands, I'm trying to scale. I think it's way harder to scale than e-com. As someone that's worked with over 250 e-commerce brands and scaled my own e-com brands.
Speaker 2:Trying to scale an agency is so tough. I think it's doable. There's actually a few big agencies that do an incredible job. I would say that we're verging on probably medium size now and I still think we do an incredible job. But there is just so much effort and internal systems that go into it that scaling human resources essentially scaling a service requires consistent talent upscaling internally, yeah, so you need to be constantly disseminating learnings across the board. You need to be ensuring that everyone that you hire cares genuinely. And God, that is a difficult thing in itself. That's hard, yeah.
Speaker 1:But I think, if my, you know, if you look after people look after your people.
Speaker 1:I think is a Richard Branson quote. But if you're hiring people on and agencies can be guilty of that as well hiring on pretty low salaries, getting junior people in because it's less of a hard cost, then those people don't care as much, whereas you look after them, you upskill them, you show them opportunities for growth, you actually teach them to be better at what they do. They're going to care more and your clients are going to get better results as well.
Speaker 2:Yeah, a client said this today. They actually dropped us a Google review this morning, nice, and our Google reviews are always. We send them into the internal winning chats to our team. So we try to get the client to mention any account managers and really shout them out. And the one thing that he said was BlueSense truly feels like an example is being set from the top down. Okay, and I think that's probably true for small to medium-sized businesses, which is the example that is set at the top, or the way that the people at the top act disseminates down into the team.
Speaker 2:And I think this is as someone that does not have kids and is going to say something wildly- out of context for me I'm going to say it anyway which is I think that that also cross-translates to parenting, which is that if you see rich parents with kids that treat people like, it's normally because when the family is at dinner at a restaurant, it's because the parents treat the staff like and it's the parents that are rich that treat everyone with respect. The kids see that when they're growing up and they infer that that's how people are, and then they treat people with respect. And I think that's the same in terms of organizational hierarchy, which is that the people at the top, the way that they act, will bleed down into the people under them.
Speaker 1:Yeah, I love that. Yeah, that's good mate. There's a couple of good takeaways here from this podcast. A couple more questions before we wrap up. Last podcast, I mentioned what do you think we'll be talking about in 12 months' time? Do you remember what the answer was?
Speaker 2:YouTube YouTube.
Speaker 1:Shorts, youtube Shorts yeah, 100%. So are you still bullish on YouTube Shorts as a channel? What are you thinking now, what do you think we'll talk about in the next 12 months' time, and what do you think about your previous prediction?
Speaker 2:Yeah, in the next 12 months' time. I hope I'm more accurate than the last one. Well, it's still a thing, right?
Speaker 1:It's still a. Thing.
Speaker 2:Yeah for sure. So I'm not sure what I said last time, so I might be repeating myself, but YouTube is an interesting one because, particularly in e-commerce, because the days to conversion, the conversion cycle, is very long, and this comes down to attribution settings within platforms, and people are going to argue with this People get really angry when I say this, but I'm going to say it anyway. Let's do it which is that Facebook attributes based on seven-day click, and so what that means for Facebook as a platform is that they can only claim a conversion if someone purchases within seven days. And Facebook, in terms of big tech incentive structures, is that they want to attribute as much revenue as they possibly can, because if they can attribute all of your revenue to the platform, they can maximize their own revenue, because you as an e-commerce operator is going to go well, facebook's driving all my revenue. We need to put more spend there, and so that's the easiest way to drive revenue up Seven-day click.
Speaker 2:If that's the only way that Facebook can attribute, what they're going to do is just go after people that have fast buying cycles, that are going to buy within seven days, because there's no point in targeting Jimmy that on average, it takes 25 days because he has to ask his wife, and then he asks his kids and then he buys.
Speaker 2:Let's not target him. Let's target Nathan, because I know that he'll buy within 10 hours, and so when you end up launching on Facebook, even as a startup brand with $0 revenue, you just save revenue within like 24 hours. Launch on YouTube you won't see a purchase for 20 days. Yeah, and the reason being is that Google tracks users for all the way up to 90-day click windows. They have no rush, they don't have to get people over the line straight away and YouTube as a platform as well, heavily optimizes towards time on site. Youtube has the highest time on site out of any website in the world. And guess what? It is an average session on YouTube, and this is the average of every single person that goes on YouTube. How much time do they spend?
Speaker 1:I would say, I don't know three hours.
Speaker 2:It's a lot lower.
Speaker 1:I'm thinking like screen time. Yeah, okay, I'll edit that bit out. Give me lot lower, it's okay, because you gotta think like screen time. Yeah, okay, it's, uh, it's, oh, I added that bit out.
Speaker 2:Give me another. What's it close? It's 20, I think it's like 24 minutes. Okay, yeah, and so I wasn't far off.
Speaker 2:Well, it's still crazy because even people imagine how many times you've gone on youtube for five seconds and gone off. Yeah, average it all out, you still would have, on average, spent 25 minutes, yeah. And so YouTube as a platform is heavily incentivized towards keeping people on platform rather than driving them off, and so that also ties into that consumer cycle. And so when you run a YouTube campaign whether it's long or short and I think like six months ago, I thought maybe it'll be different from shorts, maybe people will interact differently, but they don't really. People like staying on platform on YouTube. They're used to staying on platform. But I think that YouTube still is a really good driver of increases in marketing efficiency as a whole. And so anytime we've taken a client that's spending a decent amount and you have to be spending a decent amount to really measure the statistical relevancy of this test is introduce YouTube at a relatively low budget. Even just do retargeting. You can do cold as well, but start with retargeting and watch your MER or your efficiency overall. You could look at contribution margin if you want, and you should see it improve. Yeah, okay, it won't improve heaps, but it'll improve a bit because now you've got an extra touch point with all of those consumers, yeah, and so you're more likely to push them down the line. And something that I don't think most people really think about I don't hear people talking about it is that because of these long buying cycles because most people take 7, 13, 14 days to buy it's not in getting the click, and this applies to google ads specifically as well.
Speaker 2:We have a lot of furniture clients and people don't buy a couch in one hour. Yeah, they go, I want a couch. And then they, they go to google, they click on like six listings. They go I like that one, I like this one, I like this one. And then they sit on, they think about it for 10 days and every time they go into their living room, they go ah, yeah, I wouldn't mind a couch.
Speaker 2:And you know which of those seven businesses ends up selling the cash to that consumer? The one that retargets the heaviest? Yeah, because that person's forgotten about all the ones that didn't retarget them, and all they remember is the one that's now on their YouTube, that's now on their Facebook, that's now on their display, that's now on their Gmail ads. They're everywhere and they go okay, it's probably time that I buy that couch. And they click on that listing and so people that are just driving off one-day clicks and trying to drive conversions, you're missing. Well, all your competitors are just beating you because they're staying on top of that consumer before they buy. So it's thinking about the whole entire customer journey, not just hey, let's get traffic to site.
Speaker 1:Yeah, spot on. I think that was my biggest takeaway from Retail Fest as well and my comment at the start of this podcast around brands that are doing those 1% as well are winning and the ones that aren't. So the ones that are just running Google Ads and trying to smash it and trying to get as much revenue and trying to get the clicks through are hurting because they're not doing the additional stuff. They're not doing that extra rep in the gym, they're not looking at what they eat from a diet point of view, if we're talking about, you know, athletes. Same can be applied to e-commerce businesses, the ones that aren't actually nurturing the customer. You know, and it's so you're spot on with what you say there. And you know I'm in a similar position. I've got a furniture client as well and high-end purchases, but they just don't transact. You know, transact on that first click and sometimes, when you're so far in that e-commerce business or that brand, you're like why aren't they? And it's like it's so easy.
Speaker 1:As another great reason to use an agency, it's just because people don't click on the first couch they find and buy it. It's a five grand couch. No one I mean hardly anyone. I say no one, but hardly anyone will do that. They want to go in, just maybe they want to go into the showroom. And so are there some lead gen campaigns that you can start to run to get people to book in so you can track it, get them actually give them a good experience in store. And we're talking more sort of omni-channel than pure e-com. But it's cheaper to get an email address and a booking than it is to sell a couch. But there are a lot of ways. But I think that's the takeaway. One of the takeaways for me in this podcast is again just reiterating that you've got to do all of these little touch points well, because your customer is human For sure.
Speaker 2:Yeah, it's not, in fact, the podcast that you were talking about previously.
Speaker 2:That we did on our podcast with Carson, who did own the biggest google ads agency in the world.
Speaker 2:One thing that he pushes home a lot is that it's not one silver bullet, it's 100 golden bbs, and so it's getting the 101 percenters right. That makes you stand out and everyone looks at you, whether you're an e-com operator or an e-com brand or you're an agency, and like, like you could almost look at blue sense if you thought we were any good and you could go I wonder how they're so good. And I wish I could just and we've tried I wish I could just say, oh, that's why, like, it's one reason or it's two reasons, but at the end of the day, it's like 150 things that all make up tiny one percenters and in isolation you look at it and you go why does me understanding average order value even matter? Yeah, but then it's that with this, with that, and then it all adds together and compounds and then you actually say, oh, okay, that's why they're in that position or that's why that brand is in that position and that's why we're not.
Speaker 1:Yeah, yeah, 100%. Well, it's always hard to kind of when you're so emotional into the brand. It's hard to be subjective sometimes, but you know that's why you need good partners. Yeah for sure, beautiful mate. Thank you for the podcast.