288: This One Thing Is Killing Your Profits With Kevin Stecko

288:  This One Thing Is Probably Killing Your Profits With Kevin Stecko

Today I’m thrilled to have Kevin Stecko back on the show. Kevin runs an awesome site called 80stees.com where he sells t-shirts from the 80s.

Kevin’s t-shirt business was already super competitive but in the past several years, it’s gotten even more intense. As a result, he made some fundamental changes to his business strategy and it’s paid off in droves, both in terms of profit and lifestyle.

In this episode, Kevin will fill us in on what he’s done and the biggest mistake most shop owners are making.

What You’ll Learn

  • Why Kevin decided to raise prices dramatically
  • The math of discounting and profit
  • Why even small discounts can lead to a huge cut to the bottom line
  • Kevin’s new business model

Other Resources And Books

Sponsors

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Transcript

Intro: You’re listening to the my wife could a job podcast the place where I bring on successful bootstrap business owners and dig deep into what strategies they use to grow their businesses. Now today. I have my buddy Kevin Stecko back on the show and we are going to discuss the one thing that he changed with this business that drastically improved both his profitability and his lifestyle and this concept is actually something that most people don’t think about and I’m really happy to talk about it today.

But before we begin, I want to give quick shout out to Privy who’s a sponsor of the show. Privy is a tool that I use to build my email list for both my blog and my online store and right now I’m using Privy Display a cool Wheel of Fortune pop-up basically user gives your email for a chance to win valuable prizes in our store and customers love the gamification aspect of this and when implemented this form email signups increased by a hundred thirty one percent. Now, you can also use Privy to reduce car abandoned with cart saver pop-ups and abandoned cart email sequences as well one super low price that is much cheaper than using a full-blown email marketing solution. So bottom line Privy allows me to turn visitors into email subscribers and recover lost sales so head on over to privy.com/steve and try it for free if you decide you need to the more advanced features use coupon code MWQHJ for fifteen percent off once again that’s privy.com/steve.

I also want to give a shout out to Klaviyo who’s also a sponsor of the show whether you are just getting your business off the ground or looking for new ways to scale Klaviyo offers fast simple and repeatable ways to grow now with Klaviyo you can personalize your marketing build your customer relationships and automate your online sales and it is now easier than ever to create amazing email and advertising experiences so want to talk about Klaviyo’s new entrepreneurial growth guide packed with must read blog post case studies and getting started content this guide will help you prioritize what to do next for maximum revenue growth that moving to a new marking problem can be intimidating but Klaviyo helps you get up and going fast with proven technology and countless support researches they can actually check out this free content now over at Klaviyo.com/mywife once again that is Klaviyo.com/mywife now on to the show.

Intro: Welcome to the My Wife Quit Her Job Podcast we will teach you how to create a business that suits your lifestyle so can spend more time with your family focus on doing the things that you love. Here’s your host Steve Chou.

Steve: Welcome to the My Wife Quit Her Job Podcast. Today, I am thrilled to have Kevin Stecko back on the show. Now, I had Kevin way back in episode 139 which was maybe two and a half years ago in many many things have changed with his business since then and in case you don’t remember Kevin runs the awesome site called 80tees.com where he sells T-shirts from the 80s. Now the t-shirt business was already super competitive, but in the past several years, it’s gotten even more intense. So Kevin made some fundamental changes to his his strategy and its really paid off both in terms of profit and lifestyle. And today we’re going to delve deeply into that and with that welcome to show, Kevin how you doing today, man?

Kevin: I’m doing great. Thanks for having me.

Steve: So Kevin. I’m very curious. Why the heck did you go in Andrew youderien’s podcast first?

Kevin: Oh, wow. Well, he finally asked me, you know, I’ve known him for a while, but in a forum since 2013 the e-commerce feel for my should say and he finally asked and I was like, wow, I finally been blessed by the Great Andrew Youderian.

Steve: Ha ha ha, so I’m hurt. So now what we’re going to do is we’re going to have to make this episode even better and make Youderian look bad. Unfortunately. I mean that’s not very nice of you but we’re just going to have to do it.

Kevin: I’ll do my best to make him look terrible.

Steve: So fill us in, the audience hasn’t heard from you in two and a half years what has happened in the past several years since the last time I had you on?

Kevin: Sure. Yeah. So the big thing that happened to my business was gradual decline. So 2000 and I’ve been around since 2000 I guess in 2008 was the high-water mark in terms of Revenue 2000 through 2011 because we’re going still really well. They weren’t really growing but I mean, we’re at a pretty pretty high Revenue number. I don’t know the exact numbers, but we’re still in the five to seven million dollar range through those years. The thing started just gradually slowing down and the problem was I had built up so many expenses over the years to handle the volume that we were doing that my profitability was just gone. and some losses were adding up and I didn’t really I didn’t really know how to stop that Trend because I had all these fixed expenses that were not going to be something I can just get rid of I had buildings or I should say our building ahead lots of it.

Steve: 22,000 square foot building if I recall

Kevin: it was actually 45 thousand..

Steve: Oh my God..

Kevin : really using like half of it because when I bought the building was think when things were going up into the right, so I did not want to have to move again. So I actually overbought luckily the running the building in terms of Utilities wasn’t super expensive but it obviously the cost of the building was more because it was so big. So yeah

Steve: I think 45,000 feels like but yeah go on, sorry.

Kevin: Yeah, 45,000 probably not quite a Walmart store. But you know, so maybe like three quarters will Walmart depending on how big, you know, like a regular crazy. It is crazy. Yeah, so, you know, I was like, how can I get myself out of these things? Because obviously getting out of a building that I purchased was not going to be a simple thing the software that were using, cost me like $5,000 a month minimum to run.

Steve: What? Wow. Okay.

Kevin: Well, yeah and you know, you got to remember too that I came from the early 2000s where things were expensive, you know to launch a website was no small feat at the time. So, I guess when I signed on for that 5,000 seems somewhat reasonable there, you know, you couldn’t just sign up for whatever shipstation and make it happen for 50 bucks a month or whatever people do now. Yeah, so, you know all my orders flowed through there, so there wasn’t Really any way to get out of that without actually going through the process of having a true replacement and that took me a long time to get all the functionality that I needed. So in 2016 is whenever I decided okay, here’s the path. It’s that I’m going to take to get rid of all these expenses which was basically Outsource the storage of inventory to the point where most of my things are now Dropship for my suppliers and their even made printed on demand.

So they really not even stored for the Most part so I you know, that was a huge deal there because for one thing it bought me time. So I had a lot of inventory that I could sell down slowly and not have to replace which just look great for cash flow..

Steve: Do you have any inventory today?

Kevin: I have like 50 thousand dollars of inventory.

Steve: Okay, so not much at all.

Kevin: Yeah, that’s all things that I can’t drop ship. Otherwise, I probably wouldn’t just got rid of that because you know paying for the Storage everything just doesn’t really make sense at this point.

Steve: Are you fulfilling those yourself or using a 3PL for that.

Kevin: I move those to 3PL.

Steve: Okay, it’s been great. So literally you’re not carrying any inventory. There’s no need for a warehouse anymore. Right?

Steve: Right. And so yeah so fast forward. I did actually get a tenant for that thing as long as they exhaust they can pay their rent and they’re becoming viable company. The building will end up being a pretty good investment for me. So yeah, but it took me about three years to get to get to the point where I could get out of building I get rid of that software and just cut cut cut expenses everywhere I could you know Outsource as many things as possible, you know, I may have done the story a little bit disservice but it was a super hard super hard, painful in terms of letting employees go painful in terms of how do I how do I get from point A to point B.

And you know dropshipping adding that on wasn’t exactly a simple task because now I have to figure out why do I handle my shipping costs? So that gradually led me to raise prices to incorporate shipping into the price of the goods. And that’s whenever I learned wow, people will pay a lot more money than I’m charging.

Kevin: Let’s back up a bit so back when you were running your business before you were still charging for shipping weren’t you?

Kevin: I was yes, so everyone out together. So it was relatively simple thing to calculate the shipping rate. It was just whatever the weight of their cart was. We calculate the shipping based on that.

Steve: How does it work now?

Kevin: now well now we offer free shipping on everything over $50. So essentially if you order more than one product, you’re going to get free shipping what we do is we do we build in the price of shipping into every item based on how much it weighs. So I actually have a tool that sits on top of my, so I have a price that’s listed in our product database and then we have toilet sits on top of that and just places and adder in there before it hits the Shopify store.

Steve: Okay, so you okay. So you’re on Shopify last time we talked to I think, right?

Kevin: Yes. I’ve been on Shopify since 2013.

Steve: then can you just give me an idea of how much you cut your SAS bill down by by going to drop shipping?

Kevin: Yeah, the only thing that we still pay for now is Shopify actually so we now I’ve paid developers and I pay a lot more than most people would spend on on SAS to get to use have those developers. Give me the things that I need, but once there once I once I have that functionality, I don’t pay for it again.

Steve: Okay, so all your shipping stuff all that suffer related to all that $5,000 disappeared.

Kevin: Basically it disappeared as of April this year.

Steve: Yes, and then you’re no longer paying for the warehouse because you’re kind of leasing it out. Out to somebody else. What cutbacks did you have in terms of just employees?

Kevin: So obviously anyone fulfillment related is is pretty much going on now. I do have have an employee that actually works at home and she receives my returns and I’m actually considering maybe even going away from returns in general. I know some companies just you know, they don’t even ask for the products back. So I need to do some math to see if that would make sense.

Steve: Actually. We’re one of those companies. We usually don’t ask for the product back.

Kevin: How do you feel about does that encourage people to they learn the trick and then decide they want to refund and then you don’t ask for it back. So they know they get it for free.

Steve: No, I don’t think anyone’s really abused it and we don’t publish it obviously on the website. Well, obviously take a return if it’s like a huge like $2,000 order whatnot. But if it’s like onesie, twosie stuff, you know, we usually just let him keep it because it’s not really worth it.

Kevin: Yeah. I’m coming around to that point of view.

Steve: Yeah and plus your profit. Margin. Well, we’ll get to this in a little bit but your profit margin should be able to eat that. And just fine I would imagine.

Kevin: yes.

Steve: Yeah. Okay, so you cut all of your fulfillment employees. So like how lean are you guys now?

Kevin: Probably a little less lean than you would think mainly because I have some people on staff that probably like myself, my wife, my mother.

Steve: you gotta cut your wife man. That’s..

Kevin: yeah. my wife doesn’t do that much and my mother doesn’t do a whole lot that absolutely needs to be done. She lists like our products on Pinterest and she does some fraud review stuff which which does need to be done. But I mean I can you know, I can do those two payrolls because I could probably handle either not doing some of the things and just handle it myself.

Steve: Uh-huh.

Kevin: I don’t pay my wife. That’s essentially not paying myself.

Steve: Yeah. I actually don’t count those two people. I’m just like How lean is it like less than 10 people now?

Kevin: Oh, yeah lesson 10, okay. And we have two to software developers that that we do really cool stuff with them as a lot of it on the back back end,.

Steve: That’s interesting. Why do you still need software developers on like retainer?

Kevin: I don’t really need I mean I wouldn’t need them for day-to-day but I’m still have designs on on growth very smart intelligent growth at least but I still have designs that we can do more with the resources that we have in the tools that we’ve built. So, you know, hopefully one of those things would be launching some additional websites because once were dropped and we are Drop Shipping. So once we have the connections with the supplier, if there are products that they they offer that don’t fit into a 80tees.com You know, it’s relatively simple thing to launch a new website with a new Focus.

Steve: So I’m just kind of curious here. So you move to drop shipping. How much did your costs go up like if you saw the t-shirt before for 10 bucks, how much did it cost to Dropship?

Kevin: So so my well there’s your thoughts..

Steve: So let’s say yeah, let’s say the shirt cost you $10 and I know that’s really high but let’s say it cost you $10. How much would it cost if you by moving to drop shipping?

Kevin: Right. Yeah, it’s well, there’s there’s typically a Pick and Pack fee which probably gets gets wiped out by the savings that I would have had to handling the inventory myself, but I’d say in general probably about 20 to 30 percent higher to to not to buy one at a time via direct grammar print as opposed to Bringing them in bulk. But when I did the math, you know, once you pay for inbound Freight and once you have employees touch the product they touch it on her on receiving it they touch it to put it away onto a shelf. They touch it to pick it they touch it to pack it and then you’re sitting on it. So you’ve got time value of money.

You’ve got shrinkage because things happen in the warehouse sometimes whether that’s sun damage or they get dropped on the floor and run over by the cart, whatever it is, so you’ve totally all of that shrinkage and I my feeling is that I should say I believe this now that I my costs are probably actually less. It’s pretty hard to measure that

Steve: how do you measure like the mental aspects too right? You don’t have to deal with the Fulfillment employees and and just tracking everyone and tracking inventory and all that stuff too.

Kevin: Absolutely that I mean, you don’t even know how hard it can be to try to keep a lot of sizes in stock of a product. You know, you’re still a lot of your best-selling size and then the reason that It’s cheaper to buy the product and store it is because you’re buying in bulk. So now you’ve got a decision to make well, my best-selling size is out of stock, but I have enough of all these other sizes based on past sales. So do I you know, do I give up on this product in the best selling size or do I bring in more than I actually want. I mean those decisions used to kill me. I would literally write up a PO and then sit on it and try and wait two more weeks to see if I had more information before I send it through. Through just not even having to make those types of projections and really educated guesses is a big burden.

Steve: But I mean, you’ve kind of just shifted the problem over to someone else right what happens if you run out of a certain size now and your drop shipper?

Kevin: well the the some of them that we do that we drop shit through to actually store inventory. So they do have those problems like you mentioned and that that kind of stinks for them and it stinks for us too because you know, we end up with products that are listed on the site that don’t have some sizes but the vast majority of our products are actually print on demand. So as long as they keep like a lack of length t-shirt and stock. It doesn’t really matter. They have the ability to make that product right now.

Steve: Do you have ties to their inventory system? I just launched a t-shirt company with my kids and right now there’s no tie to the inventory system. So if someone orders a size that’s not available. I got to tell them that you know, it’s not available and they got to order something else.

Kevin: Yeah, that’s rough. Why aren’t you doing print on demand?

Steve: It is print on demand. But you know the product on demand people run out of certain sizes as well. Right? and so is your inventory tied to their system?

Kevin: yeah So we have so many suppliers that yes, we tie in if they offer an API, that’s the best because just once we build it just sinks automatically. But a lot of them send us a file so you can Excel file and upload it to the, we built we that was part of why I have the developers they built tools that take everyone’s file in whatever format they want to give it to us and then it updates our website.

Steve: I see, So this file is given to you every single day or?

Kevin: most of them do. Yes..

Steve: okay, but is it real time or is it like I once a day thing?

Kevin: Yeah for them. It’s definitely not real time that those actually make up only probably like ten percent of our our volume the vast majority of the products that we sell are pretty much always in stock because our supplier, so that’s what confuses me. I mean if you’re using a good print on demand company, they really shouldn’t be out of stock.

Steve: Yeah. I mean it’s happened to us a couple of times already. Maybe it’s just like some obscure t-shirt color and maybe it was an obscured color and size. But yeah.

Kevin: yeah, it could be we’d only time we run into problems will be like hoodies which for some reason there are the the mills in the United States have a really hard time keeping hoodies in stock.

Steve: All right, so you moved over to drop shipping. Let’s talk about the numbers a little bit. So you mentioned earlier that you had to raise prices dramatically because I know I paid almost 30 bucks for man t shirt I bought over you, great t-shirt great t-shirt, but so has that affected your business and what was kind of like the decision making process like?

Kevin: yeah, so well, like I said, when we incorporate shipping into the price that was pretty much it had it had to cop even if I didn’t want to but like you mentioned before with our with our suppliers actually charging us more to do the Drop Shipping, you know, obviously the maintain margins we had to raise prices as well there. So we That’s how I started out was everything we were dropshipping. I raised the prices on to account for those two factors. And you know, I was kind of amazed that we were selling them at first..

Steve: did the sales go down at all when you did that?

Kevin: Well at first sales went up because we had been through a long period where I was afraid to like like how I talked about before where I was always, you know, trying to decide should I send this PO in so my inventory levels were actually going down so our sales went up once we Drop Shipping. We have a lot of new products to offer in stock.

Steve: Okay.

Kevin: so it’s you know, unfortunately it didn’t exist in a vacuum for me our sales went down because of higher prices. They actually look like they went up and then as things shifted from us owning them to to drop shipping those prices would be raised as well and sales are definitely when I say sales I should say orders are definitely down average order volume or average order value. I should say is is way is way way up it used to Be like 40 bucks and we’ll have days now where it’s 65 to 70 dollars.

Steve: Can you give me an idea of how much higher you raise your prices? Was it like on the rear of 25% 30% 50%

Kevin: Yeah. Well, I can just give you a real number. So a lot of products that we used to charge $20 for now start about $36.25.

Steve: How much is that? He man shirt I buy? I can’t even remember

Kevin: you got a good deal. It’s definitely moved up. Let me see.

Steve: So, okay. So let’s say I’m buying a T-shirt and normally it’s 20 bucks and all of a sudden you raise it to $36. Man, I would probably think twice so how do you kind of..

Kevin: lots of customers have that’s that’s a common thing that’s happened to us is we’ve definitely let a lot of customers go by the wayside, but that’s where understanding that math of price increase become so valuable.

Steve: So before we get into the math, and I definitely want to get into that. From the mentality of a person like why wouldn’t I just get this t-shirt somewhere else. Do you still have exclusive deals with some of the print designs that you have?

Kevin: We do, Yes, okay. we designed that Christmas party shirt. So that is an exclusive for us or our supplier. Lets us have that as exclusive and and you know the fighting about that shirt. I’m sure you remember this, but that was right after we switch to having dropshipping availed right if we switched and your order did have some problems.

Steve: Yes, I remember.

Kevin: I think about those problems, but that yeah, I felt really bad. I’m like jeez, you know this here’s here’s a friend of mine that placed an order didn’t ask for a discount anything like that. Now he’s having problems. I felt felt really terrible.

Steve: well, I got it in time for my party. So it’s all good there. But okay. So do you think you could have pulled this off if you didn’t have exclusive rights?

Kevin: Yeah, we still sell quite a quite a few like quite a high percentage of our products sales are not exclusive to us

Steve: and you could just go to some other store and get it for cheaper.

Kevin : Yeah

Steve: really? Okay. All right. Let’s do the math now then that’s

Kevin: righ. I guess I should say about the higher price thing. So there are overall selection is something that is hard to find so we do I believe we still have a lot of people that that just browse our site because We it’s well organized and then they will go somewhere else and buy but then there’s some people that their time is more valuable than that. So even though they might know they could get a cheaper. They’re just like whatever. I’ll pay the higher prices.

Steve: Okay. So would you say that you have a larger selection than most stores that you’ll find on the internet.

Kevin: Yeah, definitely. larger selection and better organized.

Steve: Okay. Yeah, I can see that right if I see a shirt that I like. Am I really going to scour the internet looking for that exact same shirt. I mean College me might have done it, but..

Kevin: some people definitely will but not

Steve: Okay, All right. And so but this is a substantial price increase right? We’re talking over 50% price increase. So, can you just give me an idea of how much unit volume dropped when you did that?

Kevin: Yes, so we used to average well over a hundred orders a day. And now I might have I might have a bad day at 40 orders a good day. Like a really good profitable day can be 70 to 80 orders. That’s not on P like

Steve: so 30 to 60 percent drop in orders. Yes. Wow crazy. Okay. So but meanwhile you are charging, you know fifty to sixty percent more now, so We talked about this before we started recording that the math people don’t even think about when it comes to to average order value. So yeah, let’s go through that right now.

Kevin: Yeah. Sure. So the thing you have to remember is all of your fixed expenses apply to every order regardless of what your price is. So I think a lot of people don’t understand that and it’s really important to understand your perv per order contribution origin, which contribution origin is essentially after you’ve sold sold this shirt How much money is there unless a shirt after you’ve sold your order how much money is left to pay other things than the actual cost of this order? So when I say the cost of the order like you’re going to take out any sort of shipping expenses any sort of directly attributable labor fees any transactional fees, obviously your cost of goods get all that out of there. And then what’s left is what you can actually spend on employees profit, rent, your Shopify Bill all that stuff.

So it that’s that’s a hugely important number and it’s you know, it’s not hard to calculate for most people but they don’t I think very few people actually take the time. So that’s we have a dashboard that shows me every order in real time and it gives me a pretty good estimate of what my contribution margin is.

Steve: Can you just kind of talk about what the components of your contribution margin are like You calculating it.

Kevin: Absolutely. Yeah, so you’ve got your merchandise costs. That’s what my supplier charges me and then we’ve got we’ve got the Fulfillment cost which that varies based on if I like say I had an order that head three shirts on it and I went to three different suppliers. I’m going to have each of them with their Pick and Pack fees. So I’ve got to calculate what those fulfillment fees are. I’ve got my Shopify fees because I don’t use a don’t you shall fly payments so

Steve: really okay.

Kevin: Yeah, so I’ve got I’ve got That which is pretty minor cost but like on a $42 order it’s like six cents or something like that.

Steve: Why are you using Shopify payments

Kevin: because in my back and I have the ability to recharge somebody so if someone calls me and says hey, I want to add a product to an order or I want to do a I want to do a new order and they just want to do it over the phone. I don’t actually have to put the order through Shopify to recharge them. I don’t need their credit card number

Steve: I see

Kevin: so we did a back-end tokenization.

Steve: Got it. Got it. Are you using striper something?

Kevin: We use Braintree actually

Steve: Braintree. Okay, all right and interesting and that’s worth it to pay the extra transaction fees that Shopify charges

Kevin: I think so. Yeah, it works out less than $300 a month. There’s

Steve: okay. So, all right, so it’s not much at all.

Kevin: Yeah, it’s not much at all. so then you’ve got your so I talked about your labor and then your got your transaction fees which your payment card processor which you know, those those are sneakily high so, you know, to Those people are probably paying like a quarter to 35, 45 cents per transaction plus some percentage usually around like 2.2% We do the thing where they do the like the actual Cost Plus with our with our merchant account. But it I just I average it out and I come up with like it’s like 25 cents per order plus two point two percent. We just say, okay, that’s probably about what this cost even though it might fluctuate up or down a little bit and If I if I can get I can give you like a recent order here, so So I charged 36 dollars and 35 cents for the item. And this is an item that we actually design so I don’t have any royalty fees on this and I’m I’m just paying for the printing and the shirt itself and my cost there $6.75.

I’ve got Pick and Pack fees of $2 Shopify fees as six cents a transaction fees a dollar twenty-five. So after after all that said and done in this customer pay for shipping because they actually Didn’t hit my free shipping threshold. So after all that said and done, I actually have a kind of way with $26 and 29-cent contribution Margin. I should say some people like to try to figure out what they’re advertising cost is and take that out of their contribution Margin. That’s that’s pretty difficult though

Steve: That was my next question. Actually. Yeah.

Kevin: Okay it’s really difficult because you’d have to take pick some period of time whether it’s a day or a week or a month in and say okay. I got this many Facebook orders and then try and match it up to

Steve: Well, I was thinking you just take your monthly fee that you pay on advertising and just divide it by the number of well, yeah, I don’t know. Okay, so it’s not it’s not a part of the number. Okay.

Kevin: Yeah, and the reason I don’t do that is because organic is a pretty large portion of yeah or so. It’s it’s a really tough call as to what’s the best way to handle that

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All right, so that’s crazy. So you’re making $26 in margin off of a t-shirt. Whereas at least in my store. I might make like seven to ten dollars at most, sounds pretty crazy.

Kevin: It is crazy and and so but that tells you now what my number of orders and revenue how much less it can be where I end up just as well off.

Steve: So before before you raise the prices, you said your t-shirts were at 20 bucks, right?

Kevin: Yes

Steve: so that means you were making ten dollars in profit per shirt before about

Kevin: yeah, I guess that works.

Steve: right out to 10 verses 26. So 2.6 x what you were making before

Kevin: right.

Steve: All right, which is crazy. Meanwhile, you’ve have to your Demand right? So you still come out ahead by 30%

Kevin: Yeah, definitely as far as profit goes

Steve: All right, man. It’s crazy.

Kevin: Now your ego takes a hit. Yeah, there’s some there’s some definite things about it that are not fun. So, you know everyone talks about Revenue. So your revenue is lower. So your ego takes it their customers do complain. You know, I get customers all the time asking me why isn’t I paid twenty dollars in 2016? Why why is this same shirt $36 and and it’s funny because whenever I Whenever I tell them all the reasons and I go through all the expenses and everything. I think to myself boy. I’m that’s crazy that I was ever charging $20 because the only reason that worked for me back then was that such a high percentage of my worst came from organic sales. or search engine sales.

Steve: Hmm and they still do right. I mean, I just kind of checked your SEO just before this interview. You’re still ranking ridiculously high for very popular terms.

Kevin: Yeah. We do get a lot of volume from those and and some of that, I mean a still a large portion of it comes through, you know, like the brand term to so it’s not even even though we rank for Star Wars t-shirts because and that’s a great that’s a great term for us to rank for the highest by far component of our organic is just people searching our brand so

Steve: okay

Kevin: a lot of that’s built out by the paid advertising.

Steve: So when we were talking before we hit record on this I wanted to address the factor of During discounts on your site and like the real calculations that kind of come in that people don’t really think about when you’re let’s say giving yourself a 20% discount to a customer

Kevin: right. So that’s yeah, that’s I kind of call that the how much did your promotional really make? Yeah, and and so it’s easier maybe if we do like some real numbers. people understand. So basically, let’s assume you have a site with an average order value like like $150.

Steve: Well, it’s a big round numbers like and all right. Yeah hundred dollars

Kevin: Okay makes a change here. I got the spreadsheet out.

Steve: I love it. Okay.

Kevin: All right. So let’s say that what non-discounted average margin do you want to use?

Steve: non – lets just use 50%

Kevin: and okay. So we’re going to say we’ve got an average order value 100 dollars and you’re averaging 50 percent Margin. All right. So now there are a couple things that we need to take into account. So we need to know what kind of discount we’re going to offer. Let’s start. Twenty percent. So that’s that’s a pretty calm. Alright, and let’s say that you have fixed cost to fill the fill the order of like five bucks in order and that you’re you’re doing a hundred orders a day. And now let’s let’s think about this though. Let’s say you have a site-wide discount of 20% Okay, some percent of your customers actually would have ordered regardless of that discount, right?

Steve: Yes.

Kevin: So when we’re going to make this calculation we need to kind of penalize ourselves. So for that for that percent and it’s hard to know what that percent is, but you can sort of use your daily average Volume 2 back into some number and then some percent of those customers would have actually bought next month maybe at full price, but you pulled them forward. So, you know, if you were..

Steve: How do you come up with an estimate for that, I mean,

Kevin: I think the best way to do that would be let’s let’s say you’re averaging to you to use round numbers. Let’s say your average a hundred orders on a typical day and then you run your 20 percent Statewide is You really promoted heavily on email and everything and now you did a hundred 50 orders. So that would be okay case where you’re going to say. Okay. Well, I can probably assume that 33% of my customers of that day would not have ordered had I not done this.

Steve: Okay. I see what you’re saying. Whatever the increase in the average daily order volume is what you’re going to use for that number.

Kevin: Yeah, and you can be conservative with it to you. Don’t you don’t want to penalize the pro surely much? Okay. So anyway using those numbers $100 average order value. 50 percent margins with our cost of $5 per order. We’re coming up with a let’s see contribution margin per order with the discounts. I’m sorry without the discount would be 40 bucks because I have a variable cost percentage of five percent

Steve: sure that makes it easier to to calculate in your head. So 40 bucks is your contribution margin and so a hundred orders a day, right?

Kevin: Right So well, so 40 bucks would be your per order without the discount. You took 20% off though. So Now, what is your contribution Margin?

Steve: right, 30 actually no going. Yeah you have the spreadsheet.

Kevin: Yeah. Yeah. So so now you’re talking you just have by offering 20% off. You just actually have your contribution margin per order which is you know, 20% seems like not that big a deal but what matters to you what you can run your business with is that contribution so you’ve literally just cut it in half.

Steve: have you so okay. So 20 percent means that the order value is now 80 bucks, right? 50% Margin is 40 bucks. And then what was the contribution margin then after the discount?

Kevin: after this kind of goes down to $20

Steve: $20. Where is

Kevin: that’s a straight cut off the top.

Steve: Right? Right. Okay. Got it. Got it. Got it. Okay I hope people can keep up with this. Yeah.

Kevin: It’s a little that thing to remember is and probably the easiest thing if all these numbers don’t make sense. If someone the easiest thing to remember is that when you give someone a discount that comes strictly from your bottom line strictly from your profit Because it can’t come from anywhere else like your unless your suppliers are offering a discount or something like that. But that’s the only place that it can come from because all your none of your costs have changed the exception of the like percentage of merchant fees that you charged because you don’t you’re not paying on that $20 they gave to your customer. But other than that everything else stays the same

Steve: so the key takeaway for the people listening here is before we were making forty dollars per order and with a 20% discount. you would think that you would be making $32 per order but it turns out to be $20 per order because you’re taking that 20% off of your overall revenue and it doesn’t affect your costs all that cost are fixed.

Kevin: Exactly.

Steve: And so the key Point here is that that 20% discount that you’re giving is really like a 50% to your profit.

Kevin: Right. And and it’s if you would have had you know 50 of those. Customers pay full price you actually lost fifty times twenty. You know what I mean? You just lost $1,000 that you gave away to those customers that would have given you a thousand dollars extra which means that your your promotion better drive. It has to drive a thousand dollars extra just to break even

Steve: in the example that you just used. We got a hundred fifty orders instead of a hundred. So it we broke even on that promotion then

Kevin: yeah. Yeah, you’re Basically, even Steven. but you just did a lot more work.

Steve: I guess the only thing that I can think of where this this whole model kind of breaks down is like if you’re getting 50 new customers. That you can sell to going forward. It might still be worth it. Right?

Kevin: right. So that’s that was something I haven’t mentioned yet. But whenever we made the switch to the higher prices, we essentially ended up with exclusively only our best customers.

Steve: Okay.

Speaker 2: So there’s a lot of value there that it’s super impossible to quantify, but when you think about someone that is willing to pay full price They’re generally happier because they’re they’re not trying to I guess get one over on someone else. They’re just out there and they see a product a think it’s cool and they buy it or as the people that are trying to save every last penny there. It’s some of them it’s a game to them where it’s like how much can I get from you? So there there that’s really not a great customer to have I always kind of like Apple, Android, you know, the quality of the Apple customer versus the quality of the Android customer is is Has been proven over and over again ask any e-commerce site owner.

You know who they’re better customers. Are are they coming from iPhone? Are they coming from Android? pretty sure the results would be overwhelmingly iPhone unless they sell Android gear, but..

Steve: I’m an Android phone user and I didn’t complain about my He-Man shirt.

Kevin: I’m that. You know, I’m speaking in general that anyone specifically can bet that could not be the case, but I’m speaking in definitely.

Steve: Here’s some stats from my store that I think he’d find interesting. So 50% of the people who shop at my store approximately spend less than half of our average order value. Whereas only I think 12% spend double my average order value. However, that 12% makes up almost 50% of my Revenue. Whereas those cheap customers. They only make up like 10% of my revenues.

Kevin: Wow

Steve: but the volume is a lot higher of those cheap eats right?

Kevin: So do you need that volume for to achieve any scale?

Steve: Well, so there’s ego involved mainly because I run a course also, but like if I focus on my best customers which in this case are event planners and wedding planners, we could make this business a hell of a lot easier we of course take a huge Revenue hit but those people they’re consistent they order in bulk and it would just be a lot easier to just deal with just those customers.

Kevin: Right. Yeah, and and would you be able to I mean, I don’t really know the ins and outs of your operation, but would your number of employees plummet?

Steve: Probably. Well, I mean, we don’t have that many employees to begin with so maybe not actually I don’t know.

Kevin: So for me, there’s just so many advantages to being smaller. Yeah less returns less employees less problems. And in the thing about scale that I always I always try to remember is we’re no matter what I do with my business. I’m not going to be able to scale up to compete with Amazon. You know, I mean, let’s think about let’s say I made my business to point where I had to have 50 employees. Now, I’m going to need managers. I’m going to need human resources people but Amazon will always be competing with me and they they can spread the cost of that manager of those Human Resources people over so many more employees than I ever could see like scale could never be something that I go into battle against Amazon and I think that’s the same for literally every Maybe Target and Walmart there the scale doesn’t work in their favor

Probably it does for those guys but you’re talking like a smaller business less than even a hundred million you really are going to compete with scale in any way so skill is not is not a tool to use in your disposal.

Steve: Yeah. I think the other thing that you have to think about is, you know, we’re both family men. And why do we get into business the first place? It’s not to make our lives more miserable. It’s to be able to tie. I’m shift our time spend more time with family and just kind of do the things that we want to do, right?

Kevin: Exactly and I will say this like my new customers are much more happy like we get a lot less complaints.

Steve: I believe it. You probably didn’t hear from them?

Kevin: for the most part. You don’t yeah, it’s funny how that works. And I don’t exactly know why I probably get some stupid reason if I even tried to conjecture but it’s I can just tell you that the people that pay more are happier.

Steve: Can I ask you also what higher prices? As affected your advertising like you have a lot more to play with now, right?

Kevin: So we do yes, but it also made them less effective because

Steve: Interesting. How so?

Kevin: well because now I’m putting as I travel a lot of people that tell us where you know crazy for how much.

Steve: I see okay, I can actually for the most part I can average like a 3 return ad spend and my cost per getting that single order could be like 25 to 30 dollars.

Steve: Exactly, which is crazy right for t-shirt business.

Kevin: I don’t know that this applies to every company because I did have a head start. I do have the searched search engine optimization going for me. So I don’t know if you could start a business like this, but I know that there are certainly a lot of companies out there that could definitely benefit just from thinking about why am I pursuing this scale? A lot of times I hear people talk about scaling up on Facebook and and you know as everyone has ever advertise on Suppose you’re going to have periods where you think it’s grown great and you’re gonna be like what the heck happened? Facebook’s not working for me like you used to, and but you know, I’ve talked to people and they’ll say well I could spend like a thousand dollars a day and get really good return on ad spend or I could spend $5,000 a day and it’s not even half as much or maybe it is half as much.

So let me ask you this. Would you rather spend $1000 a day at like a 5 to 1 return on ad spend or $5,000 a day a tattoo? A half or 2.4 ad spend.

Steve: well. I mean I would just do both but I’m sorry two and a half? It depends on what my average order value is in the lifetime value, but I would just run both probably but it just depends if I was limited on resources than obviously. Yes. I would I would pay to advertise on the more lucrative Channel.

Kevin: No, I’m sorry. I just meant your choice would be to stop spending on Facebook at $1,000. So you’re not chasing the less quality option ordered to ramp up to spend the extra 4000 dollas.

Steve: So I see we’re saying if I have a limited budget. Yeah, I mean, I’ll tell you this Kev our Facebook customers are those cheap customers

Kevin: really?

Steve: Yeah, it just so happens that we’re talking like this and my Google ad customers are much much higher average order value. And so I’ve actually cut back on my top of funnel stuff for Facebook.

Kevin: awesome. So can I ask I mean you seem to know a lot of good information about your business. Are you doing a dashboard or some kind of you just dinging this stuff on a regular basis?

Steve: You know, it’s funny. I just kind of just talked about this in the last episode over at klaviyo. I generally ask my wife like I have my own little dashboard that I created on my shopping cart that I use but anything more in depth, I have to ask my wife for, obviously all the ad platforms. I have the dashboards for all that stuff Klaviyo is recently announced that all the steps going to be available inside of the tool now. So depending on how it looks I might transition over to that entirely.

Kevin: nice.

Steve: But right now it’s not like yours you have like a unified dashboard for everything right? Sounds like.

Kevin: I mean really it’s that contribution Margin. I don’t have some crazy good dashboard. Like like when you said about your over your average order value coming from 12% your customers versus 50%

Steve: Oh, yeah. Yeah. I have to ask my wife for that information.

Kevin: I mean, that’s great stuff to know.

Steve: Yeah, why? I did it for a talk that I was giving. That was the main reason. I pulled that numbers and when I pulled them I was like hey. I started looking at analytics then and Google analytics and just seeing you know, where the cheap customers were coming from and most of them are coming from Facebook

Kevin : That’s fantastic now, I wonder if especially since obviously you’ve got your word to markets. You got your end user and then you’ve got your event planner. I wonder if that might be why Facebook is

Steve: yeah, and I think that’s definitely what it is. Most of the event planners find us through Google.

Kevin: Interesting. So let’s let’s assume that that wasn’t the case in you talking like a normal consumer business where Facebook customers are worse just a just and kind of tell you where I was going with the spend $1000 day or 5,000 if you spent $1,000 a day at five to one return on ad spend and you had a margin of 75% your your gross profit on on that $1000 spend which is five thousand sales would be $2,750 if you spent spent 5,000 at a 2.4 return on ad spend then your gross profit is $4,000. So basically you’re doing a ton of extra work for like thirteen hundred dollars extra in gross profit. And you know, but but now your inventory is moving faster, you know, all the all the things that all the good things that can happen with with scale. I feel like are probably outnumbered by the bad things that can happen scale.

Steve: I just want to let you know that tickets for the 2020 Seller Summit are on sale over at sellersummit.com. Now what is seller Summit? It is the conference that I hold every year that is specifically targeting e-commerce entrepreneurs selling physical products online and unlike other events that focus on inspirational stories and high-level BS. Mine is a curriculum-based conference where you will leave with practical and actionable strategies specifically for an e-commerce business. And in fact, every speaker I invite is deep in the trenches of their e-commerce business entrepreneurs who are importing large quantities of physical goods and not some high-level guys who are overseeing their companies at 50,000 feet. The other thing I can assure you is that the Seller Summit will be small and intimate every year we cut off ticket sales at just a couple hundred people. So tickets will sell out fast, and in fact, we sell out every single year many months in advance now if you’re an e-commerce entrepreneur making over 250K or 1 million dollars per year, we are also offering an exclusive mastermind experience with other top sellers. Now, the Seller Summit is going to be held in Fort Lauderdale, Florida. From May 6 to May 8. And right now, we are almost sold out of Mastermind tickets already and I will be raising the ticket price regularly starting the day after Cyber Monday for more information, go to sellerssummit.com. Once again, that’s SELLERSUMMIT.COM or just Google it. Now back to the show.

Can we just kind of end this interview by just talking about how your lifestyle has changed?

Kevin: Sure. Yeah. Yeah, I’m sorry if this if this was like a boring

Steve: no, no, it’s not boring. It’s just the numbers are probably hard for people to follow. So like I get your point, right? I mean is it worth that amount of money incremental amount of money for the amount of mental anguish. This is kind of why I want to transition over to how this has changed for you mentally.

Kevin: Yeah, so I’m essentially semi-retired I’ve gone from having to You know 10 to 14 hour days just to keep the wheels on on the thing keep it rolling to the point where if I if I really didn’t feel like it today. I don’t have to actually do anything to keep the business running. I’ve got everything is going to be flowing smoothly my employees would let me know if the some disaster occurred but so that’s that’s really good. And honestly, I did need a break because we spend nearly 20 years of your of your life just doing something head down and and pursuing growth without any real reason which is definitely what I was doing

Steve: everyone falls into that Trap man. I fell into that trap three years ago before I had to talk to my wife about it. So

Kevin: let’s go that you did have that talk.

Steve: Yeah.

Kevin: So so I feel like right now I’m sort of in this like semi not super motivated phase where I’m enjoying the time with my kids doing a lot of working out. So my life is really good. I’ve got no complaints a little bit of sometimes I actually feel a little guilty because I used to feel guilty if I spent like an hour goofing off and now I’m spending potentially six hours a day kind of like working on myself in one form or another so so I have a little I still have a little bit of that. I’m trying to get over that. But yeah, my lifestyle is great though. I’m in better shape than I have been in a long time. Like I used to go to the chiropractor and get massages all the time because I was sitting in front of a desk.

You know stumped or slumped over and just my my posture all day long was killing me. So so now I don’t I don’t do that. I get up all the time. I’ll work in different positions. Like I literally I’ll take my phone out and answer emails and the sun whenever it’s nice because I’m nothing really like urgent anymore and spent a lot of time and stuff kids. So yeah that if if you’re at the point, I’d say to anyone if you’re at the point where like you can scale down and you could have a really Nice lifestyle

Steve: and I mean your profits have increased right?

Kevin: Yeah. Well I was losing money for years because I was you know pumping in money into to the building’s off or any of the employees and the only thing that was allowing allowing that to work was the fact that I had built up a large inventory value that that was actually as I wasn’t reordering products whether it was just because I was shrinking the inventory on a site or as I switch Dropship doing having that pure Cash flow coming in is what allowed me the time to actually turn it around.

Steve: You know what, I just thought it was just now it’d be really interesting to see all the people who are reporting Revenue numbers actually report profit numbers to be very interesting if it just all of a sudden shifted

Kevin: and love it and you know, I’m in the form and I know there’s some guys that are doing some heavy revenue and two of them. I’ve actually talked to a different times and you know, they weren’t profitable for periods of time and and you know, you’re doing over 20 Million Dollars and you’re losing money then that’s that’s super risky that you know the stress that they’re under at that point has got to be intense.

Steve: So yeah, but that’s a lot of credit card points right there

Kevin: if they weren’t so miserable. They be taking some amazing vacation.

Steve: Well, Kevin man. Hey, thanks a lot for coming on the show and sharing your story. If anyone wants a he-man t shirt, where can they find you?

Kevin: Yeah, they go to 80tees.com and if you want to hear me and spouse on numbers and maybe Kind of like my anti-growth posture. I do have the Kevinstecko.com just

Steve: Kevinstecko.com. Yeah, you know what’s funny is, you know, kev, whenever we kind of meet up we do have some really good conversations and Kev is actually quite a good counselor too. if you find yourself being burnt out about the business or whatever. He’ll give you a realistically a realistic and blunt perspective on what to take

Kevin: try not to hold any punches because I would hope someone would do that for me also.

Steve: absolutely. All right, Kevinstecko.com if you want to check it out. Thanks for coming on Kev.

Kevin: Thanks, Steve. Take care.

Steve: Hope you enjoyed that episode and next time you start handing out discount coupons left and right. I want you to sit down do the math and figure out how many more widgets you have to sell to make up for it because the numbers are quite astounding. For more information about this episode. Go to mywifequither.com/episode288.

And once again, I want to thank Klaviyo for sponsoring this episode, Klaviyo is my email marketing platform of choice for e-commerce Merchants. You can easily put together automated flows like an abandoned cart sequence a post purchase flow or win back campaign. Basically, all these sequences that will make you money on autopilot. So head on over to mywifequitherjob.com/klaviyo. Once again, That’s mywifequitherjob.com/klaviyo.

I also want to thank Privy for sponsoring this episode. Privy is the email capture provider that I personally use the term visitors into email subscribers. They offer email capture exit intent and site targeting tools to make it super simple as well. And I like Privy because it is so powerful and you can basically trigger custom pop-ups for any parameter that is closely tied your eCommerce store. Now, if you want to give it a try it is free so head on over to privy.com/steve. Once again, that’s P-R-I-V-Y.com/steve.

Now I talked about how I use these tools in my blog and if you’re interested in starting your own e-commerce store heading over to mywifequitherjob.com and sign up for my free six day mini-course just type in your email and I’ll send you the course right away. Thanks for listening.

Outro: Thanks for listening to the My Wife Quit Her Job Podcast where we are giving the courage people need to start their own online business. For more information visit Steve’s blog at www.mywifequitherjob.com

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One thought on “288: This One Thing Is Killing Your Profits With Kevin Stecko”

  1. Robert says:

    Steve would Kevin Stecko be willing to share his spreadsheet he calculated the contribution margins from?

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