Summary
Stephen Brown, COO of LedgerGurus and co-owner of Sole Toscana, sits down with Stacy Walker, Director of Growth at LedgerGurus, to break down their 2025 Ecommerce KPI report. They walk through what actually separates profitable brands from struggling ones using clean, real financial data.
They explain how growth, profitability, ad spend, and channel mix all connect. You will learn what the top-performing brands are doing differently and why many sellers are chasing growth without understanding their numbers.
2025 Ecommerce Key Performance Indicators Report →
Takeaways
- Clean financial data is required for benchmarking. Bad accounting leads to wrong decisions.
- 44% of brands were both growing and profitable. Most brands are not hitting both.
- Gross margin alone does not guarantee profitability. It is only the starting point.
- Profitable brands still operate on single-digit net margins. Profit is tighter than most expect.
- Higher ad spend does not always lead to better results. Efficiency matters more than volume.
- Diversifying sales channels reduces reliance on paid ads and improves stability.
- Wholesale plays a major role in profitability for top-performing brands.
- Growth without profit creates cash pressure and risk. It is not a sustainable strategy.
- Cash balance follows profitability. Unprofitable brands burn through cash quickly.
- Most brands do not actually know their true profit due to poor COGS and inventory tracking.
What We Cover:
- 00:00 Introduction to Ecommerce Success Metrics
- 02:42 Understanding Benchmarking and Data Integrity
- 05:22 Analyzing Profitability Quadrants
- 08:24 Gross Margins and Their Implications
- 11:19 Ad Spend Insights and Sales Channels
- 14:21 Cash Flow and Financial Health
- 16:59 Growth vs. Profitability Dynamics
- 19:38 Strategies for Improving Profitability
- 22:17 Common Mistakes in Ecommerce Accounting
- 25:08 Final Thoughts and Key Takeaways
Guest Information
Stacy Walker is the driving force behind LedgerGurus’ world-class sales and marketing team. With a background in retail banking focused on business relationships and lending, she brings a deep understanding of how financial insights can empower business owners to make smarter decisions. Passionate about helping entrepreneurs see their numbers as more than just reports, Stacy works to connect financial clarity with business growth.
When she’s not leading her team or talking to ecommerce sellers, you’ll find her hiking with her family, baking something sweet, or tending to her ever-expanding flower garden; usually with dirt on her hands and a new gardening book nearby.
Work with LedgerGurus
If you need help with your ecommerce accounting, reach out to us at LedgerGurus. We are an ecommerce-specialized accounting firm, and we can handle all your numbers so you can focus on growing your business.
Transcript
Stephen Brown (00:00)
What makes some brands financially successful versus others? This is a question that we asked ourselves and we have done an analysis using a benchmark report looking at what businesses are successful and what are the trends and patterns behind that success. Welcome to the Ecommerce Finance Podcast. I’m Stephen Brown, COO with Ledger Gurus, co-owner of DTC brand Sole Toscana.
Today I have with me Stacy Walker, Director of Growth here at Ledger Gurus, and we’re going to talk about a new benchmark report that we put together. Stacy, welcome to the show again.
Stacy Walker (00:36)
Thanks for having me, Stephen.
Stephen Brown (00:38)
Stacy, tell us what is the name of this report and maybe let’s get into some high level details about it.
Stacy Walker (00:45)
Yeah, this is the 2025 e-commerce key performance indicators report. We’re excited about some things that we found out and can’t wait to dive into it today.
Stephen Brown (00:56)
And people, before we get into it too far, people will be able to download a copy of this data. Where will they be able to find that?
Stacy Walker (01:04)
They’ll be able to find it on our website, ledgergurus.com. There’ll be a banner at the top. Just click it you’ll be set.
Stephen Brown (01:10)
Or they can search for it by the 2025 Key Performance Indicators Report.
Stacy Walker (01:16)
Exactly.
Stephen Brown (01:17)
Now, before we get into the details, let’s talk a little bit about what we measured and some of the issues around benchmarks. So for example, we wanted to do this for ourselves. We’ve seen other benchmarks. There are things like in QuickBooks Online, you can pull up some benchmark data, but we struggle with that data because a lot of the measurements we’re doing are only as good as the accounting behind those measurements. So we didn’t do an even measure all of our customers. We only measure the ones for which we’re doing monthly accounting on, is that correct?
Stacy Walker (01:49)
Yep, exactly. Only the ones that we were doing the full monthly accounting package on were measured in this benchmark.
Stephen Brown (01:56)
And that’s because we have seen over the years that when a customer comes to us, a lot of times their financial data is inaccurate, has many issues. And so it’s hard to trust in a benchmark report.
Stacy Walker (02:05)
Yeah, exactly, exactly. We needed the data to be clean and we felt confident that our financials for our clients were clean and the ones that have us doing additional services, not the full accounting package, we just decided weren’t the best fit for this benchmark.
Stephen Brown (02:23)
And so my concern as I see other benchmarks out there is how good is the data behind it? Because there are many pitfalls to e-commerce accounting. We’ve talked about them on the show, but we only analyzed and anonymized data sets that we were comfortable with.
Stacy Walker (02:40)
Correct. Correct.
Stephen Brown (02:42)
Okay, now I think one of interesting things that we ended up doing was breaking down customers into four quadrants. Let’s talk about the quadrants that we broke them down into.
Stacy Walker (02:53)
Yeah, so we decided to go with four different quadrants, two that highlighted profitability and two that didn’t. Companies that were growing and profitable, companies that weren’t growing but were still profitable, those were the profitable ones. On the other side, we did ones that were not having any growth and were not profitable at all, as well as some that had some growth but were not profitable.
Stephen Brown (03:21)
And as we’ve done that, we found some interesting insights. First off, let’s, what was the distribution that we saw of the 2025 data set across those? What percentage were growing and profitable?
Stacy Walker (03:33)
Yeah, growing and profitable about 44% were growing and profitable. We had about 22% that were growing or excuse me, 22% that were not growing, but we’re still profitable. And then on the flip side, we had about 20% that were growing, but we’re not profitable. And about 15% that were not growing and we’re not profitable.
Stephen Brown (03:58)
And to be honest, that latter category is the only one that I worry about because some businesses may have a no profit strategy. They’re in a growth phase or the other, the inverse where they’re not growing, but they’re still profitable. That may be a deliberate decision. It’s only that latter category. And I am pleasantly surprised to see that it was 15%. I wish it was smaller, but that’s a tough category to be in. There’s usually no good business strategy behind those dynamics.
Stacy Walker (04:28)
Yeah, I definitely agree. Stephen, you’ve seen the whole report. What was your biggest surprise from the report?
Stephen Brown (04:36)
There was a couple. I mean, maybe let’s start with the average gross margin. And let’s define this before we talk through what we saw. So gross margin, this is again one of the things where we had to normalize data. A lot of people, and we’ve talked about this in the past, a lot of people will throw in non-landed product costs into their cost of goods sold. They’ll throw in merchant fees. They’ll throw in fulfillment costs. And so we have this measurement that we’re about to discuss is gross margin being revenue minus landed product costs. Let’s just quickly go through that number and then I’ll tell you why I was a little bit surprised about this. So what was the gross margins for the four quadrants here?
Stacy Walker (05:22)
So the growth and profitable, their gross margin was 66%. Growth and not profitable, their gross margin was 58.7%. No growth and profitable, theirs was 65.1%. And then the last group was the no growth and not profitable, theirs was 60.8%.
Stephen Brown (05:53)
Yeah, so my surprise here, I was a little surprised. Okay, what I’m not surprised at, the profitable businesses have higher gross margins. That’s kind of a no-da. I thought that the gross margins would be a little bit higher for these higher performing profitable brands. But again, this is an aggregate number, an average, and gross margins can vary by product category.
I was expecting them to be above at least the top one to be above 70%. But it shows you that gross margin isn’t everything. And I think a lot of it is product category. What I’m not surprised at is lower gross margins. Also, there’s a correlation between less profitability because there’s less dollars after the cost of the goods to drive costs of sales and operating expenses. So I was a little surprised at the level being, I think, a little bit lower than I thought it would be. I thought it would be a little bit above 70%.
Stacy Walker (06:48)
Yeah.
Stephen Brown (06:55)
But again, it’s still in a good range.
Stacy Walker (06:59)
Yeah, I was surprised there wasn’t a bigger difference between that top tier, the growth and profitable and that bottom quartile, the no growth and not profitable. There isn’t a huge difference. I mean, 66% to 60%. It’s not ginormous. You’d think it would be bigger.
Stephen Brown (07:18)
Yeah, I mean, but in retail where margins are tight, six points of gross margin could roll down to six points of net margin. And I don’t know, I guess, yeah, you’d think the spread is bigger, but that’s still a pretty big profit indicator. Maybe let’s jump to the bottom lines. What we saw in these four quadrants in terms of their net margins. And we measured medians, right?
Stacy Walker (07:49)
Yeah, we did. We went with medians.
Stephen Brown (07:51)
And medians, for those who don’t remember statistics, unlike average where you take all the numbers and divide by the count of the sample, I think it looks for the midpoint of the data set. I don’t remember the math on it, but it’s trying to normalize towards where the middle of the data set is. So what were the median net margins? Because I think this will be an indicator as we look at some of these middle metrics.
Stacy Walker (08:24)
Yeah, so our median net margins for growth and profitable 6.9%. Growth but not profitable was negative 7%. No growth and profitable was 5.7%. And no growth and not profitable was negative 13.9%.
Stephen Brown (08:47)
Yeah. So this is really interesting. And I think 2025 was yet another year of profit squeeze and maybe my surprise on gross margins really shouldn’t be that big a surprise because tariffs really took a bite out of the profit apple on the gross margins level. It is interesting that the profit levels, the median, they’re not huge. Like I would say a really healthy e-commerce business is between 10 and 20% margin, but that’s really hard to perform or to achieve. And you can see that even in these two profit categories, the median was still, you know, solid single digits, but it wasn’t double digits. Now a little background on our sample. We work primarily with seven and eight figure sellers, which is an interesting phase of a business.
You know, and they’re high seven figures. We’re usually engaging with people when they’re multiples of multiple millions of revenue. And it’s a tough phase. There’s a lot of growing up, but there’s a lot of changes, even at the eight figures that we start, that we continue to work with them. There’s still a lot of things you’re trying to figure out. We don’t typically work with nine figure sellers.
But even at that stage, it’s a different ballgame. And so I would say we’re dealing with a growth maturation stage of these brands. They’ve got traction, they’ve got customers, they’re trying to continue to grow. They’re trying to develop their processes, trying to dial in some of their best practices, expand their product lines, expand their channels. The phase that we are measuring in this benchmark is a very interesting phase of these businesses’ life cycles. So let’s see if we can tease out the profit differences between these four quadrants. So we saw some spread. The 6.9% of our growth and profitable is almost that spread of gross margin between the not growing and not profitable. So it starts with gross margin.
Stacy Walker (10:43)
Definitely.
Stephen Brown (11:04)
If you can’t get good dollars out of your sale, out of the cost of your sale, it’s gonna be hard going forward. The other area that I think was a little bit surprising to me was the ad spend. Tell us a little bit about how much they’re spending as a percentage of revenue.
Stacy Walker (11:19)
Yeah. So our most profitable growing and most profitable clients are spending about seven and a half percent of revenue on ad spend. And just on the reverse side of that, the ones that are not growing and are not profitable are spending about 10.6% on their ad spend. And then the others, your growth but not profitable, they’re spending even more, 13.7%. And your no growth but profitable are spending about 8.8 percent. So I think the assumption that if you spend more on your ad spend you’re gonna get more — it doesn’t show in the numbers that we looked at.
Stephen Brown (12:02)
Now this absolutely shocked me. I was expecting much higher double digit ad spend percentages. Part of the reason I think this number is lower is one of the correlations we found around their sales channels. So what did we find about where they’re selling?
Stacy Walker (12:18)
Yeah, that’s what I was going to say.
So our most profitable sellers have definitely distributed their selling. And I don’t mean like they’re selling on Shopify and Amazon and eBay, but they’re in multiple markets. 61% of our sellers are selling wholesale and all of those top tier, top quartile sellers have a wholesale piece to their business.
And that’s going to directly affect their ad spend. There is an ad spend associated with that wholesale business. So they’re getting the revenue without having to pay out any of that spend to get it. As opposed to some of those smaller sellers who are only focused on Shopify and they’re having to buy all of their business essentially. Besides just wholesale, about 29% have a brick and mortar presence. So they have a storefront or they have like a kiosk in a mall or something to that effect. And that definitely is affecting it. But the indicator to me seems to be this diversification of channels, some wholesale, some brick and mortar, Shopify, Amazon, and maybe not even Amazon, like Walmart, other marketplaces besides just their Shopify. Essentially all their eggs aren’t in one basket, right?
If Amazon shuts them down, they’re fine because they’ve got four other ways that they’re making money.
Stephen Brown (13:51)
So the wholesale would explain a number of my surprises. The lower gross margins is to be expected in wholesale because you tend to have to give a bigger discount and by correlation you have less to spend on advertising. Now I personally don’t believe advertising doesn’t affect wholesale. It’s just not your primary customer acquisition. There’s still a halo effect of advertising. For example, how often do we see products in stores being advertised, right? The customer has to have some level of awareness. It’s not just they’re gonna walk along and be like, look at this cool product. Sometimes that’s the case, but brand recognition matters. And so that is a little bit surprising how much of our customers are wholesaling. And I don’t know if that is a factor of we are good at complex accounting and so we attract complex accounting customers versus a state of the industry.
We would love to make this a benchmark outside of our customer base. And at some point, I think we will. But the challenge, like I said at the beginning, is we’ve got to have a level of confidence in the underlying data to be able to create a good benchmark. Revenue benchmarking isn’t too difficult. I wouldn’t say it’s easy because of the complexities of e-commerce. Profit benchmarking is very difficult because there’s a lot of areas that it can go wrong. And so, yeah, I think the amount of wholesaling was somewhat surprising. I’m wondering if this is, again, I’m wondering how much of this is a state of the industry for these maturing businesses versus the state of who likes to work with us here at LedgerGurus. I mean, you talk to customers all the time.
Stacy Walker (15:41)
Yeah, that’s a really good point.
Stephen Brown (15:45)
Many, or you talk to brands all the time, some of which work with us, some of which don’t. Do you feel like the trends in this report are indicative of what you’re seeing in the industry as a whole as you talk to a variety of brands?
Stacy Walker (15:57)
Yes, absolutely. Absolutely. It’s rare to talk to a seller anymore that isn’t doing some thing, some wholesale somewhere, or getting ready to launch into wholesale for sure.
Stephen Brown (16:13)
And do you think that’s just who we attract, or do you think that’s a, do you have a sense of, because usually we’re filtering out a lot of smaller sellers.
Stacy Walker (16:21)
Yeah, we’re filtering out a lot of smaller sellers. I don’t think it’s who we attract. I mean, yes, we do. We are experts at that complex accounting and wholesale definitely brings in a complexity, but I think more and more online sellers are trying to pull in that wholesale piece.
Stephen Brown (16:43)
All right, what else did we see in these quadrant reports? Maybe give me another example of spend area that was interesting.
Stacy Walker (16:53)
Yeah. Let’s talk about cash on hand. Did that surprise you?
Stephen Brown (16:57)
It did not, but let’s talk about what we saw.
Stacy Walker (16:59)
Okay, let’s talk about it. So our most profitable growth and profitable quartile, their average bank balance was about 411,000. And then your no growth and not profitable, their average bank balance was about 87,000. Now one could argue that maybe they’re smaller sellers and so they don’t have the same amount of capital as maybe a larger seller, but I look at those other numbers and it makes me wonder if it’s the decisions that they’re making that are keeping that bank balance low or is it just that they aren’t selling as much? What are your thoughts?
Stephen Brown (17:41)
Well, if you’re not profitable, you’re gonna be burning down your cash. So that doesn’t surprise me. The interesting thing that we saw was the bank balance for the growth businesses was a bit larger than the no-growth profitable businesses. Growth usually chews up capital. So that was a little bit of a surprise.
Stephen Brown (18:08)
But I think on the whole, that number didn’t surprise me. If you’re profitable, you tend to have more cash in the bank.
Stacy Walker (18:13)
So how do you think the cash constraints of those smaller sellers are shaping the decisions that they’re making?
Stephen Brown (18:21)
I see in my experience working with customers, I see some grasping, some pursuit of how do we get there. Unfortunately, I think too many people focus on growth and not, to them profitability is do I have cash in the bank? What we’ve learned is you can have really great profit margins, but no cash if you’re growing quickly because it gets chewed up in working capital for inventory.
I don’t know, this number didn’t surprise me. It’s one of those things where I’m becoming a huge advocate of profitability in businesses because profitability usually helps with sustainability. And then with these product-based businesses, profitability is important. And just right up there is the right cashflow capabilities that usually comes through a cash conversion cycle. That’s not something we measured in this benchmark because it’s very time intensive and for this first version we’re not gonna do that. The cash conversion cycle is how long does cash get tied up in inventory and payouts from your wholesalers, et cetera.
Stacy Walker (19:38)
So if an e-commerce brand is profitable then, but maybe cash poor, what’s broken? Or is it just part of the beast?
Stephen Brown (19:55)
I mean, there is a natural limit to how fast you can grow off of your profits. This is something we’re going to be talking about in future episodes and release some tools. I just did a webinar on it. So actually oftentimes the faster you grow, the smaller the cash balance is because you’ve got to put all your cash.
I mean that is an interesting metric. Did we capture the year over year growth on these growing businesses?
Stacy Walker (20:24)
Yeah, yeah, we did.
Stephen Brown (20:26)
So how fast were the profitable growth businesses and the growing non-profitable businesses? What’s the comparison there?
Stacy Walker (20:36)
Yeah, growing and profitable their year over year growth was about 47%. Growth and not profitable their year over year growth was about 29%.
Stephen Brown (20:42)
That’s incredible.
And that makes sense, right? Because if you don’t have profits, you’ve gotta find cash from other resources, right? Investment, or you’re putting your own personal capital in. You can kind of get away with using lines of credit to grow if you’re not profitable, but eventually it’s gonna catch up with you. So 47% is a really healthy growth rate for those.
Stacy Walker (21:14)
Yeah, yeah.
Stephen Brown (21:16)
That was a little bit surprising how fast they’re growing.
Stacy Walker (21:20)
Yep, definitely. So do you think there’s risks to brands that are growing too quickly?
Stephen Brown (21:31)
Absolutely. Yeah, you can easily.
Stacy Walker (21:33)
So let’s talk about that quartile that they’re growing and not profitable. I think there’s this misnomer that we’re growing so we’re fine. And then maybe they don’t even realize how not profitable they are. How do they fix that?
Stephen Brown (21:49)
Yeah, I mean, we’ve seen things shift over the last few years. You know, four or five years ago, it was grow, grow, grow. It was all that mattered, just growth. And as we’ve had more cost constraints, I think there’s an increased focus on profitability. But I don’t know, I still think we can have more of a profit mindset. And when will we get back to that growth first economy? I don’t know.
I’m not seeing that in the near future, in the mid future. There’s so many challenges in the macro economy as well as just the e-commerce economy that personally, I feel like the most important things that brands can do is get a profit mindset first, dial in your unit economics, dial in your cost of goods sold, dial in your cost of sale.
Stacy Walker (22:34)
Hmm.
Stephen Brown (22:40)
And make sure you’re not spending too much on operating expenses before you go after growth. I mean there is a point. One of the challenges you have is there’s kind of a minimum fixed operating expense you need for a brand. It’s really hard to operate until you can dilute that fixed expense because I think you and I talked about this when we talked about the four margins a couple episodes ago — that the same dollars you spend on creating an ad, you know, could fuel a million dollars of sales and potentially could fuel $10 million of sales. So what I think one of the most difficult phases — and we usually see them when they’re starting to come out of this phase — is when you’re small, you have this fixed expense that’s dragging you down and the best way out of it is to grow it, to grow the revenue while not growing that fixed expense.
Stacy Walker (23:39)
Yeah. Yeah. I like that. Tell me what you think about this quartile where they had no growth, but they were profitable and the economy right now is that, do you think that’s wise? Like a little part of me thinks they’ve focused on their profitability more than they’ve focused on growth right now. And what’s the downside to that? Is there a downside?
Stephen Brown (24:03)
Of the three non-ideal quadrants, that’s the one I would prefer to be in. No growth and profitable. Because you can survive when you have profitability. It’s hard to survive when you don’t. Like there’s a ticking time bomb. So I’ve worked with some customers who, some companies, it’s not as many — can get investment capital and that can give them the ability to get to scale and then flip to profitability. But it’s like a ticking time bomb. And I don’t see very many brands that get investments these days. If they do, they’re angel investors, they’re friends and family, they’re pulling from their personal bank accounts. And so I feel like when you’re not in a profit state, it’s a little bit of ticking time bomb.
Stacy Walker (24:50)
Yeah.
Stephen Brown (25:00)
If you’re stuck on growth, right, you can mess around and figure out what you need to do to unlock that because profitability gives you time. And eventually, you know, you do need to unlock that. But if your profitability is decent, somebody will consider buying your business. Obviously there’s more considerations into a brand’s value beyond profitability, but fundamentally, if there’s profits, there’s value in the business. And if there’s not, the value can be much more difficult to articulate.
Stacy Walker (25:33)
Yeah. So what about those brands that aren’t profitable right now? And they’re thinking, man, I’ve got to focus on profitability. What are some common mistakes you see? Or on the reverse side, what would you tell them to focus on to get there?
Stephen Brown (25:50)
You and I got into this a little bit with the four margins conversation we had, but there are a couple of key areas. Gross margin, how, you know, I was hoping to see one of these quadrants above 70%. I know there’s brands there. Some of it has to do with your product dynamics, some products can command higher pricing than others, higher markup. We’ve done a little bit of product categorization, which you can go get. We’re not gonna get into the details of that here, but you can see that in the report. But there are other benchmarks out there that will talk about gross margins by product type. And I would wanna say, first off is, how does my gross margins compare to industry standards? Second thing I’d wanna look at is ad efficiency.
We had a shocking amount of ad efficiency. I think if we were to isolate, which we did not in this report, but if we were to isolate the direct-to-consumer-only brands, that ad number would probably be a lot higher. What we’ve seen with the way we broke down this data is that those that have diversified into wholesale tend to have better ad efficiency because they have greater distribution.
The third key area of profitability, I would say, is your fixed expenses. And again, coming back to what I said just a minute ago, sometimes the only way to dilute those fixed expenses or to reduce them as a percentage of income is to grow the top line. Where it becomes difficult is you’re struggling to grow that top line, therefore what? Well, we’re in an age of really interesting dynamics where technologies and tools can do what people are doing from a knowledge worker perspective. Technology is not packing a box. We’re seeing in highly automated warehouses that they’re getting higher throughput. The picking process is highly automated. You know, you see like an Amazon, they’ve got those robots that will go get the shelves and bring them to the packers.
Stacy Walker (28:07)
Yeah.
Stephen Brown (28:08)
I’ve got a friend who’s got a warehouse. It’s kind of the same thing, but he’s got these forklift robots that will go and pick the bins and bring the bins to the packing station so that they can just pull the inventory and put it in. But when you think about things like creative, I think there is an opportunity to compress costs there.
I think product development, there could be around ideation and testing, there could be opportunities to compress costs. The other things I think about is you don’t need a warehouse. A lot of people are doing their fulfillment. Did we measure how many people are doing their own fulfillment versus not?
Stacy Walker (29:01)
We did not in this iteration.
Stephen Brown (29:03)
We did not in this iteration. I struggle a little bit when I see people self-fulfilling, especially when it’s like a really basic product. Like there are challenges of self-fulfillment from a cost perspective. You have a lot of fixed costs and sometimes they’re very large fixed costs, like a warehouse, either you’ve got a lease or buy. And then the other thing you run into is cash issues. And so I like to look when I see somebody self-fulfilling, I really like to tease out what are the costs and could you do that better with a 3PL? Now sometimes people have a product that has some unique qualities that needs very custom handling. In those cases, it can make a lot of sense to do your own fulfillment. Like apparel, for example, it’s like, ah, that’s a hard one. I have a hard time when I see people doing self fulfillment on apparel because I’m like, that’s a really easy category for 3PLs to fulfill against.
Stacy Walker (29:58)
Yeah, yeah, for sure. And like, what other operating expenses do you think people are spending too much on? Like what are some quick cuts that people could make?
Stephen Brown (30:12)
I feel like people are a lot better than they were a few years ago, but you can see there’s a lot of squeezing. There’s a lot of compression on the margins. Quick cuts. I mean, in the marketing front, I see a lot of people that don’t scrutinize or they delegate their marketing spend. You know, there’s oftentimes campaigns that can be turned off that just aren’t performing.
The other thing that’s kind of buried in these top line metrics is underperforming SKUs, right? You might have SKUs that are having to be discounted. And that’s hard to break down into a benchmark report, right? You have to kind of do that at a brand level, but we see some brands that have thousands of SKUs and you know that there are some duds in there. So being able to scrutinize your SKUs for profitability — for contribution margin. Not just, hey, are they profitable at a gross margins standpoint. Maybe you have a low profit SKU but it generates a lot of volume dollars, and maybe that’s okay. That’s another area you can look at. So I think the profit unlocks are in those three areas. Your cost of goods sold, your ad efficiency, and your overhead.
That’s usually where I see it. Occasionally I’ll see somebody with fulfillment costs that are too high. But usually it’s in one of those three areas: ad efficiency, cost of goods, or fixed overhead expenses.
Stacy Walker (31:50)
And if anybody’s listening to this and they know where they fall, right. And they’re thinking, well, all of this time, all I’m doing is tracking my performance. I’m not actually putting forth any effort to move from one quartile to another. Then that’s your advice. Look at your COGS, look at your ad spend efficiency and look at your OpEx and see where you can make changes.
Stephen Brown (32:13)
Well, other than the no growth, not profitable quadrant, there can be valid business strategies behind the other three. I think everybody wants to be growth and profitable. Although some are, I want to be growth and not profitable. They’re like, hey, we’re just going to get really big. You know, it’s the tech mindset — growth, don’t do profits. And I think that’s bled over into the general business space.
This is the way you run a business. Well, the best business can be growth and profitable. And there are many good businesses that are no growth and profitable. Maybe better would be low growth and profitable versus high growth. But you know, each quadrant can have a valid strategy. It’s just that pulling off high growth without profits is a really hard path. It works in tech because you can usually get venture capital, but even then the survival rate is really low. And so I think when you’re trying to run that strategic playbook, you just need to understand that your odds of success are low. Whereas if you can get something profitable, you already have some level of success. It’s just a question of how much.
Stacy Walker (33:36)
Yeah, I like that. So if you’re a founder listening to the podcast today and you’re just overwhelmed by the gaps that you see in your own organization, what would you tell them for where to start? And what I’m thinking is like, what’s the one thing that you would say, look at this first and fix this first.
Stephen Brown (33:58)
Well, based on what you and I have seen, the first thing is you need to have an understanding of your profit level. A lot of brands don’t because their accounting’s garbage. And it’s usually garbage in a couple of areas. The revenue accounting can be off, but over a longer period of time, what you see in Shopify or Amazon or your accounting software, QuickBooks or Xero, in terms of invoicing, is going to be relatively accurate. The profits measurement is where we start to see big issues. So most of our customers are doing a really poor job of cost of goods sold and inventory accounting. And even when we work with them, we see a lot of struggles because we can’t fix bad inventory operations and good inventory and cost of goods sold accounting is based on good inventory operations. So one of the first places you’ve got to figure out is which quarter am I in?
And I would say that a lot of people don’t have a good sense for their profitability. So that’s step number one. Where’s my profit level? They usually have a sense of whether they’re growing or not — that’s not hard to tease out. Once I figure out where I’m at, then I have to decide, is this what I wanted? I think some people are deliberate about a growth not profitable strategy, but I think a lot of people are not.
They are fixated on one parameter and it’s usually growth. It’s the easiest one to get obsessed with. How much are we growing? Nobody brags about how profitable they are, but they should. I think that’s a bigger brag than how fast you grow, but everybody wants to talk about growth or, you know, in the tech space, which I spent a long time in, everybody wants to brag about how much funds they raised. Well, who cares how much you know.
Stacy Walker (35:34)
Yeah, yeah. That’s true. Yeah. Yeah.
Stephen Brown (35:54)
Once you understand where you are, your quadrant, and you’re good with that, then you have to decide, am I running the right strategy? And if I don’t like the quadrant name, say, I’m in the growth, not profitable, and like, ooh, I don’t want to be there. I don’t have the ability to fuel this business long-term. Then you probably need to either slow down and get more profitable or, you know, you can get profitable while not growing, although it’s easier to work on one of the two. Improving growth and profitability at the same time can be very difficult.
Stacy Walker (36:31)
Yeah. What do you think’s the hardest thing to fix? You do a lot of our CFO advisory and you talk to a lot of the brands that we work with. So which lever do you think is the hardest in practice to fix for our sellers?
Stephen Brown (36:48)
They’re both hard, but there is a thesis. So I’ve talked about profit first on this podcast and the thesis is as you focus on profitability, you oftentimes will unlock growth. And that’s what we found out with Sole Toscana, the business I co-own. We were obsessed with growth initially after buying that business and we were just burning up cash and we’re like, okay, let’s get back to a profit focus and we actually unlocked growth at the same time. Because I think when you focus on profitability, you’re like, this isn’t important, this isn’t important. You know, we really obsessed with marketing because that’s where we were losing money. But as you’re bigger, there are other areas that it can bleed. You can have, you know, that’s a skincare business. Skincare is notoriously high gross margin.
Stacy Walker (37:25)
Yeah. Mmm.
Stephen Brown (37:43)
So that wasn’t a big issue for us. And we were, and still are, only on Shopify, so we don’t have the lower margin channels yet.
But yeah, I do believe in that philosophy — if you can get your profits dialed in, it’s easier to unlock growth because what you’ll find is you’ll start stripping away the spending that isn’t performing, whether it’s marketing, whether it’s your product SKUs. And that allows you to put more focus on the things that are working. And then you’re like, let’s increase, let’s do more of this. Now, sometimes more of certain types of advertising doesn’t scale. Sometimes you struggle to sell more of a certain product, but it’s a good place to start is to narrow your focus on what’s working. See if you can scale that. And oftentimes you’ll find, yes, I can scale this thing. And then when you hit a roadblock, like the no growth profitable, then you have some decisions to make. Then you’re kind of back to — that’s an opportunity to be entrepreneurial again and say, do we test new channels? Do we test new SKUs? What do we do to unlock more growth?
But I would say I don’t know what’s easier or harder, but if I had to pick where to start, I’d say focus on profit first.
Stacy Walker (39:08)
Okay, awesome.
Stephen Brown (39:08)
Awesome. What’s in this report that we didn’t go into today?
Stacy Walker (39:12)
I think we’ve touched on almost everything in the report. We didn’t spend too much time on year over year growth, but people can find that in the report online at LedgerGurus.com.
Stephen Brown (39:24)
And we’ve done some product breakdowns in the report too, kind of some.
Stacy Walker (39:27)
Yeah, there’s a product breakdown so you can see which industries, at least the industries that we work with, which ones are most profitable. Which product categories are most profitable.
Stephen Brown (39:33)
Which product categories? Gotcha.
Okay, and again, they can find this report on ledgergurus.com. We’ll also have the link in the description if you’re watching on YouTube or look in the description on the podcast feeds. Awesome. Thanks for doing this, Stacy, and we hope that we get some good insights for you that are reading this report and look for us to do this again in the future.
Stacy Walker (39:51)
Yeah, exactly. Awesome. Thanks, Stephen. Yep, and it’s exciting.
Stephen Brown (40:05)
See you later.