Contribution margin and net profit is the be all end all for a lot of different angles when it comes to marketing. it's just hard to essentially, tell the algorithm to optimize for it. You have to be aware of the actual financial side of business too. We're in a very different position. We shouldn't be scaling acquisition. We should be fixing acquisition first and potentially we should be changing our retention strategy so we're not discounting. Hey, how's it going everyone? So upon popular request, we have Nathan back here. going more into the technical side of things that hurt my brain, but also helped me learn. so yeah, anything you want to say in a little introduction back to the platform? I don't think we made a video for us so late either. So it's cool. been a little while. no, thanks for having me. I'm looking forward to this one. It'll be, it'll be good talking about CFO, CMO kind of topics again. So this is going to be a very technical video from what we've been discussing. and so Nathan has a lot of good insights on. how CFOs think and what are some areas of improvement. were talking a little bit about contribution margin, and this is one of those topics that is being discussed more and more, however, there's a lot of variables to that. it's not as simple as just saying, Hey, this contributed to this. There's so many other factors that are outside of marketing, that we don't really have control over. So measuring the right ones are, Obviously the most important set of things. So yeah, I'll let you jump right into it. I think tracking contribution margin for most e com operators is the best North star. You can look at MEI, you can look at CAC, but at the end of the day, contribution margin is going to tell you whether you're covering your OPEX expenses or not. And then I'm probably going to start talking about contribution margin now. And some people are watching going, what even is that? So let me define it. And let's zoom out because when people say contribution margin, they're often talking about different things because. There's actually three contribution margins. There's contribution margin one, two, and three. One is the same as product cost. So you could almost look at it as gross margin as well, where it's just the price of the product minus the cost to buy the product from the factory. So that's contribution margin one. That's really what I'm referring to there. contribution margin two is the cost of delivery. So it's the price of the product minus the cost. But also minus the cost to deliver it. So that's the shipping fees, the 3PL fees, and then the transaction fees as well. So now you're starting to get lower down the P& L. And then contribution margin three is where you also take away CAC. So you take away the cost to acquire the customer. And now you're all the way down at the bottom of the P& L where the only last thing to minus off is OPEX, and then you've got net profit. And so contribution margin three is what most e com operators should be tracking on a day to day basis. And you can do that very easily using. Really any software you can use data studio, and it's just basic equations on minusing off average cogs. You can pull in cogs from Shopify. And so you can actually have cogs being dynamic. You can have average shipping, average transaction fee assumptions. And so you can see what your contribution margin is on a day to day basis. Where it starts to get even deeper and where you can draw more insights is when you start to look at where you can gain efficiencies and contribution margin at all different levels within the business, And this is where, as a marketing partner or an e com operator, you can look at contribution margin at the product level, or the order level, or you could look at the time level, which is what I was just talking about, and you can start to figure out, are we driving orders that aren't even profitable? Or are we driving orders that have 5 profit or 1 profit on them, but our cap's 30? And so we're not actually driving any incremental profit to the business because the bottom 20%, quartile of orders are just negative cash flowing. you can track contribution margin one at the product level. And that's what I would recommend to most e com operators do is what I'd recommend most agencies do if you onboard a new client, which is to have a basic Excel sheet, have all of the products. And now this is going to be really difficult if they have 60, 000 products, Let's assume that they have 30 to 50 products. You can very easily pull all product titles and then have associated cogs. pull out a basic price export out of Shopify or whatever platform they're on. And then you can see what the gross margin is per product. And that's going to be really indicative of where you should be allocating budget, across campaigns. And that's why understanding contribution margin across all of these levels is really important in the actual campaign creation. Because I know one thing that Sol8 talks about a little bit, I talk about it quite a bit, which is that anytime that you can consolidate campaign structures, you're generally going to see better performance. Because you're going to have tighter allocation of conversion data, which is going to enable better customer modeling. And so you'll see better performance, but the issue there is that you give away all of this control to Google. And so you do still want a degree of segmentation in your Google campaigns. You do still want a degree of segmentation in your Facebook campaigns, but it has to be very strategical. Based on contribution margin in most instances, which is, do we have products with 20 percent margins and then we have products with 80 percent margins. Okay. We probably shouldn't be trading them the same and we probably shouldn't be having a blanket target row as across them. in terms of implementation and all that, so would you say that it's a good idea then to, let's say a client has like a thousands and thousands of products, So they're just, breaking down every single bit in a spreadsheet, they're going to look at it and just, their head's going to blow up. Would you say like a good starting point or something you've seen is like starting with for example, the top sellers and then working your way down from there, or is there another way that you've seen work best for clients that maybe have passed that, a hundred product range? that's normally good start is sold by top sellers. we have an automated, model, which is going to be very difficult to build. So I'm not going to try to walk you through how to build it, but what it does is you could, if anyone's technical in Google shades, they'll be able to do this quite quickly. Which is you can take an order export of all previous exports with product titles associated. And then you can do an equals unique, pull in all unique titles into a separate sheet, and then you can do an equals count. If title is in the order and you can count how many orders are associated with each title, and then you can, just do basic pivot tables and look at all the top selling products with the associated gross margins that have already been tagged in there because they're in the Shopify order export. And so you can actually automate the whole thing. If you really want to get into the. technical details of it, but if you want to be like start off basic, you have barely understood what I've ever been talking about for the last five minutes. Just take the top five to 10 products, get the gross margins on them, and then that's going to be a big indicator of how you should be structuring campaigns across all platforms moving forward. Got it. No, that makes total sense. It's like one of those nice parts about if you have all these products, you have tons of growth opportunities as you go and develop it further down the line. So make the biggest impact first and those top products makes total sense. and then as you grow from that, then look for other opportunities. You might find that a product that doesn't sell anything and hasn't sold, much at all, and you've been using for a marketing. might actually be a really good source of new customers and the contribution margin is great. So it makes a lot of sense having if you can, like you're saying in that whole spreadsheet, organize it all. but if you just started out more of a, smaller client, then makes a lot more sense to have it more. So from like the top down, what's going to help us right away and then go from there for sure. And then there's also at the order level. So you can look at the product level and that's Really helpful in terms of what products you should be prioritizing. cause as we said, if you have an agency that isn't looking at margin at a product level, they might see a product performing really well, and then go and push it. And in fact, I could almost guarantee this is the case for probably clients that you manage right now. Clients that sold out, clients at other agencies, which is brands that stock Nike or brands that stock like Adidas shoes. They will always have a ROAS, but the distributor margin on those products, and like I know this because I've seen behind what they sell for, it's about 18 to 22%. And so you're actually barely profitable even at a 10 ROAS if you take into consideration shipping costs and any kind of free shipping thresholds that are within your offer. So right away, an agency that's not looking at gross margin or isn't looking at these things, Is going, okay, that's a good product. Push it, let's push more spend to it. And you're just pushing a product that has terrible gross margins. Isn't driving any profit. And then at the end of the quarter or at the end of the year, when the Ecom operator gets their P and L, they look at it and they go, what? Revenue's up 70 percent for profits to say, profits down how is this even possible? And it's because they didn't have that extra degree of nuance of looking at how much contribution profit was actually being pushed an individual product level. That was a spiral away from talking about orders though. And you can also do an order export you can just look at contribution profit at an individual order level. The softwares that do this store hero does this really good job at this. And so you can definitely look into store hero or any other SaaS solution, but it's a simple equation, which is you take your gross sales, you might as well discounts. You then minus off COGS, and then you minus off an assumed 3 percent transaction fee, and then you minus off an assumed shipping and fulfillment fee. You could pretty much get an average based on your, historical 90 day data. And then you have profit contribution at an individual order level. And then you can do a pivot table, sort by lowest contribution profit, and you'll start to discover things like, wow, we're selling this product, but it costs 16 to ship it. And the cogs are pretty high. We're getting 1 profit. And then you can go into your Google campaign and go, how much are we spending on this product? And you'll go and look and you'll see the CPA is 19. And you can go, we're just losing 18 on this product, trying to sell it. This is not a profitable order. or you might find that people are combining. individual products in a way where they're getting a discount, and it's ruining your margins again. Or you might find that when people hit a free shipping threshold, once again, it erodes your margins again, and you start having all these unprofitable orders. At the end of the day, what's the point of fulfilling an order if there's no contribution profit on it? And so that's another really good analysis that you can start to pull together. even if you were just to look at yesterday's orders, or maybe two days worth of orders, you don't have to go and look at historical three year order data, you could do this on much smaller, More simplified time horizons so that you can get a better idea of identifying where the inefficiencies are within the business and then Working on that. So what I'm hearing from all this, is be careful of sales because you might find that, Oh yeah, our overall sales are up. But then you look at, like you were saying, you're well, contribution margin is just not profitable. It's not worth it. I could see all the CFOs that are just like, Oh my God, finally, someone that's like speaking my language. It's not just about rows. It's about actual like net profit sales. because I see that a lot in accounts too, where, they'll run a sale and I'm like, Oh, we're doing great. NCAC is a lot better. Everything looks great profit. And then you go into the actual net profit and you're like, wait a minute. Something's off. What happened? Oh, this product that, should have been moved, didn't move. And they actually did a sale on this other product that didn't have as big of a margin trying to move it. And so then it caused a lot of other issues in the actual business. makes a lot of sense that contribution margin and net profit is, The be all end all for a lot of different angles when it comes to marketing. it's just hard to essentially, tell the algorithm to optimize for it. You have to be aware of the actual financial side of the business too. which for, marketers like me that are more on the creative side of things, it's a headache. And so having tools that allow you to do that, like you're talking about just in spreadsheets, simplify the process a lot. And especially if. you have a business owner that, can't afford a CFO or, wants to make this a lot easier in the process of just saying, okay, I need to get 80 percent accurate with this. you could totally do that in a spreadsheet, like we're talking about. that's a huge value, bomb for people just because it's, I still have clients that will be looking at end up numbers and I'm trying to slowly pull them away from it. And it's going from okay, we're not looking at ROAS. We're looking at, global, like what's your MIR? What's your, It's okay, now let's look at your overall profitability. It's like slowly trying to pull them away from that. for the case of just, helping them understand like net profit is the be all end all for everything. even LTV, you can't fully rely on. So that's an added benefit of looking at contribution margin is it will take out discounting. And so if you're running discounting, it will appear within the contribution margin that you're reporting on a day to day basis. I also visualize this for clients it's hard to conceptualize this if you're not in the weeds of finance, but what this shows, and there's a lot of numbers on the screen, but the premise of it is that as you increase discounting from 5 to 40%, your breakeven ROAS goes up significantly. And so if you're running a 20 percent discount, you no longer need a 1. 8 ROAS to be breaking even, you need a 2. But more importantly, if you have a target contribution profit per order, your target ROAS goes up exponentially. And you can see that in the graph here, because you're approaching an asthmatope, which is the target contribution, and so you don't have much to work with. And so it squeezes so quickly, so much faster than anyone typically thinks. Which is that, Oh, we'll do a 20 percent discount. And yeah, okay. We need a little bit of a better ROAS, but it's no, you now need like ROAS because you've cut your profit, which was on the top end in half. If you're operating on, let's say 30%, gross margin. So I thought that was a really good way to visualize for clients that as you start to escalate in discounting, you need your units per transaction to increase. So you need your average order value to inflate as well. you can't just be discounting and expecting that a higher ROAS is going to drive more profit because it won't. So I guess going further down that pathway for clients that have a good LTV, so what would you say is the impact of contribution margin and the relationship of that with and how do you look at it in that sense? this is the thing about LTV is. I think people hear LTV and then they think they know what it is or they can conceptualize how it applies into campaigns and that's what I really don't like about it. I made a LinkedIn post about this a couple of weeks ago and it's because everyone comments this on all my posts I put up which is I'll put up a post about something technical about contribution margin, on first order or the importance of first order profitability and someone will come in with Yeah, but what about the LTV and I'm like that's it's so the reason why I have an issue with it is to number one There's a time decay associated with LTV. And so when we're talking about LTV, what are we talking about? We're talking about 30 day. We're talking about 90 day. Are we talking about lifetime LTV? So since the inception of the company What is the lifetime value being since then? Because as you start to go out in time you start to increase number one your risk and number two your cost of capital You Because if you're going to be acquiring customers and hoping for profits to unlock over a very long time period, there's a huge cost of capital in just pulling that forward. and then the second reason I don't like it is because it's revenue based. It's telling you how much revenue you're getting from a customer over its lifetime, but if you look at the unit economics of any brand, and you break down first time versus returning customers, and once again, you can do this in Excel sheets just out of the back end of Shopify, you'll almost always see returning customers are getting like average of 30 percent discounts. And the reason being is that the brand is just sending emails with 20 percent off codes, 30 percent off codes, 40 percent off codes to try to get people back. And so these customers profit contribution is so minimal. And then factor it on top of all of that is that most advertisers are spending 20 percent of their budget on existing customers and they don't even know it because they're running Pmax and Advantage And so now you also have a CAC associated with getting these customers back. And so you run all the math and it's easy math to run. You can go a hundred dollar average order value, LTV is 200. we've doubled the profitability of the customer, but really let's say that we're taking 30 percent discounts. Okay. So now it's really only like 70, 170 in revenue, maybe 160 in revenue. and then you take into consideration that there's maybe a 10 CAC there and you're like, okay, it's only like 150 and now it's a completely different story. Because if you were looking at, okay, we double the profit of a customer over time, and you were using that to KPI and benchmark the entire business, but you look into the details and you actually, these returning customers aren't driving any profit or very minimal profit. We're in a very different position. We shouldn't be scaling acquisition. We should be fixing acquisition first and potentially we should be changing our retention strategy. So we're not discounting. So heavily as well. it makes sense. I think the idea of in that graph you showed earlier, it was a really good representation of that is start with a very small discount, see who bites, take them out of the list, your email list, wherever the case may be, and then go to the next process and see how far you can push it until you hit that actual point of diminishing returns. Whether it's 10%, 20%, 30%, 50%, who knows, based on your business. that's where you'll find the most profit from it. And I've actually, talked to clients in the past about that and it saved them a lot of money and actually allowed us to increase our volume on just going after new customers because they didn't realize that their LTV was actually eating into their net profits like crazy. so something just like that can really change a business from. Both the financial side and the marketing side. whenever, we hear CFOs, it's okay, like I got to try to explain to them what's going on. But then they're also coming at it from their angle. It's yes, I know what you're saying, but I'm also trying to explain to you, what's going to actually make us money. And so it's up to both sides to understand like what the algorithm, but also, okay, from the, actual acquisition side of it, is it actual benefit or not? It might look better for us, but we don't know if that's actually true. I think that gives a really good understanding of contribution margin though. we went through contribution margin went through a few different ways that you can. look for inefficiencies, order, product level, and then LTV. it's not what you, not what it seems on the front end. So making sure that you are also tracking contribution margin across the lifetime of customers. Perfect. I love the insight. we don't really get much of this from just the space in general. It's too focused on in app and what's going on. if people want to learn more about you and, get more insights, where can they find you? the first thing is the YouTube channel, so I'll give the link to you, you can scroll, look at the below, it's Bluesense Digital. The second is the podcast, it's more longer format if you want to hear me talking for an hour and a half straight to some people in Australia. it's Blues Brothers Podcast. And then LinkedIn is the easiest way to message me. If you want to ask any questions about any of this CFO jargon that I like to talk about. That would definitely be me as well, but awesome. thanks for coming on. And like I said, we'll probably, have you on more just to give some more insight for us all and I guess demystified the CFO side of things. Thanks again, Nathan.