Intersection of PPC & Profitability (PART 1)

Episode 78

In today’s episode, David and I will talk about pay-per-click (PPC) and profitability and how we can reconcile them in our businesses. We have also included a real-life case study from one of our portfolio companies, as well as a discussion of Advertising Cost of Sale (ACoS) and Total Advertising Cost of Sale (TACoS). 

Listen to this episode and learn how PPC and profitability intersect! 

[00:01 – 02:43] Opening Segment

  • We introduce our topic for today
  • How to reconcile PPC and profitability 

[02:44 – 12:59] ACoS and TACoS 

  • Don’t miss our break down of ACoS and TACoS
    • Why you should know your breakeven point 
  • FREE download on TACoS & Profitability
    • Link below
  • Want some Amazon refunds? Check out Getida
    • Promo code: FTM400
  • How to analyze shipping cost properly 
  • Go over your income statement the right way 

[13:00 – 20:19] Our Case Study 

  • We talk about the 3 phase of one of our portfolio companies
    • Launch
    • Struggle
    • Dial in 
  • What you should realize about this case study according to Ken

[20:20 – 21:30] Closing Segment 

  • Connect with us. Links below
  • Final words

Tweetable Quotes:

“Knowing your numbers is probably one of the top things you should be an expert at if you’re in this business.” – Ken Wilson

“Knowing your true breakeven point and then setting ACoS goals and monitoring and measuring them on a daily or weekly basis is really important.” – David Schomer

——————————————————————————————

Do you have a similar experience? Send us a voice message and let’s see how we can help you! 

Know more about TACoS and Profitability! Start here. 

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David 0:00
Real quick before we get into the show, I wanted to share a new service called Getida that Ken and I have been using that has made us over $10,000 in Amazon reimbursements. The service requires no monthly subscription, and getida collects a small percentage of the money they recover for you. It takes less than five minutes to set up and works on all Amazon marketplaces. Go to getida.com GETIDA, and enter promo code FTM 400. That’s FTM for firing the man 400 to get your first $400 in reimbursements commission free, how much money does Amazon owe you? There are two lessons to take away here. One is really know your numbers, right know your breakeven point. And two, be aware that the free markets are at work, there’s a fixed supply of keywords. And you know, there’s a growing demand of keywords.

Ken 0:57
Every product has a life cycle. So you know there’s a launch phase, a maintenance phase, and then there’s a declining phase for almost every product. And so if you know what these numbers are, before going into it, at least you have kind of a rough roadmap of that product lifecycle. And I think that’s helpful.

David 1:15
as entrepreneurs we’re optimistic but you know, sometimes things don’t always pan out and it’s good to know your numbers through a couple different lenses.

Ken 1:23
Yeah, a lot of variables that we can’t control, you know, competition, shipping, you know, lots of things that impact it.

Intro 1:30
Welcome, everyone to the firing the man podcast, a show for anyone who wants to be their own boss. If you sit in a cubicle every day and know you were capable of more than join us. This show will help you build a business and grow your passive income stream in just a few short hours per day. And now your hosts, serial entrepreneurs David Schomer and Ken Wilson.

David 1:54
Welcome everyone to the firing the man podcast on today’s episode, we take a deep dive into PPC and profitability. Now the reason we’re recording this episode is Ken has been running PPC for a couple of our portfolio companies and I have been hyper focused on profitability. We have had a very healthy push and pull relationship as Ken tries to manage ACOS and I’ve managed profitability. So that’s what we’re going to be diving into today. Ken, what is going on man?

Ken 2:22
David, how are you man? Glad to be in the podcast studio, if I can talk today. But yeah, you know, PPC profitability tacos, you know, you and I’ve been working on this a lot lately getting this stuff dialed in. And I’m excited to share with the audience kind of what we’ve been working on and some things that are working for us. And, you know, the end game is profits, right? That’s what we’re all after. And that’s kind of what we’re hyper focused on.

David 2:48
Absolutely and included in this episode, we’re gonna do a real life case study from one of our portfolio companies walk you through the p&l through three phases of that company, and really looking forward to diving into it. So you know, what we’re going to be covering is tacos. That’s right, you heard me correctly, tacos, we’ll be learning what that is, we’re going to talk about several methods that you can implement to decrease tacos, then we’re just going to really get into profitability and what I’m looking at on a monthly basis, and what Ken and I are looking at on a monthly basis, when we get our p&l’s back in order to optimize and better manage for profits. So as I mentioned before, tacos, this is an extension of ACOS, so ACOS is ACOS that stands for advertising cost of sale. And this is going to be how much you spend on advertising per dollar of revenue you make. It can also be as a ratio of ad spend in contrast with target sales. All right now tacos In my opinion, this is ACOS cooler, older brother, this means that advertising spent relative to total revenue generated. And so just an easy example. Say you have adspend of $2. And you have ad revenue of $10. You’re gonna have an ACOS of 20%. Now on the tacos example, say you have ad spend of $2. And you have ad revenue of $10 an organic revenue of $10. Right, so now we are at a 10% tacos. And so we’re going to be diving into why this metric is really important. But as I have progressed in my e commerce career, I have started to pay a lot more attention to tacos, and its impact on the business as opposed to ACOS. So, before we dive into our examples, you know, I think PPC advertising is an example of the free markets at work. And so we’ll take an example of like a leprechaun loincloth, right, this is our example leprechaun loincloth, you’re going to sell it for 15 bucks, it’s going to cost you five bucks to source and you’re going to have five bucks in Amazon fees. So that’s going to leave you with $5 leftover or a 33% profit margin. Now, if you think of anything that’s manufactured, if you drill down deep enough, you almost always get back to commodity. So for instance, a leprechaun loincloth, as everybody knows, takes two commodities rope and cloth, right. And so if you drill down deep enough, you’re going to get to commodity type prices. And then you’re going to have some fluctuations in labor. But what I would say is that most leprechaun loincloths would be manufactured between four and $6. You know, the best manufacturer in the world could do it for four. And maybe the worst could do it for six, but it’s a pretty tight range. And so, you know, what I have found is that as we’re bidding on keywords, if your profit margins around 33%, a lot of the keywords tend to have an ACOS of 33%, which leaves you at breakeven. And, you know, that’s something that I’ve sold at breakeven at a lot of different points in my business. And as we’re going to see in the case study that we go to next, that’s actually been something that I’ve been avoiding. And I’m going to go into why I have been avoiding that. But I think this is just there are two lessons to take away here. One is really know your numbers, right? Know your breakeven point. And two, be aware that the free markets are at work, there’s a fixed supply of keywords, and, you know, there’s a growing demand of keywords. And so, you know, for instance, I talk about a fixed supply of keywords, you know, you take leprechaun loincloth, for instance, there’s only you know, probably somewhere between like three to five words that really describe this product, right, you’ve got leprechaun loincloth, you’ve got very small green bathrobe, you’ve got shamrock pants size extra small. But you know, if you think of any object, right, there’s usually only about 10 words right that describe it. And so when I talk about fixed supply, that’s what I’m talking about. And you know, certainly there’s a lot of longtail keywords, right, so like St. Patrick’s Day clothing, or GI Joe green pants or funny gift for an Irishman, right, these are not going to be high search volume keywords, but there may be an opportunity to bid on these at a little cheaper prices. So anyway, as I was talking about before, I think you really need to know your true breakeven point. So you know, a couple months ago, I went full accounting nerd and built the firing the man calculator. And this is a free download, just go to firingtheman.com/calculator, but this is a spreadsheet that will get you to your true breakeven point. And so you know, going back to our example of this leprechaun loincloth, you talk to your manufacturer, they’re gonna say, you know, your unit price is $5. And that’s an important number to know, but you cannot stop there, there’s a lot of additional costs that you need to factor into your purchase to get you to your true breakeven point. And so this calculator lays out and I’ll go through a couple of them, but this calculator lays out, you know, every cost I’ve ever incurred, some of them I don’t incur on every order. But these would include, you know, packaging, product inserts, barcodes, inspections, shipping from the manufacturer to the US, shipping fees to the front porch, to the Amazon warehouse, tariffs and any other expenses. And this gets you to like a fully loaded cost. And at this point, you would deduct this fully loaded cost from your selling price. And that’s going to get you to your true breakeven point. And so, you know, as we’re gonna see, in this example, this metric is really helpful for managing ACOS. And as we work our way down the p&l, we’re gonna see where tacos comes in.

Ken 8:28
Yeah, one thing David, I want to point out is for all the listeners, we’re gonna have a download on the website for this podcast. So all of the graphs, the documents, everything we’re referring to, if you go to firingtheman.com/tacos, TACOS, you can get this download, it has the case study it has everything we’re covering all the hyperlinks everything there. So just wanted to cover that real quick. And one point on what you just covered David on this calculator, what I’d like to really, two things I’d like to highlight one is knowing your numbers is probably one of the top things you should be an expert at, if you’re in this business. And two what I like about this calculator is it breaks down all of your fully loaded numbers, you know, everything your break even point and then it has a worst base and best pricing. And so you can see like, hey, if I can price my product at this, what is my breakeven cost? Here is middle of the road. And here’s the best case scenario. And it gives a breakeven cost for each of those. And something that I’ve learned the longer I’m doing this, the more I realize that every product has a life cycle. So you know, there’s a launch phase, a maintenance phase, and then there’s a declining phase for almost every product. And so if you know what these numbers are before going into it, at least you have kind of a rough roadmap of that product life cycle, and I think that’s helpful.

David 9:48
Sorry to interrupt the episode. You may have heard Ken and I talking recently about a new tool that we’re using for Amazon refunds. Now I have used other refund tools like this, however, I can tell you in the first seven days, they scrubbed the back end of my Amazon account going back 18 months, and found $5,000 of refunds. And the nice thing about this is, it’s my money, Amazon made a mistake, and they are just auditing my account. The other thing I really like about this tool is there is no monthly fee, they only charge a commission if they are successful in getting you your money. Go to getida.com GETIDA, and enter promo code FTM for firing the man FTM 400. This is an awesome tool. I can’t say enough good things about it. Now back to the episode. Absolutely, I’m glad you brought up that best case, worst case and base case, because there is a lot of variability here. So you know, if you start at the top, at sales price, you know, when I launch a product, I usually have a sales price in mind. Sometimes I increase it, sometimes I decrease it. But generally the price I launch at is not the price I’m going to have at the end of year one or the end of year two, right? And you just kind of got to, you know, split test and see what produces the most profit. The other variability there is in shipping, right? We’ve run into this in our own businesses where, you know, we’re having inventory restrictions at warehouses. And so instead of sea shipping, we need to airship and that is currently about four or five times more expensive.

Ken 11:20
It’s currently impossible.

David 11:21
Yeah, yeah, I was quoted $11 per kilo the other day, which is bananas. And so, you know, that is wildly different than sea shipping at two bucks per kilo. And so anyway, I think that’s a good reason to analyze, you know, at least a worst case and a best case, because, you know, we get into this, we’re always optimistic, right, as entrepreneurs, we’re optimistic. But, you know, sometimes things don’t always pan out. And it’s good to know your numbers through a couple different lenses.

Ken 11:51
Yeah, a lot of variables that we can’t control, you know, competition, shipping, you know, lots of things that impact it.

David 11:58
Absolutely. So for those of you that are tuning in, just in your car, just listening to this, I’m gonna do my best to walk you through an income statement. If you’re sitting at a desktop, you ought to open up this slide deck, firingtheman.com/tacos. And flip to this slide called know your true breakeven point. But here we go. Just a forewarning I’m going full accounting nerd on this one, but I hope it’s helpful. So at the top of your p&l, you’ve got total income, right? This is just the sales coming into your company. The next line item you have is cost of goods sold, right. So this is going to be the cost of your product, the shipping costs, you know, everything it takes to get your product into sellable form. Now, when you take income minus cost of goods sold, that gets you to gross profit. And so in this example, we’re looking at a gross profit of 43%. Now, some people would look at that and say, all right, that’s my breakeven point. But as you work your way down this p&l, you’ve got other expenses. And this is what we call operating expenses. So this is going to be, you know, the cost of photography, this is going to be the cost of any employees that you have, your owners compensation, miscellaneous, office supplies, etc. And so you know, in this example, we’re starting with a gross profit of 23,000. But then we have another $14,000 of expenses that we need to deduct to get us to net income of 9000. All right, now that net margin, net income divided by total income, is 17%. And this is where we establish our range, you know, at the high end, and this is our strategy, Ken and I strategy, our range on PPC for ACOS is gonna sit somewhere between our net margin and our gross margin. So in this example, between 17% and 43%, alright, so and here’s the reason that we’ve established this range. So if our gross margin is 43%, and we have an ACOS of 43%, all of those sales, we’re breaking even on, however, the company still has additional expenses, and you’re not breaking even on the net, you’re just breaking even on those sales. And so you’re going to need to earn organic revenue, which will produce organic net income to cover your operating expenses. And so this is something you know, I see a lot of people fall into this, you can spend a ton of money on PPC, and it not be fruitful, right, you could have a million dollar business with with $5,000 net income, right? And that kind of goes back to the free markets at work. And so anyway, I think this knowing your true breakeven point and then setting ACOS goals and then monitoring and measuring them on a daily or weekly basis is really important. So we’re gonna, you know, turn the page into our case study and this case study starts back in January 2019. And, you know, extends through today. So, this case study is broken down into three phases. The first is the launch, the second is the struggle and the third is dialed in. And each one of these phases is several months. So for instance, phase one to launch, this is going to run from January 2019 to December 2019. You know, during this time average monthly revenue was $14,000, we had a gross margin of 31%, we had a very low net margin. So this would be net income 4.8%. And we had tacos, right, so this is going to be PPC spend divided by total revenue of 13%. And so, you know, as I look through this p&l, in most months, you know, we’re going to have somewhere between 10 and $15,000 of revenue. And if you look at net income, it is generally around $1,000. pretty low, pretty low. And so this was an instance where I was self managing PPC, we were doing a lot of breakeven sales, and my tacos wasn’t quite dialed in. So anyway, if I look at that 12 month period, and I graph out my net margin, right, this is gonna be net income divided by revenue. And then we have, I’m going to graph out tacos, and what we see is that tacos, that line is always above net margin. And as we see, you know, in the next phase, these lines are going to flip. And so, you know, let’s switch over to phase two, this is going to be January 2020, to July 2020. Now, keep in mind, this was the pandemic. May was the best month that this business has ever had did $62,000 of income. But during this time, during these seven months, average monthly revenue was $31,000, we had gross margin of 35%. So stepping up a little bit, net margin was 6.2%. So again, stepping up a little bit, but a high tacos, tacos was 17%. And so you know, if you look at most of these months net income, is, you know, 1400 1200 $105. In April, we did negative $65 in net income on $33,000. In total income, really the only month that performed well was May, and this was kind of an anomaly month. And so here I was spending a lot, I hired an agency, we had not gotten things dialed in. And I was really spending a lot on PPC. And so you know, from a revenue standpoint, you may look at this and say, Hey, this is a really good business, but you get down into net income, and there’s not a lot of meat on the bone. And so you know, again, as I graph out my net margin versus my tacos, you know, my tacos, that line is hovering well above, tacos is hovering well above net margin. And so as we get into phase three, and this is the dialed in phase, what we’re calling this, this is an eight month period stretching from August 2020 through March 2021. Here, we’re still seeing good increases in average monthly revenue, we’re at $47,000. Gross Margin is at 42%. net margin is at 23%. And this is the real key. This is why we do this is to earn net income to either pay ourselves or reinvest into the business. And, you know, what I want to really highlight here is tacos was 9%. And, you know, every company is different. But this is for this company, this is optimal, in my opinion. And you know, as we look at adspend over the life of this account, it really hasn’t increased that much. You know, in the early stages, when monthly revenue was, you know, $14,000 or so, we had ad spend of like 2500. Today, we’re doing average monthly revenue of around $50,000 ad spends about four grand. And so you know, we’ve really limited spend there, we’ve picked up on what longtail keywords convert well, but we’re no longer going after that breakeven sale. And you know, when I meet with my PPC manager, I instruct them 22% ACOS. And you know, you compare that to my gross margin of 42%. I’m not selling at breakeven at all. I mean, all of my PPC sales are funding my operating expenses. And so anyway, long journey, and you know, Ken you were along for the ride for some of this. And, you know, this started back in 2019. This case study that business it started about two years prior to but wasn’t really putting up any serious numbers. But it took a while to really get this dialed in. And it wasn’t until I started measuring tacos that I could really measure from month to month. Hey, what looks good for this business. And so you know, going to this graph, here, we now have our net margin exceeding tacos. And you know this graphically with net margin sitting higher than tacos. This represents to me a profitable company. And so anyway, I hope that that helps. I feel like A lot of times with PPC people talk and they don’t use real life examples. So I hope applying hard numbers to this aids in understanding. So, Ken I’m going to kick it over to you to dive a little bit deeper into tacos you know you were the one that introduced me to this so looking forward to hearing what you have to say

Ken 20:18
yeah absolutely before we get into that just a little bit on that case study. You know, it’s excellent to see you know, actual numbers and actual case study on a brand and the struggles and you know, kind of like pull back the curtain like what’s behind the curtain? And you know, it’s kind of been amazing watching you kind of pull these levers and dial profitability and yeah, it’s a good case study to look at it and notice that it takes a long time like this isn’t done overnight. You don’t say like coming in. So I’m going to fix this overnight PPC is done over the long term, PPC takes a long time to get dialed in, profitability as well, you know, especially in this Amazon ecosystem that we’re playing in, largely.

David 21:01
Alright folks, Ken and I are getting pretty long winded on this discussion on PPC and profits and don’t want to cut it off short. So next week, we are going to deliver part two of this episode. So stay tuned. Thank you. Thank you everyone for tuning in to today’s firing the man podcast. If you like this episode, head on over to firingtheman.com. And check out our resource library for exclusive firing the man discounts on popular e commerce subscription services that is firingtheman.com\resource. You can also find a comprehensive library of over 50 books that Ken and I have read in the last few years that have made a meaningful impact on our business, for that head on over to www.firingtheman.com/library. Lastly, check us out on social media at firing the man, and on YouTube at firing the man for exclusive content. This is David Schomer

Ken 21:55
and Ken Wilson. We’re out

David 22:12
before you go we wanted to share a new service that Ken and I have been using called getida that has made us over $10,000 in Amazon reimbursements. The service requires no monthly subscription and getida collects a small percentage of the money they recover for you. It takes less than five minutes to set up and works on all Amazon marketplaces. Go to getida.com GETIDA.com and enter promo code FTM 400. That’s FTM for firing the man 400 to get your first $400 in reimbursements commission free. How much money does Amazon owe you?

Transcribed by https://otter.ai

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