Metrics That Matter: Exploring the Diagnostic Toolkit for Ecommerce Sellers

0:15 Stephen Brown

Welcome to the Metrics That Matter webinar with LedgerGurus and Common Thread Collective. We're going to be exploring the diagnostic toolkit for ecommerce sellers.

I am Stephen Brown, I am the COO of LedgerGurus, and I'm also a co-owner of a direct to consumer brand, Solé Toscana. With me, I have Richard Gaffen. Richard, do you want to introduce yourself?

0:33 Richard Gaffen

Yeah. My name is Richard. I'm the Director of Digital Product Strategy at Common Thread Collective. We're an ecommerce growth agency. And so my job is to create public facing tools that people can then use to aid their own ecommerce growth.

0:45 Stephen Brown

What you're going to learn about is the 10 key metrics that make up the ecommerce diagnostic toolkit, and that measure performance across operations, customer acquisition and retention. How to break down where your brand is over or underperforming, and get a clear picture of your business growth opportunity.

With that, I'm going to turn it over to Richard to take the lead.

1:01 What the diagnostic toolkit is

Richard Gaffen

Just want to talk a little bit about what the ecommerce diagnostic toolkit is. Essentially it's sort of a glorified audit.

Part of the impetus behind building this thing is we discovered that there were certain clients that we would have where, because certain elements of their operational mechanics, inventory management, cash flow, costs, weren't ideal or weren't optimised, it really affected our ability to do marketing for them.

1:26 Richard Gaffen

And that kind of grew into this idea of creating an overall business assessment that evaluates the growth potential of your business. You hit these certain metrics in a certain way, it means your business has a lot of potential to grow. For anybody who's trying to grow a business in ecommerce, having this information, we think, is absolutely mission critical.

1:44 Richard Gaffen

So the tagline for the ecommerce diagnostic tool is, the only way to move forward is to know exactly where you stand.

Part of the reason that we came up with that is that's maybe the number one thing that we hear from potential clients, is a lack of understanding about where they should go next. And that might come from, hey, we're really struggling and we don't know how to fix this. But it also may be like, we're doing really well, but we know that there's more. What do we do next? How do we get eyes on the data to understand what the best next step might be?

2:12 Richard Gaffen

How would it change the way you run your business if you could precisely identify your weak points and expend all your energy running after your biggest opportunities? And I think that question sort of answers itself. I mean, it would change everything.

The idea behind the diagnostic toolkit is to give a guiding light to say, hey, we know there are a million things you can do, but how about focusing on these one or two things, because we think that they're going to be most impactful to your business.

2:37 The duckweed test

Richard Gaffen

Before we get into the rest of this presentation, we need to talk about duckweed.

So duckweed, this is an analogy that we used to set up why we came up with this product a couple of years ago. And really last year too. Ecommerce was going through a pretty rough time, and in some ways it still is. And one thing we became obsessed with was, what type of brand is able to survive no matter what?

3:01 Richard Gaffen

And so as we were trying to think of an analogy for this, the one that came to the forefront was duckweed. You guys have probably all seen it before. It's essentially a floating aquatic plant that grows on top of a pond.

But the thing about duckweed that makes it different from almost every other plant in existence is its DNA is such that it'll grow when it's light and it'll grow when it's dark. So duckweed grows at many times the rate of any other plant, because it continues to grow when it's dark outside.

3:25 Richard Gaffen

That's what the ecommerce diagnostic toolkit is meant to discover. Are you a brand that is able to grow in bad times and in good times, in the dark and in the light? And if you're not there, what are the things you can do to bring yourself to a point where you can grow in the dark?

3:43 The operational metrics

Richard Gaffen

And then metric number one. Again, I want to set this up in contrast to the metrics that most marketers usually measure, which are on platform returns. Facebook ROAS, Google ROAS.

And what happens is those metrics, because they're not tied to the overall profitability of the business and all of the other business realities that exist for an ecommerce brand, they end up giving limited information and creating scenarios where pushing after those metrics actually doesn't really help the most important thing, which is your bottom line, which is building a profitable business.

4:13 Richard Gaffen

So we wanted to discover 10 key KPIs that are actual indicators of whether or not a business has true growth potential, beyond simply the Facebook ad account is performing really well or really poorly or whatever.

4:26 Richard Gaffen

So the first one, we call this cost of delivery percentage.

Most people would measure COGS as a percentage of revenue, like our COGS is 20%. We sort of upgrade that, or evolve that, to cost of delivery, which is all of the variable costs that go into selling product.

4:41 Richard Gaffen

So COGS obviously normally includes the cost of manufacture. Often it also includes the landed COGS, which is the cost to ship the product to you. But then we also include things like the cost to ship to the customer, tax paid, fees levied by let's say Shopify on each individual purchase, credit card processing fees. Any fee that scales with volume of sales.

5:06 Stephen Brown

I can tell you, we would call it from an accounting perspective cost of sales. It's not something you usually find in a profit and loss, but any cost related to the sale of the product.

5:16 Richard Gaffen

Right. And so the reason that we want to measure that is it allows us to judge how profitable our marketing is. Because you run an ad, you make a sale. If all of the costs associated with that sale, which have to include things like credit card processing fees, pick, pack fees, whatever, if all the costs associated with that one sale leave you in the negative, then you have a problem.

5:35 Richard Gaffen

Even if your ROAS looks great, there's still an issue if your AOV ends up being lower than CAC plus cost of delivery. Measuring CAC is a separate thing altogether, but this is the first thing.

5:47 Richard Gaffen

So let's go to number two here. OPEX percentage. This is straightforward, everybody measures this. This is just your fixed costs as a percentage of revenue.

There can be some argument about what's included as OPEX and what isn't. But generally speaking, we would say any expense that your business has that does not scale with sales volume, or scales with sales volume very slowly. Generally speaking, OPEX is anything that doesn't scale directly with sales volume.

6:10 Stephen Brown

What we've seen as an accounting firm focused on ecommerce is most of your spend is in your cost of goods, your product costs, your ad spend, which again would be that cost of delivery or cost of sale as we would describe it. And then payroll. Fulfilment I put in there as well.

Those are your big costs. Your product costs, your fulfilment costs, your ad spend, and your payroll.

6:36 Stephen Brown

A lot of businesses get crazy though. They'll spend way too much on agency.

6:40 Stephen Brown

And I think the model here kind of helps you look at it. And one of the things that the diagnostic toolkit does that I loved is it gives some benchmarks for what is healthy.

6:49 Richard Gaffen

Yeah. And at the end of this we'll get into what we would consider to be healthy benchmarks, or growth forward benchmarks.

Making sure you have an eye on this metric is really important, because this stuff can really balloon if you're not keeping an eye on it.

7:03 Richard Gaffen

Let's move on to number three here. And this is the one that I'm most interested to talk to you about, Stephen.

One thing that really came to the forefront, especially during the lean times that ecommerce has been having recently, is the importance of cash flow.

7:18 Richard Gaffen

And so this is our definition of cash conversion cycle, which is the number of days it takes to turn invested cash into cash on hand. Essentially that would mean you pay for inventory. How many days later do you sell that inventory and then receive the cash for it?

7:34 Richard Gaffen

So there are three sub metrics that play into this. One is days of inventory outstanding, days of sales outstanding, and days of payable outstanding.

So days inventory is, from the time that you purchase inventory to the time you sell it, how many days is that? Days of sales outstanding is, when you're making sales on credit, how long does it take people to pay their bill? And then days payable outstanding is, how long do you have to pay your bills?

7:59 Richard Gaffen

And so the idea there is to get a sense of how much cash do you have on hand at any given time. Because having cash means the ability to make decisions. And that's a critical metric to understand when you think about what resources you can pull on to actually grow.

8:14 Stephen Brown

I love that you guys have this metric. I think it's super important. With any product, this makes or breaks a lot of businesses, because your cash is critical.

And I think it's more important today because the cost of lending is so much more expensive than it was three years ago. The supply chain, well, it's better than it was in 21 and the beginning of 2022, but it's still slower than it was in 2019.

8:37 Stephen Brown

So I think getting a good handle on the cash conversion cycle, and having the shortest cash conversion cycle possible, is excellent.

8:46 The marketing and retention metrics

Richard Gaffen

So those first three are really the operational metrics. These are more of the marketing metrics.

We always like to stand these up in contrast to just single channel ROAS, that ultimately is a fourth or fifth tier metric.

8:57 Richard Gaffen

What's more important is looking at things like 60 day LTV percentage. So this is the average percentage increase in customer value 60 days after first purchase.

So simply, somebody pays, maybe their first order is a hundred dollars, and then on average 60 days later they're worth, maybe they make another purchase and maybe it's $200. That would be pretty big. But let's say they've become worth 150 bucks to you or something like that on average.

9:26 Richard Gaffen

That is a great metric to look at to think about how long you can float a loss on first order. If you want to grow, you want to be as close to break even on first purchase as possible.

And that's because as you try to reach more people, your CAC, your customer acquisition cost, how much you're paying for somebody on Facebook let's say, will inevitably go up. And so in order to grow, a rise in CAC is actually a good indicator that you are spending more, that you are growing your customer base.

9:57 Richard Gaffen

But then of course you also have to make money on those sales. You can't be cash negative with them.

So what 60 day LTV percentage helps you measure is, okay, if my customer value grows this much in 60 days, it means I can actually take a higher CAC. And if I can take a higher CAC, it means I can actually reach more people, grow my spend volume, grow my sales volume as well.

10:21 Richard Gaffen

So I'll give a little semi anecdote here from our own brand, Bambu Earth. We were losing on first order terribly. Our Facebook ROAS was terrible. Our first order revenue was, we were losing money on first purchase.

We were thinking about shutting the business down, until we looked at specific cohorts and were able to see that within 60 days they actually grew so much in terms of their value to us that actually 60 days later we were above break even on that first purchase.

10:49 Richard Gaffen

And so we're like, oh wait, we can just lean into this and our bottom line will be okay. And we were able to grow. And so we've grown probably tenfold since four years ago, just with, I will say, a negative first order value, because we understand that in 60 days our revenue will increase enough to float that initial CAC.

11:08 Stephen Brown

I love the way you're thinking, with the dynamics being more than just what is the average order value, but how much growth are you getting from that customer?

11:18 Richard Gaffen

Okay, let's move on to the next one then. This is basically the same. One year LTV percentage is the average percentage increase in customer value 365 days after first purchase.

If 60 day LTV is a good indicator of your short-term retention, this is a good indicator of your long-term retention. Are people sticking around for a long time? Do you have a product that they can keep coming back for?

11:34 Richard Gaffen

Okay, FOV to nCAC. This is the ratio of first order value to new customer acquisition costs specifically.

So first order value is AOV minus cost of delivery, so minus all of the variable costs, minus CAC, and then divided by CAC. And that gives you the ratio. You could say advertising to sales ratio maybe is a similar metric to this. But this is just giving you an idea of whether or not you're profitable on first purchase or not.

12:04 Richard Gaffen

Number seven, this is your number of distribution channels, how many revenue sources your brand has. This is as simple as, don't put too many eggs in one basket. If you are only an ecommerce store, that's going to be more volatile. It's basic. Diversify in terms of your sales channels and you'll be in a better, more stable position.

12:20 Richard Gaffen

Organic traffic percentage. So this is, again, another problem that we see with a lot of brands that come in is that they're over leveraged on paid. And because paid revenue is so volatile and you have to pay for it, whereas organic traffic is much more stable and it also doesn't cost anything, a higher percentage of organic traffic is going to create a more stable growth environment than a higher percentage of paid traffic.

12:44 Richard Gaffen

If every time you hit send you had to pay, we would consider that paid.

12:48 Richard Gaffen

So let's jump to nine, one year LTV to nCAC. This is again just like FOV to nCAC, first order value to new customer acquisition costs. This is one year LTV to new customer acquisition costs.

And this is a good way to think about your return on investment, which is to say, if I put a dollar into this business, after a year I get $2 out. That's a pretty good investment. And so it's a way to think about what is the long term value creation of your brand.

13:14 Richard Gaffen

Okay, revenue peaks. So the idea is the number of months in the year where revenue outperforms the mean by at least 25%.

And what that's a measure of is, are you taking advantage of the entire year to build moments where you can spike revenue?

13:33 Richard Gaffen

This is a big untapped resource I think for a lot of brands. Everybody has a peak. Usually everybody has a peak around Black Friday and Cyber Monday. Part of the attitude is that, oh, March, nothing really happens. April, nothing really happens. Oh, this is a downtime for our brand.

13:47 Richard Gaffen

Our challenge then with this is to say, look at the entire year and figure out ways that you can fill in those valleys and actually invert them and turn them into peaks.

And so what I would say is, seek out down months and think about, maybe this is where I drop a new product. Maybe this is where we do a special, let's say, summer sale. Maybe this is where we take a lesser known holiday and we create some sort of promotion around that.

14:15 Richard Gaffen

And the idea is that there's a lot of opportunity to sell, but you have to create moments that people will buy into and then buy your product around as well. Think about how you can create moments throughout the year.

14:26 The growth quotient and benchmarks

Richard Gaffen

Those are the 10. We'll talk about what the output of the diagnostic report is.

So this is for our brand Bambu Earth. The diagnostic toolkit outputs something that we call the GQ, the growth quotient.

14:36 Richard Gaffen

And the idea is, it's like IQ, your intelligence quotient. You set a threshold. If you hit the benchmarks that we set for each one of these metrics, and you hit them perfectly, you'll have a 130 GQ. And that correlates to, 130 is the IQ score you need to get into Mensa.

14:57 Richard Gaffen

So that elite level, or the level at which we can confidently say that your brand has a ton of growth potential. Basically the fire's already lit, we just need to put a little lighter fluid on it. That's 130.

15:08 Richard Gaffen

And so you can see that our own brand Bambu is below that benchmark, because there are certain places that are affecting this score.

But these are all of the benchmarks that go along with it. Depending on how much you exceed or miss the benchmark, it adds or subtracts from the GQ score of 130.

15:27 Richard Gaffen

So if you're missing all of these by a lot, it'll subtract those scores from your GQ and give you a low GQ. And then if you exceed them by a lot, they'll add. Conceivably there's no upper limit to how high your GQ score could be, or how low it could be.

15:43 Richard Gaffen

I'll go through each one of these one by one. These are the detailed results for our brand, Bambu.

The benchmark for cost of delivery, 30% or lower. For OPEX, 25% or lower. For cash conversion cycle, I do think this is maybe a little bit too high of a bar, but a zero day cash conversion cycle.

16:00 Stephen Brown

Yeah, I wanted to ask you about this. How often do you come across brands that have a zero or better cash conversion cycle?

16:07 Richard Gaffen

Very, very rarely.

16:09 Stephen Brown

Did you say the bar's too high? I mean, that's probably one of my questions.

16:14 Richard Gaffen

There's a possibility of that. I think there are two ways to think about it.

One is that if a 130 GQ score is the most elite level brand, then I would say yeah, that's true. Having a negative cash conversion cycle is a hallmark of a brand that's really crushing it. It can be done. You have to be very good with your supply chain, you have to be really smart with how you execute. But there are examples out there of businesses that have figured this out.

16:39 Richard Gaffen

60 day incremental revenue growth percentage is 30% growth after 60 days, that's our benchmark. We would say if a brand is at that or above, they're in a great position in terms of their short-term retention.

16:51 Richard Gaffen

Then a hundred percent revenue growth after a year. Another great indicator that you have a solid committed customer base, and your long-term retention efforts, which include things like how good is your customer service, what's the experience of the product, are they having a delightful experience with it that's getting them to tell their friends and makes them want to come back. So our benchmark there is greater than or equal to a hundred percent.

17:15 Richard Gaffen

Then first order value, FOV to nCAC, our benchmark is zero, like breakeven. If your first order value is above breakeven, you're in a good position.

Number of distribution channels, we want to see three or more. Percentage of organic traffic, 50% or higher. And then one year LTV to nCAC, 0.5 or higher. And then number of revenue peaks, four.

17:40 Richard Gaffen

What I want to speak to with this is how we use this then, or how you can even use it to diagnose issues with the business. We'll call them weaknesses and opportunities.

And I think you can see really clearly that with Bambu Earth, if you look in the rightmost column, you'll see whether or not there's a positive or negative effect on the GQ score.

17:59 Richard Gaffen

So right now the biggest negative effect is cash conversion cycle. That could be brought down, but that wouldn't be the first place we would go.

We would look at probably percentage of organic traffic. We're 46% against a benchmark of 50. So that means that this is something that I can definitely confirm, Bambu Earth has an issue with being over leveraged. We have a difficult time growing our organic traffic as a percentage of revenue.

18:23 Richard Gaffen

So that's a clear next step that we need to take on. How do we figure out how to reduce that and how to grow our organic traffic?

Number of distribution channels, there's a negative five impact there. That's definitely a place that we could expand that would be important.

18:37 Richard Gaffen

Number of revenue peaks, I think this is a big one. Bambu Earth peaks, it says the score's two. That's because our calculator calculates November and December as two different months, because of course they are, but that doesn't really mean they're two different peaks.

So in essence, the real interpretation of this is that Bambu just has one, over the holiday, which means all the other 10 months out of the year are not necessarily being ignored, but there's a big opportunity to create spikes in revenue, to create moments that people feel compelled to come in and buy.

19:08 Richard Gaffen

And then our one year incremental revenue growth percentage, there's a negative impact there that could be grown.

But then you'll see too, our first order value to nCAC is actually also negative, which has an impact on our GQ score. But the impact also isn't that high, because you can see that our 60 day incremental revenue growth percentage actually has an impact of four. It's over the benchmark, which means that we can reasonably assume that we can float those costs over that period of time, because our LTV grows more than 30%.

19:36 Richard Gaffen

So you can begin to see how this becomes a pretty at a glance way to diagnose issues with the business, and then to take next steps.

19:45 Richard Gaffen

And this is how everything in this report is calculated. So we have a proprietary data analysis platform called Statlas. And what that does is it brings your information from Shopify, from Facebook, from Google, from Klaviyo, whatever email client you use. It brings it all into one place and then it calculates a lot of this stuff for you.

20:04 Richard Gaffen

So if you actually get the diagnostic toolkit, a lot of what you'll be doing is walking through Statlas and finding the information to pull. Now Statlas of course is an extra cost on top of this. That's why we offer 30 days free of Statlas with every diagnostic toolkit, so that you can just do it for free and then cancel your Statlas subscription if you feel like it's not for you or you don't want to continue.

20:25 How the metrics were chosen

Stephen Brown

I'm really curious, why these 10 metrics? How did you guys come up with these metrics?

20:29 Richard Gaffen

Yeah, this was a result of two separate projects.

We would do these six week sprints where we would train new growth strategists in how to evaluate a brand. And what we discovered is, as we were going through that, we were landing on the same six or seven metrics at the time, to say, when a client comes on board, you need to measure these six or seven things in order to determine your chance of winning with them.

20:52 Richard Gaffen

Then at the same time, we were also doing work on something we call the anti-fragile scorecard. What did we think were the indicators of a brand that could survive tempestuous times? What are the characteristics of that brand?

21:02 Richard Gaffen

And so the diagnostic toolkit is a combination of anti-fragile metrics, these are the things that make your business survive, and then growth metrics, these are the things that make your business thrive. And we brought them together.

21:15 Richard Gaffen

So a shorter answer would be, what are the shared characteristics of the brands that we've really been able to win for, the brands that we've seen a lot of success with? And I think the answer to that question lies in these 10 metrics, that those brands are doing really well.

And it's pretty replicable. If a brand comes in and it's like, oh, they're really crushing it, let's run a diagnostic report on them. And as it turns out, they're pretty much over the benchmark on all of these things, with some variation.

21:41 Stephen Brown

Second question is, do you find that as people apply improvements to these different metrics, they do see their ability to grow improve?

21:51 Richard Gaffen

Yeah, definitely. And some of that is just sort of self-explanatory. If you become profitable on first order, that would just inevitably be good. If you start making more money in 60 days, that's going to be good. If you have more cash on hand, that's going to be good.

So yeah, there's definitely a correlation between client success and how much they're able to improve these metrics.

22:12 Stephen Brown

Because what you're looking at is growth potential. I would argue that if you have growth potential, one of the fuels is probably cash, and you're going to need cash. You apply cash to your business and you should be able to see growth.

22:25 Stephen Brown

So let's just talk about next steps. If somebody wants to learn more about the ecommerce diagnostic toolkit.

22:32 Richard Gaffen

For attendees of this webinar, we want to extend a special offer.

So CTC has a membership program called ADmission that's attached to it. And essentially what it exists for is to give businesses, particularly between zero and 1 million in annual revenue, a chance to get agency expertise without actually having to pay agency prices, which as an agency ourselves, we can tell you are often pretty high.

22:53 Richard Gaffen

So ADmission is a monthly membership that gives you access for a much lower price, an all access pass to ADmission.

It includes the diagnostic toolkit, which is normally $297. It includes an ADmission membership, 30 days of Statlas, our enterprise scaling guide, which is the overall foundation of all the principles behind the ecommerce diagnostic toolkit, and I think is a really helpful pairing with that. And then three months of a subscription to the D2C Index, which is our weekly newsletter, and then data. So we have a data site that updates trends in the ecommerce space.

23:27 Richard Gaffen

So you get all of that for just $299 a month, which essentially is the same price as the ecommerce diagnostic toolkit. So we want to extend that to you guys, because we think there's definitely greater value there. And it'll help put the diagnostic toolkit in context, which I think is really important.

23:43 Richard Gaffen

If you have any questions, we're happy to answer them. But we think that this is probably the best way to get the diagnostic toolkit, and to get all the tools around it that you need to really make it effective, all for essentially the same price as the ecommerce diagnostic toolkit.

23:57 Stephen Brown

Awesome. Obviously we do accounting services, so if you are having a struggle calculating some of those financial metrics, that's what we do as well.

Okay. Thank you for your time today, Richard. This was awesome to discuss. Hope it was good for everybody that attended, and we'll see you on the other side.

24:14 Richard Gaffen

All righty. Take care, everyone.