The E-commerce Leader

[00:00:00] Michael: If you’re making a 30% margin, that means you’re not going to even maintain your market share because your business can only grow about 30% organically. Or however you figured out the maths of it. It’s going to be below the level of market growth.
[00:00:11] We are Michael Veasey and London, England, and Jason Miles in Seattle. Watch. More importantly, you are the owner of a thriving online business, and you want to become the best e-commerce leader. You can be. We’re here to get you there for show notes, with links and resources mentioned today. And for other GC resources like downloads, just visit our blog, the E commerce leader.com.
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[00:01:11] Michael: Some e-commerce businesses have really interesting cashflow characteristics. It’s a secret to most outsiders in fact, to peer like magic. But as Arthur C. Clark said famously any sufficiently advanced technology appears like magic, but it’s not magic. It’s just really well engineered business with great cash flow characteristics.
[00:01:29] So in this episode, we’re going to talk about the crazy reality that is possible in today’s world, including having negative cashflow and other. Customers to pay you months or even years before you make the product and many other exciting things. Jason, what are your thoughts on this topic? How can we, it’s not insanely boring and everyone should turn off.
[00:01:48] Jason: This is not insanely boring. So don’t turn off right now. I’m gonna talk to you about Starbucks and how they operate. I’m going to talk to you about other business models that we have firsthand knowledge and that we use ourselves that have crazy cashflow characteristics. That basically mean you win really.
[00:02:04] And you went in interesting ways compared to other companies. And so don’t tune this out, even though the word cashflow might sound technical or boring. I love this topic because I’m a student of business and love to learn about what businesses do to win. And, and so I’ll just, for example, since I mentioned Starbucks, I’ll just kick things off with, with them.
[00:02:24] Different businesses have different business model. And you will, of course know that some of you do retail arbitrage that listen to this, some of you do, digital marketing, like for, like for courses, that kind of thing. Some of you have a drop shipping business. Some of you have made to order, products that are handmade, handcrafted.
[00:02:41] All of these businesses have different characteristics will Starbucks. I heard this recently, should be considered a. Have you heard this Michael, that people are saying Starbucks should be considered a bank to me, this is what, why would Starbucks be considered a bank? And then the person said, as it happens, they put an app out there and the app asks you to preload.
[00:03:06] Onto your Starbucks app. Do you do this person? Do you guys do use the Starbucks app at all?
[00:03:11] Michael: Shop at Starbucks? Cause I don’t like the coffee very much rather my coffee on the coffee, safe
[00:03:19] Jason: non Starbucks drinker. Okay. I’ll go back to full screen. You’re out. I’m just kidding. So here’s how it works in practice in my wife.
[00:03:26] Yeah, it does this and she, so I observed the behavior from her using the Starbucks app. And then once I heard this math, I was like, wait, what. So basically if you get the Starbucks app, you, preload it with your dollars from your debit card, and let’s say you put 50 or a hundred dollars into the Starbucks app.
[00:03:44] You’ve given them your. And they want you to use the app because then they’ll give you rewards points and you get a, you get a free brownie every nine years or whatever it is, whatever their redemption scheme is. And the person who was making this case that Starbucks should be treated as a bank, is basically saying that in, in mass at scale, Starbucks is collecting.
[00:04:06] I don’t know the real numbers you could probably look in there. I dunno what a 10 Q or something like that and find out their financial reporting, but they’re collecting, let’s just say hundreds of millions of dollars. I’m just making that number up. But they’re collecting a massive amount of money from customers before they ever do anything.
[00:04:25] Now, those customers may or may not ever redeem that cash back as physical product, but the entire time that Starbucks owns it as cash on. On their balance sheet, and in their business, they have for use of money. This is happening at scale inside that business. And it is a magic cashflow trick.
[00:04:46] That is really interesting to understand. That makes Starbucks basically have float, which in an insurance business terms, it’s free money or money that you get that you, you manage before you need. Redeploy it to the customer that characterize. Is just one example for one company, everyone knows which Starbucks, but there are many such examples that we want to talk about in this podcast.
[00:05:12] And so I don’t want to know, sorry for, camping on that too long here as we kick things off. But I just want to peak people’s interest and explain that this is. For a lot of businesses and this understanding of how cash flows work, is just a, it’s a weird factor in many businesses. Mike, what are your thoughts on that?
[00:05:28] And even though you don’t like Starbucks, you like their cashflow
[00:05:31] Michael: Starbucks. If I wanted to own something, if I don’t own Starbucks shares, it’s one of those places where I’d want to own shares, just like with Coca-Cola. I think the drink sucks, but I think the business amazing, Yeah, of course, I’m talking to man in Seattle here.
[00:05:42] So in Seattle, I guess you’re either insanely proud of Starbucks or you’re far too hipster to drink anything like a Starbucks. But I would say, checking a apart, it is, an amazing insight. I didn’t know that about Starbucks and it reminds me of a couple of things. First of all, the obvious thing you said, you mentioned insurance float, and one reason why Warren buffet I’m so obsessed with owning insurance companies is because they then created a float, which drove the growth.
[00:06:05] Companies. The second example is obviously Amazon we’re all too familiar with third party sellers having to wait for 14 days to get paid after you’ve made sales, that’s not a coincidence. It means Amazon also runs a negative cashflow business, meaning that it actually has the money upfront to then use to expand its operations.
[00:06:21] Now here’s why I think this matters incredibly much. If you get paid up front that the simple insight is then harness. Growth sucks. Cash. If you have a growing business, I guess pretty much all of us is almost a in America, like a sacred mission. And for the rest of us merely, a wish to grow your business.
[00:06:38] That sounds great on paper, but it normally means it’s going to suck up any spare cash you have and therefore having cash available upfront. It just profoundly changes everything. For starters, it enables you to expand your business and secondly, it means you might actually get to get paid because otherwise you’re going to be, the shoe dog millionaire, Phil Knight’s position, where you basically broke into the company gets sold.
[00:06:58] Yeah. So those are the two sides of the downside and the upside. Why we got to get this crap, take this cashflow
[00:07:03] Jason: stuff. I hadn’t thought of it that way. But basically what you’re saying is if you can figure out a negative cashflow business element and your customers pay for your growth. Exactly. Yeah. And for example, just go back to Starbucks for a second. Let’s just say they took in a hundred million dollars in the app and their daily output of that is, I don’t know, let’s say a million dollars. So they have a hundred days to use that money on a rolling basis. Yeah. They want to build a new store in.
[00:07:33] It costs them $3 million. No big deal. Yeah, they got, they get a hundred million dollars sitting there to play with. Yeah, that’s the model that we’re talking about. And that is really interesting characteristic for their business, but many other businesses too. So there are other examples we want to talk about today.
[00:07:51] Should we keep going here on the outline? Any other thoughts on this? Why do you like this topic generally in, what are your thoughts as it relates to traditional Amazon sellers and all that?
[00:07:59] Michael: As an aggregator where somebody works for an aggregator spoke to me recently about them.
[00:08:03] Those are super financially savvy operators in the e-commerce space, right? Suddenly they’re bringing in wall street levels of insight to, our little backwater relative to the big markets out there that wall street invest in. It’s still quite small. And he was saying, listen, it’s very simple, for example, and I think 2021 Amazon grew an average of about 38%, maybe 29, 20, 20, recent times.
[00:08:23] If you’re making a 30% margin, that means you’re actually not going to be able to keep up with it. You’re not going to even maintain your market share because your business can only grow about 30% organically. Or however you figured out the maths of it. It’s going to be below the level of market growth.
[00:08:38] So you then have to go and get yourself outside funding. Supply credit, which I’ll talk about in a minute, but the point is, the characteristics of the cashflow of your business will restrict the growth. And if it restricts the growth less than the market, you’re in, if there are big growing fast-growing markets, you’re actually going to lose market share, which means your basis is going to have all sorts of downsides to it.
[00:08:56] Like you can’t charge as much money, your visibility’s last, et cetera, et cetera. So it, I think, the engine that enables growth is the cashflow characteristics of your business. And that’s why it’s really important. I guess one of the things we could talk about with. It’s sourcing strategies.
[00:09:11] Basically as you put it very simply who pays for the product, you paying it first as a customer paying you at the manufacturer, even as you’ve said that the government. So I’m Nikki, your thoughts here that I think that’s a really good way of putting it. I’d put it in more traditional terms like retail arbitrage, online, arbitrage, wholesale.
[00:09:26] But it comes to the same thing. So if you’re doing private labeling, for example, as the business owner, you’re going to pay for the stock months before you sell it in most. Yeah. Yeah. If you’re shipping from abroad, what are your thoughts about who pays
[00:09:37] Jason: first? Yeah, let’s apply some ideas just to that simple question who pays for the product before it’s, before the customer actually owns it or physically controls it.
[00:09:46] And retail arbitragers who use a cash back credit card to do their sourcing. Basically Visa’s paid for the product you haven’t paid for the product. If you use your visa card. You don’t pay for 30 days. So visa paid for the product. If you can sell it in 30 days, you have a negative cash flow business.
[00:10:05] You have. But someone else is paying for the, for the item. And then, and then you, the customer pays for that and then it’s shipped out the door. So visa is your basic 30 day float tool for retail arbitrage. That’s very simplistic. The challenge with that business model is hard to go to scale, passed maybe half a million dollars or so, but, but they’re very common other models too, about, answering the question hoop.
[00:10:28] For the product very frequently, the manufacturer will give you some kind of manufacturer scheme. Paying, in essence floating you the product or giving you some kind of, a deal, Michael, you’re probably more familiar with those kinds of scenarios than I am, but that’s another common one for people who are manufacturing or working with a manufacturer, I should say, in China is very common.
[00:10:47] What are your thoughts? Can specific element of, who pays type.
[00:10:52] Michael: I think it’s absolutely critical to a business. To the previous point we’re making, if you’re in fast-growing markets, if you can get your supplier to basically pay for the expansion of your business. So in other words, organic growth of business are, you’re not taking it on a funding.
[00:11:04] Investors funding, sources, debt, anything like that, factoring all the other options, but you keep within your business, but you’re really not keeping it within your business because, your suppliers advancing the credit. Then that’s incredibly powerful. And it’s several reasons. It happens a lot actually, but it doesn’t happen overnight.
[00:11:20] So if you’re just getting started, you’re not going to get that sort of deal normally. But if you have, a Chinese manufacturer, because the communist party is involved in everything and kind of the normal rules don’t apply, they’re obsessed with getting. Export revenue and they don’t need to worry about profitability so much.
[00:11:34] Just the way I can understand that I’m obviously not an expert in the Chinese financial system. It’s pretty opaque to anyone anyway, but, that’s, that seems to be how it works. Meaning if you can get a deal with your manufacturer that you pay for the products, when they land in the UK or the U S for example, then you’ve suddenly taken two months worth of working capital off the table.
[00:11:50] Probably three, because it’ll take a month to manufacture normal. Normally you put down a deposit before that of maybe 30% traditionally, depending on the size of the deal. And then you put 70%. Two months before it lands. So if you can keep that money in your business for two or even three months longer, that profoundly changes the everything, because it means you can probably ascribe, assigned half of the working capital or tie up half the money for that single product line, which you could use in different ways.
[00:12:15] But you could have twice the number of product lines out there, for example, that you would have had. Yeah, just based on that one change, this is why it’s exciting. Cause it changes.
[00:12:23] Jason: Now. So that’s an, a scenario in which the manufacturer is paying for the product to be made in, in, in essence, before you, before you have to, give it to the customer and in many schemes, if the manufacturer cuts you, that slack, or that gives you that grace, and then you pay them.
[00:12:38] Giant American express card or something like that. And in payments then you’ve got, the, and then use any kind of short-term loan tools or whatever, or financing tools. Then you’ve got an addition, additional extension of window. So these are cashflow strategies that are tried and true for people who operate in that model.
[00:12:56] Let’s talk about different models. Extending the idea. The question again is who pays for the product before the customer gets it. And, sometimes you can have the customer pay for the product before you make it. And that’s not uncommon, in fact, made to order items or traditionally done that way.
[00:13:12] If you have somebody who says, I want this, here’s the money, then you come back. Give them, whatever it is, the table that you made or, the item that’s oh, that’s traditional, that’s old, pre-internet thinking so the customer can pay certainly. Can you do that in the e-commerce business at scale?
[00:13:27] I think there’s a lot of opportunities to do that. A lot of ways in which that can be done. When we started our business, in 2007, 2008 on eBay with doing auctions, what we realized was that we could auction a physical item and actually have it be sold. And if it’s really fast to make it.
[00:13:47] And send it after it, after the auctions or after it sells. And if you control the manufacturer, it’s just in time manufacturing, you could call it. That’s what the big companies would call it just in time manufacturing. There’s nothing wrong with that. I don’t think maybe it’s, I don’t know, go check your legalities, but somebody pays you for something when you make it and send it.
[00:14:07] Then there you have it. You haven’t had to. Do anything prior to having their money. So that’s physical, there’s also digital versions that we can talk about for digital businesses, which operate very differently as well. And then I want to talk about the government for a moment, but first let me pause and just say, Michael, any thoughts on, having the customer pay, Sure.
[00:14:27] Michael: So we’ve actually got one member of the mastermind in, in London who is actually the most recent person to join us, I think, or last couple of people. He’s actually got a print on demand business, which isn’t just that the usual merch by Amazon. Although, I’m not saying that it can’t be good business model, but he’s actually got his own printing machines over in Bristol, in the west of England, even though he lives in London, he pops over once a week to visit his manufacturers all the way, about a hundred miles away.
[00:14:50] They produce stuff on demand for Amazon, eBay and Etsy, and that’s a thriving business. It’s taken a lot of work and there’s quite a lot of capital tied up. I think one of his printing machines is 60,000 pounds of whatever, 80,000 bucks worth. So it’s not a casual decision and he’s grown into over time.
[00:15:05] But that is exactly that thing. So you get paid, upfront. If you’re on Amazon, of course the customer pays, then you make it and then you ship it to them or Amazon ships it, depending on how you did it. And then. Of course, Amazon pays you later on Etsy. I’m not sure what the sort of characteristics are that transaction, but in essence, it is the customer paying first, which is quite different from the private label kind of business model, where most people are in that group are operations.
[00:15:28] Jason: And the benefit there of customer paying first is complete and total risk mitigation. The only thing can happen negatively is they ask for a refund. Or they don’t like the product. They give you a bad review, that kind of thing. But it is, if you know that you don’t have to make something prior because you don’t know how much it’s going to be sold or whatever it does eliminate that risk.
[00:15:52] So it’s interesting. Yeah, thoughts on that,
[00:15:56] Michael: just basically right. Eliminates the risk of buying something that people don’t want to, by themselves, which is very big. So it does eliminate that risk. The only thing I’d say is returns. It depends on the percentage of that. Certain categories like clothing.
[00:16:08] We’ve got one of the members of the mastermind. He’s a clothing manufacturer and retailer, and that is, that could be big return rates like a Germany clothing traditionally runs about 40% return rate on Amazon. So returns can become big in certain characteristics in certain categories. Mostly it’s not too bad.
[00:16:24] And the other thing is, of course, in his model, if he’s printing on, some kind of plastic widgets inputting for China, you’ve got to import the widgets by the tens of thousands. And then you could invest in the machines, but over time. So you’re broadly speaking of right, it reduces risk, a great deal.
[00:16:37] Certainly a lot better than ordering, a thousand units of some expensive thing from China. It takes three months to hit you and then you try and sell it on Amazon and it doesn’t sell. That’s a big risk for sure that.
[00:16:47] Jason: Yeah, totally agree. Okay. So that’s interesting, and people obviously have heard of the print on demand industry, whether they can have that be an aspect of their business or not is a different question, but it is interesting to think about and look into if it’s something that’s possible.
[00:17:00] I want to talk about another common example that is, also. Seattle area business. Wow. This is so interesting. And that’s the Costco model membership model, and I think e-commerce operators have a tremendous opportunity to bolt on membership models to their, existing, business. And I we’ve done this in our own business and we have coaching clients.
[00:17:27] And implement that strategy. So I know of what I speak and it’s a small way compared to Costco, but they’ve done this at ginormous scale and built the model around this idea. And here is the idea, create a membership program that the members pay you for. And then they get the Bennet’s benefits over time.
[00:17:48] And obviously Amazon prime is an example of that in the digital e-commerce world. But Costco was the originator of this membership club idea. In fact, Jim Senegal, the, the founder learned from a guy named Saul price. Had the chance to hear Jim speak locally here. And, it was a fun evening where we interacted and had Q and a time.
[00:18:09] And the guy’s just a genius at this stuff. And, this model in basic terms is you set up a membership program with a list of benefits. People give you the. And then you, deliver on, on the outcomes now in Costco scenario, they sell their items. As I understand it, pretty close to break. Even they don’t make money on their groceries or the, the consumer items they sell.
[00:18:33] They in, in totality make their money on the membership. Amazon prime, I think, has similar characteristics where Amazon realized that the money is in the. And there’s real power there now. Normal everyday business that has an item it’s selling to, a, a traditionally manufactured item.
[00:18:53] The question is there any context in which a membership program would make sense for your customers? Maybe you can give them something like free shipping. Maybe you can give them something like, go down and list of Amazon’s benefits and it was on primary benefits. Maybe you can give them, early access to.
[00:19:08] To items, maybe you can give them private collections that only they can shop from. Maybe you can give them standing discount. Maybe you can give them, I don’t know, something else, a signup benefit or some kind of bonus. List of potential benefits is endless. And to the extent they’re digital, they’re free after you create them.
[00:19:27] But, th this is the interesting model here with memberships and, I know a lot of people who have a e-commerce operation who are selling on Amazon. And trying to sell on Shopify. Haven’t taken the next logical extension, which is once you sell on Shopify, you can also change your business model.
[00:19:45] And if you bolt on membership on top of a Shopify site, it is dumping cash upfront that you didn’t have any. Current obligation for right in your, your balance sheet. The cash comes in, then you’ve got, is ongoing obligation. These moms. Revolutionize your business. And so that, just another example of membership, I don’t know, Michael, if you’re in memberships that you think about what you know, or you’ve got examples that you’d like for this
[00:20:13] Michael: category.
[00:20:14] Nice to say about this. I think there’s incredible power. The first thing I want to just re underline what you just said, that if you’re moving off Amazon or somewhat not off, but bolting on Shopify on top of an Amazon focused business, that is not just another version of the same thing, as you just said it, it has profoundly.
[00:20:29] Different characteristics if you choose it too. And I think the subscription thing is really incredibly important. There’s a book called the automatic customer. Can’t remember who it’s by. We’ll put it in the show notes at the e-commerce leader.com if you’re listening, but that tells you basically a very sophisticated business thinker and operator.
[00:20:45] I think the guy who wrote that and it tells you that a business with recurring revenue is much more valuable. It will go for sort of three or four times the profit level that, an average non recurring revenue business will go for. That it’s incredibly powerful thing to do. So why should you do it?
[00:21:00] Because you could sell it for, 10 times profits is out of five times profits or 15 times or whatever it is, the main metric that drives that is retention rate or the churn rate, the opposite when people leaving. And that’s why I think I’m an Amazon prime user. Primarily, I use it for their videos.
[00:21:14] They’ve been created an entire sort of mini Hollywood studio just to keep me in case in prime, how incredibly powerful that is, that shows these people are not stupid. This shows how powerful this is and how much money and effort you should put into keeping people in your world forever and ever.
[00:21:31] Jason: The people who sign up for Amazon prime and don’t even shop on Amazon for any products.
[00:21:35] They just like the movies,
[00:21:38] Michael: basically Netflix. My, my favorite usage of prime is Netflix. My wife is the one who buys crazy amounts of stuff in my Amazon prime account because I keep getting the emails and oh, you’ve ordered, 10 sets of earrings on like really are okay. My wife did so got it.
[00:21:49] So we have different uses of it. I use Amazon prime only is my free Netflix. Yeah. But yeah, that just goes to show. That’s crazy, but the other thing is, the, there’s, if you want to get amazing, Eh, uptake of their stuff. There’s a very good book, which is very broad marketing wisdom by a guy called Alex Hall.
[00:22:07] Hormoz it’s free. If you get the audible version or the Kindle version, it’s called a hundred million dollar offers and I’ve been reading this and I’ve just ordered the paperback version so I can go and an underlying everything. Cause it’s just such a great book. Yeah.
[00:22:19] Jason: Amazing. It is so good. I, you do the same thing that you just described, you listened to it or whatever, and then you want a second version of it.
[00:22:27] You want to get the paper back or whatever, it’s that good of a book, $100 million offers. Yes.
[00:22:31] Michael: I want to figure out a ways to get people falling over themselves, to subscribe and keep them subscribed. That’s a very good starting point. So if you’ve got another example, it’s obviously a very experienced in all of this membership and time.
[00:22:43] Outro: Hey folks. Thank you so much for listening to another episode of the e-commerce leader. One of our courts of deep dive episodes. Don’t forget to check out our calling app episodes, where we get our hot takes with Chris green and Carl hammer each week at two o’clock on Tuesdays, I should say not two o’clock on Tuesdays at 8:00 AM.
[00:23:02] Pacific 11:00 AM, east coast or 4:00 PM UK time. So the only time. It’s two, o’clock sorry, learning to speak English here. As we go. Today we’ve been talking about the shocking cashflow traits of the best e-commerce companies. Hope this is thought-provoking to you. You may ask what Starbucks has to do with your, much smaller e-commerce business.
[00:23:20] It’s a way of thinking and its way of engineering things, I think more than anything else. It’s really important to think through, first of all, what the characteristics of cashflow are. Okay. Own business right now. And the second thing is then to think about where they could be or to put it in Jason’s favorite.
[00:23:36] Turns I think it’s gold rates that came up the questions where, what I want to change, what I want to change to and how do I change? Very good questions. I would argue that changing the cashflow characteristics of your business could unlock massive growth and reduce risk. Possibly, both at the same time.
[00:23:52] So really important stuff. The business model you’re running is really important. The sourcing strategies, you run also really important. And some of the things that exist out there, like the membership model, the Costco model, or the Amazon prime model are things, particularly if you have your own Shopify store or.
[00:24:08] Deep seed store that you could be exploring. So hope these are thought provoking. I believe these are actionable, but their strategy level things, not that things that you can just implement tomorrow, but sit down with your accountant is my advice. Make sure you understand the characteristics of your business in terms of cashflow, and then think about imaginatively.
[00:24:27] Re-engineering your business over time to change that because if you change the cashflow characteristics of your business as the richest people in the world, the owners of Starbucks as Jeff Bezos It’s still, one of the biggest shareholders of Amazon or Costco to name, but three will tell you that it will change everything about your business.
[00:24:42] Hope you find it inspiring as ever. Don’t forget to check us out on Spotify or apple podcasts or Google, whichever podcast app you use. And if you can give us your highest and best rating out of 4 1, 2, 3, 4, 5 stars on apple or indeed on Spotify. Now that would be great. Thanks so much for listening and look forward to speaking to you in the next show.
[00:25:01] That was the e-commerce leader podcast with Michael VZ in London, England, and Jason Miles in Seattle, Washington. If you liked this content, don’t forget to subscribe to the show on your podcast. App. Feel free resources, including PDFs, videos on topics like traffic products and sales channel. Just go to www dot the e-commerce leader.com.
[00:25:26] No hyphens, just as it sailed. Thanks so much for listening.