The Startup CPG Podcast

If you are in the Startup CPG Slack #finance channel, you’ll regularly see tons of questions about projections, cash flow, and unit economics, so I’m so excited today that we are joined by Paul Bianco, CEO and Founder of Graphite Financial. Born out of a VC fund, Graphite provides startup accounting, finance & tax services for high growth brands. For the past few months, Graphite has even been offering 1:1s with our community members for free to get specific advice for their business (keep an eye out in Slack for more opportunities). Today we’ll focus on the topic of unit economics for CPG companies.

Listen in as Paul shares about:
  • Tips for calculating gross margin correctly
  • Issues with commonly used terms like LTV (Life Time Value) and ROAS (Return on Ad Spend) and what metrics he recommends instead
  • Using cohort analysis in LTV calculations
  • How much data is enough data to create a meaningful analysis
  • Best practices and tools for projections
  • Tips on when and how to find the right finance service for your company
  • And more!
This episode was sponsored by Graphite Financial. Go to graphitefinancial.com/cpg
This episode was sponsored by Shopify. Go to shopify.com/startupcpg
This episode was sponsored by Promomash + Crisp. Go to promomash.com/startupcpg
This episode was sponsored by Maven Agency. Go to strategymavenagency.com

Episode Links:
  • Graphite Financial website
  • Download a free financial model template, chart of accounts template, and more here
  • Paul’s LinkedIn
  • Brands mentioned: Plated, Brightland, Funky Mello
Shopify Links:
Promomash/Crisp Links:
  • Try Promomash + Crisp free for 30 days here
  • Webinar recording: Promomash + Crisp Present: The Next Big Thing in WFM Demo Analytics
  • Webinar recording: Distributor Data 101: 5 Things Brands Should Be Tracking and Why
Strategy Maven Agency Links:
  • Strategy Maven website
  • Book your free account audit here
Show Links:

Creators & Guests

Host
Jessi Freitag

What is The Startup CPG Podcast?

The top CPG podcast in the world, highlighting stories from founders, buyer spotlights, highly practical industry insights - all to give you a better chance at success.

01:26 Jessi - Hi, Paul. Welcome to the show today. How are you? Doing well. Thanks for having me. Awesome. I'm really glad to have you here. I'm wondering if you could start us off by  just telling us a little bit about yourself and about Graphite.
03:00 Paul - Sure. Yeah. I'm Paul Bianco, and I'm the founder and CEO of Graphite Financial. We do finance and accounting services for startups. We act as startups' internal bookkeeping, controller, and FP&A and CFO function, many of which are CPG companies. Awesome. That's great. I believe that you've been in CPG, the startup world, for over a decade. Can you tell us how you got into working with consumer packaged goods companies? Yeah. Definitely been in, I guess, in startup years. It's been a bit of time, but about 10 years and how that started. I was a CPA originally, but actually I joined a venture capital fund called FF Venture Capital about 10 years ago. That's what got me into the whole D2C CPG. I'll use, I know it's not interchangeable, but I may say it that way in certain cases. One of my first portfolio companies as an investor was a company called Plated, which was in the meal delivery space. That's really what started it. We're mostly investing in non-consumer products, but I really kind of, Plated in particular, I had an affinity towards his great team. I still keep in touch with a lot of folks from there. That's where I learned almost everything I do, I know now, and that's kind of evolved over time. From there, years later, I started Graphite, and about 2017 is when we hit the ground with the company. It's just evolved. We've seen the market increase. We've seen more and more CPG companies starting. We saw this evolution of D2C companies with similar tech stacks around, and we decided to build a practice specifically around these companies.
04:47 Jessi - Great. Yeah, that's super helpful. For our conversation today, we're going to be digging into the unit economics of a CPG company. I'm curious with, based on your background, you've seen companies do so well, take off. You've seen a lot fail probably. As we set the stage for this today's conversation, is there anything that stands out from what you've learned? Obviously, we'll dig in more, but I'm curious if there's anything that you saw that really made you passionate about educating people and starting a firm and helping brands win over time?
05:27 Paul - To be honest, one of the first things that drew me to it, it's very tangible. For example, with Plated, I could order the food and I could tell my grandma about it. I thought that was cool. Then later, I started working with a company called Brightland, which their first product was olive oil. Now they have many different products. Great company, great founder. Also very tangible. I could have conversations. That's what drew me into it a bit more. But yeah, I've seen companies do really well. I've seen companies not do well. I've worked with many, many consumer companies. Just like anything else, it just comes down to, at the end of the day, the only thing I've learned is this is across any company I work with. We work with hundreds of startups, different industries. It just comes down to the product first and foremost. It really is that simple. As a startup, you're not going to have amazing distribution advantages or anything like that. It really comes down to that product that resonates. A lot of the metrics and things that we look at just try to figure those things out. What I've never seen work is something that's not really resonating and brute force just makes it happen. It really is. Again, just keeping it simple, everything comes back to that core principle, just a product that… A suite of products that really work. Then the economics around them, that helps too. But then that's step one.
06:49 Jessi - Right. Yeah, that's very interesting and makes a lot of sense. When you first sit down or meet with a brand and they're getting started, say they've got a great product-market fit, and they're trying to dig into their finances and understand how they can build a profitable business, are there any terms or pieces that you dig into first when you're evaluating a company or deciding how to help them and then we can dig into some of those?
07:19 Paul - The very first thing we look at, there's a slew of things, but really just the financial statements at first. Just understanding the first thing if we're about to potentially work with a company, I just want to understand revenue, sources of revenue. Are you DTC only? Are you at Amazon as well? Which by the way, we're seeing far more brands gravitate also towards Amazon as well. Whereas even like three, four years ago, it was definitely less. Amazon's huge, but it's more and more common for brands to be there too. And then understanding the retail component. One for us to understand the complexity of the business, but also just wrap our heads around what's working, what's not, what does the overall picture of this thing look like, what do the operations look like, and just see how complex the company is, margin profile and all those things.
08:02 Jessi - Yeah. Okay. That makes sense. And on the margin side, I'm curious if you can talk a little bit about some of the metrics around margin, because you see a lot of brands need to, you get asked, what's your gross margin or what are the margins on this? And I think that it can be a confusing thing, especially if you're new to the industry, you don't have any background in accounting or bookkeeping. You're like, what do I include in these different calculations? How do I know what my margins are? How do I know that I'm building a healthy business? What are the right numbers? Do you have any comments on calculating gross margin in particular and some of those margin pieces of what brands can track?
08:45 Paul - Yeah. I mean, look, you could start the work even before you launch. So I'll give you an example, a company we started working with six months before launch, but the product was being developed. Part of it is just understanding, you want to understand the total cost of the product, first and foremost, but knowing that that's not it. There are many other things that go into understanding your gross margin. The most important thing I'd say, the higher the margin and the higher the average order value for consumer, that's really what sets you up for success or having something, if the average order value is a little bit lower, having something recurring. But really at the end of the day, margin is as simple as you're taking, it's what the, let's say we're talking about DTC, Shopify, it's what the person, it's what they're paying you. There's some fees, some credit card fees, things like that, but then it's the cost of the product. It's the cost of getting the product to your 3PL, or most companies use that. We have some clients that do their own warehousing. So it's a little more complicated there around staffing and rent and whatever. It's the cost of getting the product in the hands of the consumer. It's the cost of getting the product back to you if they return it, your shipping costs and chargebacks. That does happen. People buy something and just try to cancel it on their credit card. There's a bunch of things that go into it. And that's why it's really important to think about, really try to think through all those things holistically. So you actually understand what is my gross margin per order, right? That's the easiest way to do it. Therefore, like how many orders and then, after that is contribution margin, we think about which is all that, which is that minus the cost to actually acquire the customer. So it's basically the revenue minus all the things that it took to get that revenue to sell something to the person, then minus additionally, the cost to actually get that customer interested in the first place. That's your baseline. And then what we like to do is understand, well, all those things considered now, how many units or how many orders do you need to sell to now chip away at all the other expenses of the business, like having employees and things that cost a lot of money building a team, new product development. It could be a lot. It could be a lot, but it's super important, especially in this environment.
11:05 Jessi - Yeah, no, that's super helpful. Yeah. You and I were discussing previously just how a number like gross margin can be misleading sometimes for all the other overhead that a brand might have that they actually need to make up and to be profitable. Is there anything within margin calculations that you see brands not include, forget to include the most, anything that is an afterthought most often and you see brands be like, oh, I forgot to include that or I didn't know that that was part of it.
11:34 Paul - Yeah, I think we somehow sometimes have some healthy debate around discounts and things like that. You can construe that to be marketing to an extent, but really if it's like you're constantly discounting, where does that go? That's a piece. And then a lot around just the shipping of getting the product delivered and actually to the place, breaking that down into the actual inventory costs and just allocating those accrued costs over. Now we're getting super accounting here, but allocating those costs over gets more complicated as you get bigger. It's not a huge, huge thing if you're smaller, as long as you just keep track of your costs. And you'll look, one of the most important things for the companies, forget about metrics, we're just doing the basic accounting, which is actually very complicated for CPG companies for a lot of reasons, a lot of transactions, physical goods, there's real stuff in the world going all over the place. At a minimum, we just want to look at the margins month over month and are they fluctuating? Are they not? If they are, is something wrong or is something actually different? Is the product cost higher? Is shipping more expensive now? What's going on? So that's a baseline and having good accounting is obviously that's a pitch for ourselves, right? That's what we do. But that's really like a big piece of it, just making sure things are clean so you can understand what's happening. Right. Yeah. Yeah. You need your accounting to be useful for decision-making. Yeah. And use it for yourself. The one thing we always say is, it's like, well, but what if it makes my margins look worse? If I, well, any sophisticated investor is going to look and see that you're dumping some expense not in where it needs to be. So your margins are what they are, might as well look at them in a straightforward fashion and understand. So you, because they're really for you as the operator at the end of the day, right? And explaining it. And if you don't have, if you're kind of obstructing your own view of your own financials, like, I don't know, what's the point, right? You're basing it on numbers that are not a hundred percent correct. So the more accurate, the better.
13:41 Jessi - Yeah. I think that was a, like a moment for me where I was, you know, learning about, you know, bookkeeping and financial reports. And it was like, oh, like investors want these things, whatever. And then it was like, well, okay. But like, how do I just want to look at the numbers? What's useful for running the business? And the investors are like, that's what's most important. Like, yeah, like we determine what needs to going on, but you need the numbers to be correct to run the business accurately. And I was like, you know, I think it helps make the shift from seeing accounting and bookkeeping is something that you kind of have to do. And people don't always love to work on their books or whatever, because it kind of can seem like a pain. But when you, if you can make the shift to like, this will help me run the business or learn how it will help you run the business. I think that that can be super helpful. At least for me, it's been helpful once you kind of learn some basics. It's really intimidating to start to learn all these terms get thrown around investors asking questions. Like it can be kind of overwhelming.
14:35 Paul - I completely agree. That's the right way to think about it. You know, for me, I, you know, often, especially companies that are earlier on, they'll come to us, they'll say, well, how do investors want to see it? Like, does this, is it, and I understand because we see a lot of companies, we see the ones that are healthier. We see the ones that are getting funding, but really, and this is across any company, again, we're talking about this in the context of CPG, but it's more of a question of, I think investors is just looking for a solid business. They almost want to just be surprised and delighted at something you've figured out. And it's less about this exact playbook they have, right? There are certainly metrics and we can talk about those later. That I think give them a handle on things, but at the end of the day, what they're trying to figure out that they're in the business of risk capital, right? They invest money in it. There's risk there, but the less risk, the better, right? So if they really, you know, if they could wrap their heads around the numbers and what they're trying to figure out is at the end of the day is product market fit, right? Which, you know, through the numbers, like is this product resonating with consumers or not, right? And then how scalable is the thing, right? Could we build multiple products? Is it a one product type company? How big can we make this? What is the, you know, what does the organization have to look like to get there? Can, is this a venture backable, potentially public type company? That's really what they're thinking about, but that's all a byproduct of just like being a healthy company, you know? And like thinking, you know, thinking about it from that perspective, you know, would, as a founder, would you invest your own money if you weren't running it like someone running a very similar company or you're like, I'll give you my life savings, right? Like if the answer is not, then it may be riskier than an investor may also want to think about.
16:19 Jessi - Yeah, no, that's very helpful. And kind of some of the, you know, you mentioned some of the metrics that investors look at and also, you know, that can be ways to just kind of look at the business. And I think I believe you have some strong opinions on some of the terms like lifetime value, LTV and like ROAS return on ad spend. I'm wondering if you can like talk us through those terms, some of the things that, you know, you think about them, should people be looking at other things instead? Like I'd love to kind of discuss, you know, some of those terms that are very popular.
16:48 Paul - Yeah. So look, LTV is used in consumer a lot and SAS too. Those are some of the main ones where they're kind of, and a lot of companies, but we hear that a lot. And maybe it's just like been burned so many times as an investor and just working with companies. And I've seen so many pitch decks and out of the hundreds or thousands of pitch decks and pitches and companies we've met, there's so little consistency in these numbers, right? LTV, just the other day, had a conversation with a company, consumer brand growing a lot, right? But the question was, should LTV be two years worth of revenue? Should it be three years worth, four, five? Like what do I, to me, I don't even like saying the word, right? LTV, because what does it really tell me as an investor? It's like, well, or, you know, comparing it versus CAC, like the ratio, it like doesn't really tell me much until you, I need to know exactly the numbers that go into it anyway. So for LTV specifically, I say like, forget that. I actually like a visual view, because LTV, what it doesn't tell you is the time horizon exactly and the break even period. So what I like to see is what kind of the CAC is, right? It's a baseline. You could do it on a per cohort, like per month basis or on a per customer basis, right? Down to the unit. But really it's that. And then the cumulative gross profit, not the cumulative revenue, right? And we see that sometimes. When we look at, when we talk to companies and they want to, they're thinking about their kind of break even periods on their customer acquisition costs, sometimes we'll see them looking at top line revenue as the other side of that equation. And the first thing I'm thinking, like, you definitely don't have a hundred percent margin. It's like the thing you're selling costs, you're either buying it or actually manufacturing it, or there's some cost associated with selling what you're selling. So it has to be the cumulative gross profit from that either cohort of customers or that exact cohort. When it intersects, that's your break even point. Sometimes it's the first order, right? That's called being first order profitable. That's a very, very good place to be. Not the easiest place to be, but a very, very good place to be. But sometimes it takes way longer, right? But you could see then what that cohort gives you or what that average customer gives you. And the further time it passes that break even point, it keeps going. And that understand, that kind of gives you a sense of with investment, because once you pass the break even, that's the extra, that's the gravy. That's actually what's generating true profit to the bottom line of the business and understanding how that stacks up as important long-term. So just like a visual view and then ROAS, I've always joked about, I always wanted to build a marketing agency within Graphite, even though we have nothing to do with marketing, but for consumer, right? For our SaaS companies, biggest expenses, typically lots and lots of employees, engineers, things like that, AWS, whatever. But for consumer companies, it's of course the cost of the product, but that's an asset because you're selling it, right? But otherwise it's advertising. Our customers spend hundreds, thousands, millions each a month in advertising and all different channels, right? And I've always thought that marketing firms and finance people are looking at the same thing, but speak different languages and ROAS is a little bit more of a marketing term. But often when I speak to folks in marketing, typically that they're looking at top line revenue as well, as part of that equation. I really think even there it has to be gross profit to really understand, because that's what if your margin is like 10%, like, you know, hopefully it's not like, I hope your margins are 50 to 70% in consumer, right? But it makes a huge difference, right? So that the way I'm talking about factors margins in as well. And then with the first thing I was saying, it really, it factors in the repeat rate over time. So that's, it's just, and if you, this is not a visual, you know, it's a podcast, but like, it really, really makes it way easier to think about and understand the business. And then there's just a handful of things like that, that as a founder, or as an investor, you look at it, you're like, okay, I understand. It helps a diligence process quite a bit.
21:04 Jessi - Yeah, no, that's, that's super helpful. And yeah, lifetime value is interesting as, like I, I, that was even something that like, and there was a, you know, a segment of college class where we covered calculating lifetime value. And it was just like all over the board of all the different ways you could do it and the time rise you talked about. And from that moment on, I was like, I don't believe any lifetime values that I see after this, because I just, once you see the behind the scenes, like, I don't, I don't think I'm going to trust that metric. So it's interesting to hear you talk about it.
21:34 Paul - Yeah, just seeing a lot of companies and look, the industry's evolved a lot in its thinking, right? Like the concept of cohorts, 10 years ago, as investors and plated, I could tell you, we weren't talking about cohorts day one, we evolved into that learning, working with the company, and then to give the company a lot of credit, really thinking things through. But we thought we're really trying to figure out how do you, how do you exactly make sense of a company that has a significant upfront cost of customer acquisition and, you know, revenue from that group of customers over time, right? Now every single consumer company I speak to, at least as heard of the word cohort and like understands it conceptually, but 10 years ago wasn't really a thing. So I think just the whole industry has evolved. And if you're doing that cohort work anyway, might as well visualize it in a way to understand that breakeven horizon. It's the same math, just a little bit in a different, it's just kind of flipped over.
22:33 Jessi - Yeah. I mean, can you dig in a little bit on that cohort model just so that we also have that? Because we have a lot of, you know, listeners that are not familiar with the industry at all. And so I want to make sure we've got some like 101 level content too.
22:47 Paul - Yeah, for sure. So, you know, so even within finance and accounting, you know, the concept of a cohort, that's not, you know, I went to school for accounting. I got my CPA after school. I worked a bit in accounting public consulting firm that, you know, had to do with larger company financials. And some of that was consumer, not once did I ever hear of the term, the concept of a cohort. So this is not, you know, this is something that's becoming more and more common with, especially with consumer companies. What I'm basically saying is the folks on the call that are listening and have not heard of cohorts, even folks in finance and accounting, it's not really a top thing. You learn it, you know, over time. But what it tries to do is it says, it tries to, so when you're looking at financial statements, right, like if you're investing in something and you look at a company's 10 K, you're looking at their financial statements and it's linear within a period of time, right? So think about it like this month, I'm a company, I made 100,000 in revenue. I spent 100,000 total, right? I made $0, right? But that's this month. But the concept of, and a consumer and SaaS are two of the main ones is you're spending a bunch of money now to acquire these customers. But again, you're getting value, you're getting revenue from them over a period of time, right? Sometimes not, right? If you're a mattress company, I don't know, like you're selling a thing once kind of, and maybe you have other sheets and this and that, or like pillows. But a lot of companies have kind of a repeat aspect to it, whether implicit in like, it's a consumable product, or maybe there are accessories that go a lot like a solo stove, right? Where it has like, you could buy the solo stove, but that it's like, it's now the pizza thing that goes on and it's this, it's that, like accessories or like Yeti or whatever, like there's various new products that go along. So what it's basically doing is it's saying for a given cohort of customers and the cohort is all the customers that were customers for the first time ever this month, and we usually like looking at it monthly, how much money did I get from this group of customers this month? Then the analysis says, so, you know, so it's June, right? So how much did I get from brand new June customers in June? Then in July, you'll say, well, how much did I get from not the July customers from those same June customers? How much revenue did I make from them in July? Right? Usually it's less because like one month after, but then after a couple months, you may see, Hey, those same June customers in August, Oh, we actually made a chunk of money from them again. They started repurchasing my product. So it basically takes that analysis and looks at it over time. You go back historically. It's not the easiest. There's lots and lots of Shopify data. We do this and help visualize it for companies. You go through all this data, you determine when that customer was a customer the first time ever, and they're kind of locked into that cohort basically. And then you see how much you got from that group of customers over a period of time. So basically take something from like a 2D view into more of like a 3D over time view instead of just within the period of time that you're in. So even that in saying that, that kind of confusing sounding, right? But actually like visually, it's not that it's fairly simple once you kind of wrap your wrap your head around it. And, and again, really for any type of company where there's a one time purchase, but then more purchases thereafter, even if it's not subscription, even if there just are, it could potentially be more things that the person buys, it's important to look at because it helps you understand when you're looking at your customer acquisition costs, it helps you understand like what your allowable customer acquisition costs kind of can be. So you can understand this because then you can kind of back into where your time horizon for breakeven is and really understand the company's cash flow needs. Was that clear? Was that like moderately clear?
26:44 Jessi - That's super helpful. And I think, yeah, I think, you know, again, this is an audio medium, like you said, but I can kind of at least visualize in my mind, you know, thinking through the different cohorts, like, you know, like one of our recent episodes was with, you know, funky mellow marshmallow cream, which I love. And so I think about, you know, as the first time I purchased would be the start of my, you know, cohort essentially. And then, you know, I bought more marshmallow cream the next month and the next month and the next month.
27:13 Paul - No, that's exactly the way to think about it, right? If think about it as you the buyer, right? If it forget about being the business owner as the buyer. Yeah, if you bought something last month for the first time ever now that if they're doing a cohort analysis, like you're in that cohort now, no matter when you buy something, they're looking at you as that cohort, right? So consumables in particular, anything that lends itself to re reorder rates, higher reorder rates, it's even more important. But it's I think every consumer company should look at this.
27:45 Jessi - Yeah, that's very helpful. And you mentioned that it's something that you help analyze because there is a lot of data to look through. Are there tools or anything also that are out there to help people kind of wrap their head around this or get an, you know, help dissect kind of the raw data and shop, you know, if they're using Shopify, for example, or, you know, are there sometimes analytics built in to, you know, their ecom provider, for example, to help look at some of this?
28:10 Paul - Yeah, it's funny. Even Shopify is like a basic view of cohorts. But what we typically do, well, there's a couple things. One, you know, are many of our clients are now Shopify and Amazon and retail. Set retail aside, you're not going to be able to like figure out who bought something off your website and then who bought it at like Target, right? That's that's tougher to do. But maybe you could figure out if someone's buying stuff from you off your website first, maybe then Amazon, right? I know I've done that before. I feel bad sometimes when I'm buying from a consumer brand and it's a startup and I know their margins are definitely going to be higher, right? But I'm like, oh man, I'm like already in Amazon, it's definitely going to ship faster. Fine. So sometimes you even have people go between channels, right? So taking that aside, right, at a minimum, you can take that Shopify. So one thing we do, we can use data visualization, like business intelligence software, and we could take all of that Shopify data through the API ingested in there and then, you know, into a data warehouse, and then we make sense of it and we'll do the cohort stuff. Because even with the cohort, so you may want to look at it different ways, right? So it could be something like, you know, overall, this group of customer, this cohort of customers in a given month, or you might want to look at people who bought this product first, what is their behavior look like over time? Or even though like attribution is like ridiculously difficult, right? Or you could say, hey, from what do the cohorts look like slicing it by where they came from, right? Whether it's through affiliate or Facebook or, you know, now this starts getting more and more complicated, but you know, you could slice it any which way. But once you have the data, you could do that, right? Which is pretty cool, right? At the beginning, I say like, keep it simple. Let's just see what the data is telling us overall. And then I'm sure there's more we'll learn by diving even deeper. But if we're going from like no information to this information, you've already won. You know a lot more about your business than you did yesterday, right? So let's start there. And then over time, let's look at, okay, if someone buys my flagship products first, are they more likely to reorder? If they subscribe and save first, you know, whether you use that term on your website or not, that's something I could say for sure. The data I've seen, if someone subscribes to the product right away, people are apprehensive sometimes, right? But if you subscribe, I mean, it's just those cohorts look far better, right? For almost anything. Not all products, not all companies lend itself to that. But that's the way that that's kind of the way I look at it.
31:48 Jessi - What is the most important thing about being a Caution Founder? Is there a certain amount of data or orders or website traffic that helps to make sense to do more in-depth analysis versus just is there too little data almost where it's like, this isn't enough for us to really make any assumptions where you may be Caution Founders, wouldn't quite put too much weight behind this. I'm curious about if there's any kind of thresholds for how many orders or how much information to really start understanding the trends in your business to make decisions based off of it.
33:32 Paul - That's a very, very good point. First of all, if you just recently launched, there's not going to be that much data. You'll know what your customer acquisition cost is, even if you're spending a decent amount of money, but you won't know the customer behavior. If we start working with the company early on, we'll work with companies pre-launch for sure. We can make assumptions. We build projections too. That's a big piece of it. You could do the forward-looking. I actually recommend doing that first. Do some of the forward-looking work using basic industry assumptions. You know what your margins are going to be. You may not know exactly what your return rates are going to be, but you know your product margin. There are some norms we can use. You'll know if your margins are going to be 70% versus 40%. You'll know that before you even launch. Repeat rates too. When we first started working with Brightland, we knew early on this is a consumable product. It's probably pretty darn good retention. Companies that don't lend itself to that, you know where it may land. If it's the first time you ever started a company, you may not. But you're God. Put yourself in the consumer shoes. This is something I buy every single month or not. So I'd say you could do that work upfront. But yeah, look, if you're doing 5, 10 grand a month in revenue or super, it's more just like get a feel. Talk to the customers. See if people… You can just get a feel for it. Understand if this is a thing. People are buying. People are converting. Customers are happy. You're not getting a lot of returns and things like that. That's probably a good first place to start. But once you start, with consumer products, it's a blink and you'll miss it sometimes. Because we've seen companies like 5 grand in revenue this month. Then it's like 20. Then it's like 100. It's like becoming a million dollar annualized business. It could happen quick. And next thing you know, you actually do have a lot of data. The other thing is it costs money to do the work. You have to think about your ROI there as well. So the bigger the company, the more stuff happening, the more complexity, probably the more important it is to do this stuff. But if you're doing over, I don't know, a million a year, a couple million a year in revenue, there's enough data to look at there, but not super small.
36:02 Jessi - Right. Okay. That's super helpful. And I definitely want to talk about projections because I think that that's very interesting. Before we jump into some of those pieces, I'm curious if you could also talk a little bit about some of the things you specifically think about for retail and for Amazon. Because you mentioned that you're seeing more and more brands on Amazon. I'm curious about if there's anything different that you think about in the Amazon channel. And then retail is its own separate beast, but I'm curious if there's any things that particularly come in mind for brands to be tracking in either of those channels.
36:34 Paul - Yeah. I mean, just very quickly with retail, really is a completely different beast. I'll brush over it quickly. What I find is it always takes longer than you think to do a role, get into the stores, get a roll out going. It's a different skill set to different folks in the team doing that work. Right. So it's a little bit of a different thing. And it could also be quite trickier on the terms that you're going to actually get paid and it can, there's financing available for these, these arrangements. Right. It's a different beast. And I kind of think about that like almost fully separately. So we kind of think of like the e-comm, you know, which is the, I call it Shopify. I know things exist that are not Shopify, but like most, you know, a lot of companies are on Shopify and then Amazon. Shopify, it's kind of what we've been talking about this whole time. Right. You know, Amazon, it's a little bit different, right? So the interesting thing, you know, we've seen even from, you know, I'd say, it's funny. I've never really thought about this, but I'd say once the whole iOS 14 thing happens, right. And, you know, I'm sure most on this call understand, and it really hurt customer, it hurt Facebook and it made acquisition, customer acquisition costs go up. Amazon definitely was a net beneficiary of that. Like, and I don't think like Apple, Apple makes a privacy change, right. It's crazy. What are we on iOS like 18 or 19 now? Like it's, it's like ancient history where it was years ago. This whole switch happened, right. Two years, around two years ago, almost exactly two, two and a half years ago. But yeah, a lot of companies from there with so much pressure on making the economics work on the Shopify side of things, right. Direct to consumer, more companies started looking at Amazon and it's just a little bit different, right. Your margins are going to be lower because they're going to take their, they're going to take their pound of flesh, right. They're making money, Amazon off of everything you're selling. But, you know, the interesting thing we found with some of our clients, we work with them, you know, Amazon agencies and they can look and see what kind of the search volume is for your product. And some companies are surprised that, I mean, Amazon's like one of the biggest search engines in the world, right. The amount of times, you know, we've had clients where the volume of people searching, not for the thing you are in, not the market you're in or that product type, the category, like literally for your actual product on Amazon and it's not there. Maybe that's lost revenue. Maybe they'll buy something else off Amazon, right. So that's a first step, which means if people are already just looking on there, yes, your margins will be lower, but your customer acquisition cost is going to be lower, maybe even zero for some customers, right. Amazon also has advertising, you know, functionality as well. So like they get advertising as well as, you know, as well as a chunk from your product, right. But it's just a different way of, it's a different way of getting to the same number, which is what it's costing you to get the, get the product and in the hands of people, you know, minus what it costs, you know, so getting the product in the hands of people, what you collect minus everything else, all the costs of actually getting it to them minus who you got to pay to get it to them. And then minus the average minus any of the customer acquisition spend. So it's actually fairly similar. So that's how we think about Amazon. So the trade-off is margins are lower, but CAC is better. So maybe it's actually better, right. So, and what I could say is a lot of companies, we see them moving more, you know, those avenues tend to grow. You know, Amazon that generally means things are working, right. So that seems to be, I've definitely seen a trend in that direction.
40:02 Jessi - Yeah, that's really interesting. And it reminds me of when we had Sandra from Nopalera on the show and she was talking about when, you know, when they got on Shark Tank, they were like, the volume of search that's going to be just for your brand name is going to be huge. If you're not on Amazon, you're going to be missing all of that. And so they got set up on Amazon just because of Shark Tank. And so, yeah, it's interesting how it's, it's a search engine as well. And that kind of, you know, how CAC may be lower. Yeah, that's very interesting.
40:35 Paul - Yeah. It's just a different way, again, different way of getting to the same number. And yeah, it's funny you say that, like, and there's, and even within Amazon, like companies spend a lot of time on their website and the photography and how it flows and the narrative and getting, getting customers ultimately to make a purchase. It's a whole, you know, you do that in Amazon too, right? Like you've probably seen Amazon listings where it's like, like a fuzzy, you're like, this is like legit, like, but you've probably also seen pages that have like tons of information, great photography, a nice flow to it, it explains what it is, right? Those convert higher, right? So similarly, if you're thinking about doing, going the Amazon route, it's a lot of the same math and understanding conversion, right? And there's an investment to be made there. You, you may already have a lot of the photography that maybe you already did a lot of that work, but working with an agency that really understands that and understands conversion and how it all reviews and all that stuff is so important to right, that's a little bit out of your control. But yeah, there's, there's a whole science behind the Amazon piece as well, that that shouldn't be ignored.
41:44 Jessi - Oh, yeah, for sure. I think I'm, I'm the kind of person that's always just like, I can, you know, I'll try to figure this out. I can figure, you know, I can figure lots of things out. And Amazon was one of those things I was like, I'll try to figure it out how it works. And then once I finally worked with an agency, and they were just like, here's, you know, all these things, here's how to set up your listing. I was like, that would have taken me a really long time to figure out, you know, they just, you know, people that work on it specifically, it's like, wow, well, they have that really specific knowledge on how to optimize everything. So yeah, that's, it's, it's very true.
42:11 Paul - Exactly. Exactly. And when, especially if you're talking about a brand that's growing, it's, it's, it's like worth, it's worth the investment to like really think it through. Maybe it doesn't work in the end, but hopefully your investment into that's not crazy. But often it does work. And then look, and then taking again, all that data, trying to marry it together to understand, you know, repeat rates across Amazon, right across, you know, your, your across Shopify as well. What is it telling you? Maybe it's telling you just keep doing what you're doing. Maybe it's telling you go a little bit heavier in one direction or the other, but you know, that's, you know, all things that again, as you grow, could really, it could definitely start moving the needle, especially when the numbers start getting pretty big.
42:56 Jessi - Right. I also, like I mentioned, I wanted to talk about projections. I think projections is like one of the most common asks maybe in our sort of CBG Slack channels, people saying, Hey, does anyone have a template for projections? Who can I talk to about developing projections for lenders or for investors? I don't know how many people I've sent the link to your free template on your website, which I'll definitely link in the show notes, but I want to get your thoughts about projections, any best practices there. What do you coach brands through when they need to develop, you know, projections?
43:28 Paul - Yeah. I mean, I, like, I could probably, I won't, but I could probably speak for an hour on this alone. The most important thing I'd say is just one use real data, right? Like assuming you have data to work, if you haven't launched yet, all right, you'll have some data, but not everything, but just be, be realistic, you know, like really try to build it. You use a template that's decently easy to use. Don't make it overly convoluted. I, I tried to make, I originally built ours that's on the website. Now we have folks on our team that are much better at financial modeling than I am to that have like optimized it. Try to keep, keep it simple. And, but again, just like philosophically build it for you as the founder, because it's a tool to help you run the business, not like a fancy spreadsheet to send some lender or, or investor, right? They'll, they'll see if like things have been going up like a little bit, and then it ends up like, then like miraculously the, like the first month of the projections, it's like, you're starting to double every month. We've seen that before. And like, doesn't look realistic, actually kind of looks naive, right? And it doesn't do any good for you, right? Where, where it does come in very healthy. And especially with consumer, again, you, you know, if you've been doing this for a bit, you kind of know what your customer acquisition costs is going to be on average. You know what your product costs are. You know how many people work at your company. You could get pretty close, right? You could get real, we've seen companies get so, oh, an entire year out, get really, really close to their projection numbers on revenue again, on cogs, right? Some things change, you know, CAC may be worse in one month or another, and you decide to, you know, reduce in one channel, things change, but you can get pretty close. And what does that end up telling you? Well, how much cash am I going to have? Right. Like, what do you care about as the founder of it? Quite a bit. You want all these metrics to be great. Okay. But really like, what's the cash flow? Like, am I going to run out of money? Am I going to be able to fund that, you know, ahead of the holidays? Right. I have to make a big investment and more inventory. Could I like, will I be able to afford that? You know, where do I need some financing to do that? You know, you tell you all those things, as long as you're true to what the business actually is. Again, that's not, that's not helping anyone build a spreadsheet, but philosophically build it for you and not your perceived audience.
45:42 Jessi - Yeah. Well, I think that's really important because I also think that it can just be overwhelming to work on projections. And this is speaking from myself as someone that isn't, you know, always the most comfortable in spreadsheets and those kinds of things. And it can feel like, well, I don't know, I don't know the future. I don't know the exact number. So I'm just not going to do it at all. And like, as, you know, as I've been in the industry longer, and especially working in operations, you know, I have to do light duty forecasting for operations contracts or whatever. And it's a very, it feels really imprecise a lot of times, like you feel like you're just, you're, but you actually know more than you think about your business. You, when you are kind of like, okay, what's realistic. And then you end up actually kind of coming close to those numbers that you worked on. And so I think it's also kind of getting over that, like, that it's not a perfect science and that can feel kind of uncomfortable for folks. And, you know, so I appreciate your philosophy on that. Cause I think that it just helps kind of get over the hurdle of like, this is a tool for you and you just, you got to start somewhere. Cause it helps you plan the business and know what to kind of look out for.
46:42 Paul - Yeah, exactly. Right. And similarly, look, if, if, if the company is early on, right, certainly use a template, but like similarly, if things are trucking along, you have a budget, you know, use an expert, right. That could like, we were just talking about with Amazon, right. Someone who's worked in consumer could build this cause it could take, it could be very, very difficult and burdensome, right. And it takes a lot of time to manage the projections, but again, early, early on, it, it doesn't hurt to put some numbers in a spreadsheet, right. And just begin to understand what it looks like. And you'd be, like you said, you'd be surprised how close you can get, right. It gets more complicated as you have like now all these various channels and like retention from different types of customers, different products, maybe even up different brands. If you're a larger, then it starts getting more complicated, right. But early, early on pre-launch, keep it simple, you know, and then go from there.
47:36 Jessi - Yeah, no, that's great. And as brands are, as brands are navigating this and especially, pre-launch early days, do you have any tips for finding a partner to help with some of these things? Like obviously, you know, graphite helps with a lot of these items, but I'm curious if, with your time in the industry, if folks are looking for help or deciding when to like bring on like, you know, bookkeeping help or a fractional CFO, do you have any advice in that area of kind of like when and how to look for the right partner that's going to work with your firm, the best, you know, with your brand, the best?
48:08 Paul - Yeah, I mean, look, so speaking about, you know, for the finance and accounting, you know, it depends, right? It's tough. I mean, of course, I'll say the earlier the better, right. And I'd say we certainly work with brands, especially if they're venture backed, you know, have raised millions of dollars, even if you're pre-launch, because now look, you've got, you've got other people with, you know, a stake in this too, and they're going to want to understand what's going to happen. It's not just you, right? If you're bootstrapped, you're building the thing yourself, the company and you're the, you know, and it's your money, you may say, hey, to bring on, you know, finance and accounting firm is going to be however many thousands of dollars to help me with this stuff. Maybe, you know, those founders tend to wait a little bit longer, right? So it depends. But when things are moving and, you know, an investment of a few grand is not going to make or break the business, like it can add a lot of value, right? And again, that's any service provider, right? Bra fight is, it's, I guess it's still a startup where we're almost a hundred employees now, but when we were small, I did everything myself, you know, and, you know, especially when we were a very small team and then we grew over time and we have more service providers now as we could afford it. And we, as we can naturally do those and make those investments. So you kind of will have a sense for the, the one thing I would say is on accounting though, like you do have to still, even if your company is not profitable, you still do have to do your tax returns and everything. So like 50% of startups end up just not doing their taxes because they didn't realize it was a thing, at least do that, right? So you can engage with a firm like us or, you know, or someone else to at least help with that piece. And then as we're looking at the company, we can see the complexity and understand how, you know, you know, what, what, what's kind of the needs are, you know, going forward and just starting a conversation and you'll know if you're not getting the data, you trying to do the accounting yourself is becoming a lot of work and super inaccurate and your, your guts telling you, you don't really know enough about as much about the business or have a hazier view of your business than you like. That's usually like a pretty good sign that it's, it's time to work with someone that just does this.
50:18 Jessi - Yeah, that's, that's very helpful. And I like your point about the tax returns as well. And that that can be a great way to just get started and get it reduced to a firm and just have some contacts. I'm a big believer in, you know, kind of thinking if you had steps ahead of where you are too. So like get to know people before you have a CFO emergency and you don't know who to call for some, you know, fractional CFO support or whatever. So making those connections, even if it's around, you know, a tax return is really great. Well, if, if folks are interested in engaging with graphite, can you tell us a little bit about kind of the suite of services that you offer or what's the best way to engage with your team? Like I said, I'm definitely going to link your template in the show notes, cause I think that's a great free tool for folks to access. But yeah, just a little bit more about, you know, how, what it can look like to work with Graphite would be awesome.
51:07 Paul - Sure. Yeah. So look, we're, we're, we're a service provider, right? So we're, we're sitting on top of, if you've got QuickBooks or using bill.com or Settle or any of these ramp, any of these accounting tools that you're using, we take that completely off your plate as a founder. So first and foremost, we want you to have clean financials and all that, but also we really just want the founder to be able to spend time doing the things they're good at, they like to do, and could actually move the needle to help grow the business. And we could kind of do the rest. So what that looks like is we're doing managing all the accounting, the reporting, how's the business doing? How's it, you know, what's working, what's not. But even some of the administrative things, right? That goes along with it, run your payroll, right? If you're using a PEO or similar, Augusto just works, whatever we, we take all of those financial administrative things off your plate, pay your bills, your vendors, your suppliers for you. We, you know, your contract manufacturers, whatever, whoever you're working with, keeping track of, or at least inventory accounting. This is actually, this is tough, right? If you have an inventory software, but what were, what was your margin for the month, right? You got all this inventory, what did you use, right? And what did you, what's new inventory? What, what, what's your margin actually look like? So all, you know, all of that stuff, you know, so the day to day, what we call day to day accounting, you know, and bookkeeping and kind of financial reporting. Then we have another tier of service that sits on top of that. And that's the projections, which is, you know, basically a finance team as a service and kind of business intelligence as well. We're saying, all right, now not just what has happened, but let's work with you and think about what's going to happen and help you understand the business, not just for the sake of it, but understanding, especially if you are raising money, helping build that narrative around what it is you're doing and what the future might look like for it. And then all again, taking data from all different sources like Shopify, Amazon, we could scrub it, normalize it, get in data warehouse and visualize it using, using business intelligence software. So that's kind of the next piece of, of what we do. And then we do tax and R and D credits and some other services like that. So not one size fits all. We grow with companies from pre-launch all the way through like quite a lot. We work with brands that are stage and your needs at the time. hundreds of millions in revenue. And, and, and, you know, we, we try to develop a solution for that makes sense for you, right? It's, if we don't go overboard, we try to do what makes sense for the
53:36 Jessi - Great. That's awesome. And is there a specific email or is it best to go on the website or cause I can include in the show, it's like, what's the best way to reach someone on, on your team to get a conversation started?
53:45 Paul - I would, yeah, I would honestly take a look at the website. The website will tell you, and there's even stuff to read on the website, some content we have around these things that we're just talking about. So take a look there. And then there's a form on the website. You could reach out, but I do see all of those also, but so do many folks in the team. Someone will reach right out to you. And basically we just do, we're not, we're like the opposite of sales. We'll sit down with you as a company, understand your needs and see if, see if there's a way we could help. Do we really dig in to understand, you know, your numbers, the need, and that's, that's all just like in preliminary conversation. So even if you're just interested for the future, we're happy to have the conversation. So if you just reach out on the website, it's graphitefinancial.com.
54:32 Jessi - Yeah, that's, yeah, I was just going to say it's graphite G-R-A-P-H-I-T-E. So graphitefinancial.com. Like I said, I'll put it in the show notes as well. There's a ton of great resources. I mean, I wish that I had had a connection like graphite like years ago. So I love that you came on the show today and shared knowledge with us. And I'm just really, you know, happy that you're in our community and providing value to our founders. And I hope some of our listeners, you know, reach out and connect with your team. So thanks so much for being here today, Paul. This was really great. Appreciate all of your wisdom and just really glad to have you on the show. Appreciate it. Thanks a lot. This episode was sponsored by Graphite Financial. Thank you for listening in today. I'm so honored you joined me for this conversation. And I love hearing from you all with feedback, suggestions, or if you just want to say hi at podcast at startupcpg.com, or you can find me on LinkedIn. If you liked this episode, we'd love for you to share it with a friend or colleague, subscribe so you don't miss future episodes, and maybe even leave us a five star review on Apple podcasts. If you aren't yet in our slack community of founders and experts, we'd love to see you there. You can get the free invite at startupcpg.com and find all our other awesome resources there like webinars, databases, the blog, the magazine, and virtual and in-person events. And if you found yourself rocking out to our intro and outro music, which I do every single time, make sure to check out the super fantastic on Spotify. It's the band of our startup CPC founder, Daniel Scharff. I'm Jessi Freitag, your host and producer, and on behalf of the whole team at Startup CPG, thank you for being here and see you next week.