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The Year-End Review Most eCommerce Founders Skip (And Why It's Costing Them) · eCommerce Podcast

0:04
Matt Edmundson: Hello and welcome to the eCommerce Podcast.
0:07
My name is Matt Edmundson and it is great to be with you.
0:10
And let me start by saying Happy New Year.
0:13
Oh yes, it is that time of the year when we start again, isn't it?
0:18
New Year's Resolution and Auld Lang Syne But before we start
0:23
buying gym memberships, there's one essential thing we need to
0:26
do for our e-commerce businesses.
0:29
And that I think is a year end review.
0:31
Now, that might sound a little bit boring, and you're like, Matt, gimme
0:35
something more interesting, more exciting.
0:37
But let me tell you, I'm gonna argue that I think it's essential.
0:40
I'm gonna show you how it saved Lego and they're gonna go through
0:45
the process to do it right?
0:48
Because here's the thing, right?
0:51
Here's what we've discovered, that
0:52
companies that actually capture and apply lessons have a 27% higher success rate.
1:01
27%!
1:03
Now, if someone comes along to you and offers to increase your
1:07
chances of success by 27%, I think.
1:12
You a jumper, the chance, right?
1:13
So that's what we're gonna do, right?
1:14
We're gonna look at just that.
1:16
So let me start by telling you about Lego.
1:20
In 2003, Lego was on the brink of bankruptcy.
1:25
Their sales had fallen by a massive 30%, and they had accumulated an eye
1:30
watering staggering $800 million in debt.
1:37
That's insane.
1:38
And this was Lego, right?
1:40
The company that created many of my childhood memories, a company that
1:44
hadn't made a loss between 1932 and 1998, and suddenly everything
1:52
was falling apart for them.
1:55
Now, Jim Collins, who wrote the book, good to Great, and if you've
1:59
not read it, definitely read it.
2:00
He talks about this idea of.
2:04
Confronting the brutal facts.
2:06
That's what he calls it.
2:07
Confront the brutal facts and how this is essential for a
2:10
company's long-term success.
2:12
He tells us that success requires the discipline to honestly
2:17
acknowledge and address the harshest realities of your current situation.
2:22
And we do that without denial.
2:25
We do it without filtering, and we do it without excuses.
2:30
And in this idea, Collins also introduces something called the Stockdale
2:35
Paradox, and this is the idea that
2:39
realism about your current situation has got to be paired with an unwavering faith
2:46
that you will ultimately prevail in the end, regardless of the
2:51
difficulties that you face.
2:53
So confront the brutal facts, but maintain faith in the future.
3:00
It's a really interesting tension, and that's exactly what Lego needed to do.
3:06
So they did.
3:07
And when leadership conducted a thorough review, they discovered
3:12
that the company hadn't generated any economic profit for more than 10 years.
3:18
How do you, 10 years.
3:20
Right?
3:20
And nobody knew.
3:21
How did they not know that's.
3:23
The big question, but they didn't.
3:25
They did not know which products actually made money.
3:28
They didn't know their customers anymore, and as one executive put it, he said that
3:33
the culture was so closed off that massive opportunities were completely invisible.
3:40
It's incredible, right?
3:41
How long they went without realizing what was happening.
3:45
And it was this review process mixed with brutal, honestly,
3:49
honestly, mixed with brutal honesty.
3:52
Uh, that would reveal what would in essence remain hidden.
3:56
Maybe cause the company default or whatever.
4:00
Now, I don't know if that sounds familiar, right?
4:02
Not, maybe not the bankruptcy part, obviously, uh, but maybe that
4:05
feeling of running so fast that you never stop to look at what's
4:10
actually happening in your business.
4:12
And you have that sense that you might be missing something important,
4:16
but you're not quite sure what.
4:18
And the truth is that you don't know what you don't know until you look.
4:25
I mean, that's blinding logic, isn't it?
4:27
It's true though, isn't it?
4:28
Uh, blinding revelation of the new year.
4:30
You don't know what you don't know until you have a look.
4:33
You have got to confront the brutal facts, whether they're
4:37
good or whether they're bad.
4:38
But you've gotta do so with this spirit of faith and humility.
4:41
I think that the future can.
4:43
And we'll be different.
4:45
So how do we do just that?
4:47
Hopefully that's convinced you.
4:48
This is a good idea.
4:49
Now, most Ecommerces I work with do one or two things at the end of the year
4:56
if they actually do a review at all.
4:57
Right?
4:58
Option one is they, they, they're actually don't do the review.
5:01
They're just too busy.
5:01
They're too tired.
5:03
January arrives and they're already firefighting.
5:05
The next thing, and if you guys are anything like me, you have
5:08
definitely been there, right?
5:11
Option B. Is perhaps the preferred option.
5:15
There's a glance, um, at revenue and we celebrate it.
5:18
If we went up, we panic if it goes down and we call it done.
5:22
But neither approach really tells us anything useful.
5:25
It's not so much confronting the brutal facts as giving
5:29
them perhaps a cursory glance.
5:32
And for the record, ladies and gentlemen, uh, being totally
5:36
transparent with you, I have done.
5:38
Both.
5:40
Now.
5:40
There were years when I actually convinced myself that reviewing was
5:43
a luxury that I couldn't afford.
5:45
I didn't have time, which was ironic obviously, because the
5:48
review would've shown me exactly where I was wasting time and money.
5:52
But let's not go there.
5:53
Uh, but there, I think the other thing that I've noticed is, for me, right
5:57
there is a much more subtle trap that can catch me out almost every time recently.
6:06
And that's when the facts aren't actually brutal.
6:09
Um, it's when the facts are actually really good, right?
6:12
Like you, you know, you've ended the year up on just about every
6:16
single metric and you fall into something that I call the genius trap.
6:21
Now the genius trap, in essence, looks at the numbers to prove how much of
6:25
a genius you were that year, right?
6:28
I'm such a genius because I had a good year.
6:32
Um.
6:33
And it's dangerous and it's 'cause it's easy to find.
6:36
Let me tell you, it's easy to find data that proves what
6:38
a genius you actually are.
6:40
Um, you can cherry pick the wins.
6:42
You explain away the losses.
6:43
You build a narrative that makes you feel good,
6:46
but genuinely it doesn't really teach you anything.
6:50
And I've done that.
6:51
I've been caught out many times by the genius trap.
6:55
And so I think there's, you need.
6:57
You need that humility when approaching this as well.
7:00
You need the confidence to confront the brutal facts, but
7:03
you also need to approach them with humility and the 'cause.
7:06
The goal, right?
7:07
The goal of the review isn't to prove you are a genius.
7:10
It isn't to prove that you are right.
7:13
The goal is always to understand what worked, what didn't work, and as a
7:19
result of that, where do we focus next?
7:22
What's gonna have the biggest bang for our buck?
7:24
And here's how I think about it, right?
7:26
This may or may not help you.
7:28
I don't know if you have a board, but I've got a board at my
7:31
company, um, and I have to present findings to the board of directors.
7:36
If you don't have one, pretend that you do.
7:38
And if you, if you use ai, create an AI board of directors.
7:43
Um, I've talked about that before in the show.
7:44
Really clever idea right now.
7:47
Think about presenting to a board.
7:51
What would you proudly share?
7:53
What do, can you not wait to tell them?
7:55
Right?
7:57
But more importantly, what would you rather not mention?
8:01
Because it's in that second list, the stuff that you'd rather not talk about.
8:06
I think that's where the real insights live for us.
8:09
So let me walk you through the framework that we use.
8:13
Uh, if you are a friend of the show, if you've been here a while, you
8:15
will have heard me talk a little bit about the Slingshot framework.
8:18
We're gonna be doing a whole lot more on this, um, in the coming year.
8:22
Let me tell you.
8:23
Uh, it's a framework that we use, uh.
8:26
Because let me tell you, years after selling building for many years,
8:33
e-commerce businesses, I've found this framework works super well.
8:37
And actually it works really well with reviews 'cause it gives it the
8:40
structure that we need and without it.
8:42
Um, I think you can get lost in the weeds because there's so much to think
8:46
about when it comes to e-commerce.
8:48
Um, and so we either get lost in the weeds or we stay so high level that
8:52
actually it's, it's not very helpful.
8:54
And so we use this framework, the Slingshot Framework, and it breaks
8:57
businesses down into seven in Connect in.
9:00
Connected.
9:01
That's not the right word.
9:02
Interconnected, that's the right word.
9:05
It's the new year.
9:06
You're gonna have to forgive me guys.
9:08
Now the Slingshot framework breaks then business down into
9:10
these seven interconnected areas.
9:13
And for each one, we're gonna ask questions about what worked, what didn't
9:17
work, and obviously what we can learn.
9:19
So I'm gonna run through these seven areas quickly.
9:23
Um.
9:24
Just so you get a brief overview of the, of the framework, uh,
9:27
number one, we call it sell,
9:29
right?
9:29
Area number one.
9:30
So what are your products?
9:32
Fundamentally for any e-commerce business?
9:33
You've gotta have a product that people want to buy, right?
9:36
Are you curating high demand products that actually generate profit,
9:41
not revenue, but profit, and which products are your real winners?
9:46
And which are quietly draining your resources.
9:50
And this is where I think many of us get surprised because sometimes the product
9:54
we're most proud of isn't actually the one that's making us the money.
9:59
So we've got to audit our products, we've got to do a review of our products.
10:04
Okay, so the first area of the framework is product.
10:07
The second area is story.
10:10
So I've got a product I wanna sell.
10:12
Now I've got to connect my brand and my story with the
10:16
customer's brand and story, right?
10:18
So this is all about your brand and customer understanding.
10:22
Like, do you truly understand who you are serving?
10:26
Is your messaging really landing?
10:29
You know, um, and for me in this framework.
10:33
I like to operate in this overlap, uh, between our story and the customer's
10:39
story where I can find that commonality.
10:41
Uh, between my brand, my story, what I want to do, and the customer story, what
10:47
they want, what they want to do, that's where magic happens, let me tell you.
10:52
And it's in that overlap that it works.
10:55
And if you're not in that overlap, I think.
10:57
Your messaging tends to fall quite flat.
10:59
Okay?
11:00
So we need to look at our story segment.
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Um, not just our brands, not just our colors, but our story, what the customer
11:06
story is, what our customers want, what their hopes, dreams, and desires are.
11:10
And let's see where those two things overlap and see how
11:13
we can get that to connect.
11:15
So area one is our product.
11:17
Area two is our story.
11:19
So we've got a product to sell and we've got a brand messaging,
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uh, idea in which to wrap that up.
11:25
Now we need to work on the technology.
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So
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area three is all about the tech stack.
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Um, this is all about how we sell this to our customers.
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Is your technology helping or hindering are your systems integrated or is data
11:38
fragmented across multiple flat platforms that don't really talk to each other?
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They're all building on each other.
11:44
This is where we've got all those subscriptions that we don't really
11:46
need, but we bought because we thought we needed them at the time.
11:49
You know, it's all of that stuff.
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How is our tech stack doing?
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The tech that we use to sell our products and tell our story to our customers,
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which leads me nicely to area number four.
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So I've got the product, I've got our story sorted out.
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We have got the technology sorted out.
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Now
12:08
we need to think about the area that everybody loves to talk about,
12:11
which is marketing.
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And this is all about getting the customers to come to your tech
12:16
stack to buy your products, right?
12:19
So which channels are actually delivering?
12:22
And here's the scary question.
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If your main marketing channel disappeared tomorrow, would your business survive?
12:30
That's a great question.
12:32
We've all fallen a fail of this in some way or other, I'm sure if you've
12:35
been in e-commerce for a while, right?
12:37
I'm, uh, if meta changed its algorithm, for example, which let's
12:41
be honest, happens all of the dang time and your ad stop working,
12:46
uh, ring the iOS 14 update bell.
12:48
Um, what would actually happen?
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Right.
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And that question, I think has, has kept many of us up at night,
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uh, as, as well it should.
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Um, area number five, we talk about optimizations.
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Now we've got people who have come to our technology stack to buy our products.
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We've got the brand story sorted out.
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Now we need to optimize the site, which is all about conversion.
13:07
So once the visitors are there, are they actually buying?
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Where's the friction?
13:12
Um.
13:14
When did you Right last?
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Watch a real customer.
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Try and buy something from your website.
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Not look at the analytics, but actually watch someone trying to use
13:25
your site and trying to buy from you.
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It is so eyeopening, right?
13:30
Uh, area number six, we call experience.
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So this is all about the post-purchase journey.
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So they've come to your site, they've bought the product, we've converted them.
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Now we need to think about what happens from that point onwards.
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And this is area six in the framework.
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What happens after somebody buys?
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Is that journey building loyalty or are you losing customers
13:51
before they even come back?
13:54
This is one of the most overlooked areas in e-commerce because I think
13:58
everybody obsesses about marketing.
14:00
It is the golden child in this framework.
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Everyone loves it.
14:03
Even in our clients, this is where we spend most of the time.
14:06
Um.
14:07
And it's good and it's good to do that.
14:09
But don't forget this, right?
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Um, because you don't wanna drop the ball here.
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This is where I think your business really just sink or swim.
14:17
Area number seven of the framework is growth.
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Okay, so are you building flywheel?
14:24
Momentum is the question.
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There are three levers.
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Levers.
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Why did I say levers?
14:28
'cause I've got an American voice in my head.
14:30
There are three le, three levers of growth, um, and only three I think
14:36
when it comes to growing a business.
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Three levers that you can pull, right?
14:40
Number one is the number of customers that you have.
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If I pull that lever, I get more customers.
14:46
Number two, I can convince the customers I have to buy more product
14:51
from me, which in effect in e-commerce, we call the average order value.
14:55
So how do I get them to buy more when they're there?
14:58
And the third lever that we can pull is all to do with average order frequency.
15:05
Average order count, as I've heard it called this, is basically how many
15:09
times a customer comes back to buy from you and how frequently they do that.
15:14
Okay, so if I want to grow my business, I have to pull on one of those three levers.
15:19
Okay?
15:19
I've either got to get more customers, I've either got to get the customers,
15:22
I've got to increase their average order value, or I've gotta get the
15:26
customers I've got to, in effect, increase the frequency with which they.
15:32
Buy.
15:32
If I pull on any one of those levers, I will grow my business.
15:36
Here's a really bonkers thing, right?
15:38
If I grow, say, new customers by 10%, I grow my business by 10%.
15:43
If I increase average or value by 10%, I. Increase my business
15:46
by 10%, you get where I'm going.
15:48
If I increase average order count by 10%, I increase my business by 10%, right?
15:53
The maths works.
15:55
If I increase all three at the same time, due to the wonderful, uh, mathematical
16:00
function of geometrical progression, I actually grow my business by 33%.
16:04
Um, and so you start to get geometric growth when you focus on
16:07
all three areas at the same time.
16:09
So they are in effect, the three areas of growth, uh, in the grow area Now.
16:16
That's our sort of seven step framework that we use.
16:18
We call it slingshot.
16:19
Like I say, we're gonna get into it in much more detail over the year.
16:22
We're gonna really focus in on what that looks like for your business, and
16:26
I'm hoping, actually, we're gonna put a load of content on the site about it.
16:29
That's the plan.
16:29
We'll see if we get there now.
16:31
Each area right?
16:33
Deserves honest scrutiny.
16:35
So no matter how brutal the facts, not just how did we do, but what did we learn?
16:41
What didn't work?
16:42
What are we gonna do differently?
16:44
Okay.
16:44
And of course, as you would expect this being, uh, an episode on the eCommerce
16:48
Podcast where it's just me, I love to give the freebies to help you do
16:52
this well, um, which I'm gonna explain more about in just a few minutes.
16:56
So there is a freebie that's gonna help you.
16:59
Walk through this with questions and, and help you track the ideas and the numbers.
17:03
Okay.
17:05
So I'll explain like, say more about that in a minute.
17:07
Before I do though, let me just take a minute to talk about the
17:11
numbers that I think you should track so we understand the framework.
17:15
There's these sort of seven areas that we need to look at.
17:17
Okay?
17:18
Um.
17:20
Let's look at the data, but before we get too much into the data, let me, let
17:26
me preface this by saying that I have found something really helpful when it
17:31
comes to data and looking at reviews, um, and the, and the results and, and.
17:40
Yeah, it's, this is a really smart thing.
17:42
Okay.
17:42
And it's, I, I call it lead and lag measures.
17:45
I don't call it that, it's just what I picked up.
17:47
Um, I read the book, uh, four DX, the Four Disciplines of Execution, which actually
17:52
came out of the Franklin Covey, um, setup.
17:55
They wrote the books like The Seven Habits of Highly Effective
17:57
People and stuff like that.
17:58
Really interesting management consulting company.
18:01
And they defined lead and lag measures.
18:04
So before we jump into the numbers, let me give you this.
18:08
Understanding around lead and lag measures, which I think is
18:10
gonna really, really help you.
18:12
Okay?
18:14
Now, everything, uh, you measure in a typical review.
18:19
So as you're going through these seven areas, as you're walking through,
18:21
walking, working through the freebie.
18:24
You're putting numbers out there, hold intention, right?
18:29
That probably just about everything you are seeing in the review is
18:33
what is called a lag measure.
18:35
Okay?
18:36
So things like revenue, profit margin, conversion rates, customer count.
18:40
These are in effect lag measures.
18:42
They are all results.
18:44
So what I mean by a lag measure is this, by the time you measure
18:47
them, by the time you get that number, they are already fixed.
18:51
You can't change last year's revenue anymore than you can unring a bell, okay?
18:56
It is what it is.
18:58
And I mean, you can get fancy accountants, don't get me wrong,
19:00
but you can't go back and change it.
19:02
So lag measures tell you what happened.
19:05
They in effect help you keep the score, but they don't necessarily
19:10
tell you how to play better.
19:13
The work that actually matters happens, I think in lead measures.
19:19
So this is measuring specific activities that control and
19:24
influence those lag measures.
19:27
Okay.
19:27
Stay with me.
19:28
Um, so given that this is the new year, lemme give you some example, right?
19:31
So the time of recording, it's New Year's Day.
19:33
Um, so happy New Year, right?
19:36
Uh, time of recording.
19:37
Definitely not the time of recording.
19:38
The time that this episode comes out is New Year Day.
19:41
Uh, I'm not recording it and posting it on the same day, just total transparency.
19:44
Anyway.
19:45
Uh, it's New Year's, right?
19:46
So we're all obsessed with weight loss, aren't we?
19:50
In the new year?
19:51
Um, and right now, probably most of us can do with losing a few pounds.
19:54
Okay?
19:55
So weight is a lag measure.
19:59
It's a number that is based on decisions that I made last year.
20:03
Okay.
20:04
It's decisions that I made in the past.
20:07
I made decisions to eat.
20:08
I made decisions about exercise, and as a result, my weight is a lag measure.
20:14
It tells me the net result of those past decisions.
20:18
It tells me the score.
20:20
Okay?
20:20
If you like football and managers, it tells you the score.
20:23
But if I want to change my weight, um, if I want to lower
20:27
it, I can't just measure that.
20:32
I can, but it's not totally helpful.
20:34
Right.
20:35
What I actually need to measure are the lead measures.
20:37
So what are the lead measures when it comes to weight loss?
20:41
Well, the obvious ones are gonna be, um, how many calories I eat and how
20:45
many minutes I spend doing exercise.
20:47
Right?
20:48
They are two lead measures that if I focus on, if daily I measure how many
20:53
calories I eat and how many minutes I spend exercising, then I know.
20:58
That will have a direct impact on my weight.
21:03
Okay?
21:03
So my weight will come down unless I'm trying to bulk up to get, you know, big
21:06
like Arnie, uh, which I'm not, by the way.
21:09
Um, so hopefully you're getting the, the difference between a
21:12
lead measure and a lag measure.
21:14
Okay?
21:15
So, um.
21:16
And, and this is important, we're gonna get to this in a second, right?
21:19
So for example, sales revenue, let's go through this in a bit more detail.
21:22
Sales revenue then is a lag measure.
21:26
So your sales number are, um.
21:30
A number which tells you the results of what you have already done right?
21:33
And it's a good number to know, but you have to think
21:36
about when it comes to sales.
21:37
So if you want to increase sales next year, as well as measuring that number,
21:42
you have to understand what the lead measures are that help that grow,
21:47
and then measure those relentlessly.
21:50
Okay.
21:51
Uh, conversion rate, for example, would also be another one.
21:54
How do we improve conversion rates?
21:56
So a lead measure that affects it might be something, I don't know, like AB tests
22:00
every month and implementing the winners.
22:03
Okay.
22:04
Or did we increase?
22:06
Customer lifetime value.
22:07
So customer lifetime value is a lag measure.
22:09
So a lead measure for that is did we add and test new email sequences each month
22:14
for educated customers on product use?
22:16
For example, going back to my friend George Byron.
22:19
And so the principle, uh, is to understand the key lead measures that drive and
22:25
effect the lag measure, and how often these emerge through testing ideas.
22:30
Because there's no real one size fits all.
22:33
I can't say to you, right, for you to increase sales.
22:36
Revenue, these are the lead measures for you because there is no one size fits all.
22:41
I'm really sorry there isn't.
22:42
Um, and what works for you might not work as well for somebody else.
22:46
We've all seen this, right?
22:47
You've all heard things on this show.
22:48
You've all seen things on YouTube where somebody comes
22:50
on and said, man, I did this.
22:51
And I went from zero to a million in like a microsecond.
22:55
It was amazing.
22:55
You do the same thing and you're down 10 grand already, right?
22:59
Um.
23:00
So you have to find those lead measures for you.
23:02
And the only way to really do that is to test.
23:04
So when you are doing your review, you are looking at, excuse me, you are looking at
23:11
the lag measures and that's fine 'cause you need to know where you ended up.
23:15
Right?
23:16
But when you are thinking about what we can learn from this and
23:20
what's driving this, when you set your goals for the coming year.
23:26
Don't just set a sales revenue goal, we wanna increase sales revenue by 20%.
23:31
'cause you're thinking in terms of lag measures, think in terms of lead measures.
23:34
Like what are the key levers that pull sales revenue?
23:38
I've already mentioned the three levers by the way.
23:40
Uh, but what are those levers that increase sales revenue and let me focus
23:44
relentlessly on those every month.
23:46
'cause by doing that, I know my revenue will increase.
23:49
Okay.
23:51
So what that will tell you then is what activities, what specific
23:55
activities that you can commit to that will drive the results that you want.
24:00
Okay.
24:00
So I, the reason I'm telling you this is the amount of times
24:02
I've come to people and they say I want increase revenue by 20%.
24:06
Um, and that's all they're measuring is revenue.
24:09
And I think you have to understand lead measures and lag measures and
24:12
measure the impact, uh, of those things.
24:15
So.
24:16
All that said, I hope you're still with me.
24:18
The purpose of the review is to understand your lag measures and
24:22
to get an idea of the lead measures going forward into the next year.
24:28
So let me quickly run through the numbers that I think are worth
24:31
tracking as lag measures if you're gonna do the review properly.
24:36
Okay.
24:37
Um, I think you need to track several different metrics.
24:41
And again, these are all in the freebie.
24:42
Okay.
24:43
So for financial health, you're gonna be looking at gross profit margin.
24:47
Uh, and
24:48
a healthy gross profit margin in e-commerce is about 50 to 70%.
24:52
you're gonna be looking at net profit margin.
24:54
You want about 10 to 20%.
24:56
that work working capital ratio, you're gonna aim for about one and a half to two.
25:01
Now, let me explain Working capital ratio, because it's not
25:04
immediately obvious what it is.
25:05
It might not even be something that you have heard of, but it is a
25:08
useful health measure nonetheless.
25:10
Okay?
25:11
And what you do is you calculate this by dividing your current assets.
25:16
By your current liabilities.
25:17
Okay?
25:18
And I don't wanna get too accountant, too mathematical.
25:20
You do need to get your head around some of these numbers though.
25:23
Okay?
25:24
So let me define current assets.
25:26
Um, in a way that's hopefully gonna simplify it and just keep it really easy.
25:29
A current asset is the sum of everything that can be
25:34
converted to cash within a year.
25:37
Okay?
25:37
So that's your current assets.
25:38
Everything that can be converted to cash within a year.
25:42
So that's obviously gonna include cash in the bank.
25:44
Um, but it's gonna include accounts receivable, like maybe
25:47
strip owes you a bit of money.
25:49
Um, inventory that sells quickly.
25:52
Um, short term investments, things like that.
25:54
What can I convert into cash in the next 12 months?
25:57
That's my current assets.
26:00
Current liabilities.
26:01
Then follow a similar definition.
26:03
These are all the debts which I have to pay within the next year.
26:08
Okay, so what do I owe my suppliers?
26:13
Like short term loans, unpaid taxes, invoices, not paid accrued expenses.
26:18
These are all debts that I have to pay in the next 12 months.
26:21
So if you've got, for example, a hundred grand in current assets and
26:27
50 grand in liabilities, then if I take the a hundred divided by the 50.
26:32
Your ratio then is two, and that's healthy, and you are aiming for
26:37
somewhere between 1.5 and two.
26:39
It's generally known as the sweet spot because you've got more
26:43
than enough assets to cover your debts with a comfortable buffer.
26:46
So if it's below one, if that ratio is below one, what that tells you is
26:49
you've got negative working capital.
26:51
In other words, you've got more short-term debt than you've got assets to pay for
26:56
that, which is not, I mean, it's not the end of the world, but obviously that's
26:59
something you need to be aware of.
27:02
Conversely, if it's over two, um, are you being too conservative?
27:07
You might not actually be using your capital efficiently.
27:11
Now, I do want to caveat that statement by saying this completely
27:14
depends on your business model.
27:16
Like, if I'm honest, my working capital ratio is quite a bit above two because of
27:22
my personal convictions about debt, which not everybody has, and I, I'm not gonna.
27:29
Try and convert everybody to my way of thinking about debt.
27:32
Um, and when, but when I'm acquiring companies, when I'm partnering
27:36
with companies, when we're going through that whole process, I look
27:39
at that working capital ratio and I'm looking at that number there.
27:43
Okay?
27:44
So depending on your current business model is gonna depend on where that is.
27:47
So go have a look at that ratio.
27:51
Now the customer metrics that I think you absolutely should track are
27:55
gonna be your customer acquisition cost, also known as cac, which if
27:58
you're British, is slightly funny.
28:00
Um, what does it cost to get a customer?
28:03
How much do you pay to get a customer?
28:05
What's your customer lifetime value?
28:08
That's really important.
28:09
What's your customer worth over time?
28:11
Now, um, if you've been around for a while, you'll have heard
28:14
Oliver Spark on the show.
28:16
He talked about.
28:17
This customer lifetime value.
28:19
And I, I know that over the years of knowing Oliver, um, and he runs Suite
28:25
Analytics, which is an analytics platform for e-commerce, which I'm quite, I'm
28:30
quite, uh, quite, I enjoy Suite actually.
28:33
I think it's a good platform.
28:34
A shout out to Oliver and what those guys are doing.
28:36
Um.
28:39
When you measure customer lifetime value, one of the questions
28:42
comes in your head was how?
28:43
Over how long?
28:44
Right?
28:44
Because it says customer lifetime value.
28:46
So how do you define the length of a customer lifetime?
28:49
And again, I think that comes down to your business model.
28:52
Like if you sell couches, then your lifetime value of a customer
28:55
might be over 20 years, right?
28:56
Because how often do we buy a couch?
28:58
I'm in the supplement game, I'm in the gift game.
29:01
I'm in a few different games, but most of which are quite short, repeatable,
29:05
so I measure over a 12 month period.
29:07
Um, and so customer lifetime value for most companies, most of the
29:12
time you're gonna wanna measure that over 12 months, possibly 24 months.
29:17
Um, but majority gonna be 12, right?
29:19
But whatever the period of time you choose, make sure you use
29:23
that consistently when calculating customer lifetime value.
29:27
Once you understand your lifetime value and you understand the cac, the customer
29:33
acquisition costs, you can create then a ratio, so your LTV to CAC ratio.
29:39
Um, and you are wanting somewhere around three to one.
29:44
In other words, you want a lifetime value of a customer about three times more
29:49
or better than the cost to acquire one.
29:52
Okay?
29:53
And again, this is, there's no hard and fast rules here.
29:56
It all depends on your business model.
29:58
But if your CAC is too high and your LTV is too low, you've got
30:02
no profits to run your business.
30:04
So less than three to one, it becomes really hard to sustain.
30:07
Um, over three to one, it might tell you that you've probably got a bit of margin
30:13
to put into new customer acquisition.
30:16
Um, so if you have a five to one ratio, you might wanna look at actually,
30:21
does that give us a bit more play to increase our customer acquisition costs?
30:26
If it means we get substantially more new customers?
30:30
Always worth thinking about because new customer acquisition
30:32
is obviously, is, is important.
30:34
So you've got your lifetime value.
30:36
Customer acquisition costs, average order value.
30:38
Uh, it's one of the three levers of growth we mentioned.
30:40
Gonna wanna look at that.
30:41
Um, conversion rates.
30:43
Uh, an average conversion rate in e-commerce, by the way, is two to 3%.
30:46
I dunno what it is for your industry.
30:48
Um, you can obviously find that out.
30:50
Just, you know, ask I, it will tell you these.
30:52
In fact, don't ask ai 'cause it might just make it up.
30:55
Do the work yourself and find out using Google, um, or perplexity
30:59
actually might help you there.
31:01
Um, but understand your conversion rate and benchmark that you also want to
31:05
understand your repeat purchase rate.
31:07
So how many times customers come back, the percentage of customers that come
31:11
back, um, is really, really helpful.
31:14
Um, that's a really good number to measure.
31:17
Um, and these aren't atory metrics, by the way.
31:19
I think they're vital signs for the health of your business.
31:22
And if you don't know these numbers.
31:24
Um, I think whatever review you do is gonna be sort of guesswork
31:27
and dressed up really as analysis.
31:30
So before you deep dive into the seven areas and, and go through the, the
31:35
freebie, the download or however you wanna do it, but if you go through the
31:38
download and ask or answer the questions that we ask you in that download, in
31:42
that workbook, the workbook starts off with the spaces to put those numbers.
31:46
Okay?
31:46
So spend the time you need to get them together before you start.
31:50
Um, and.
31:52
Regularly track them.
31:53
Okay?
31:53
At least, at least every year.
31:55
You know, if you put those numbers in now at the end of the year, you can
31:58
see where they are and you can see what's worked again, what's not worked.
32:02
You know, with a year on year comparison, I think it's quite helpful.
32:06
So have a look at that.
32:07
Now, let me finish, uh, with the Lego story because I think it's important, uh,
32:12
just to round that or close that circle.
32:15
I think they say, uh, after that sort of brutal 2023, no, 20 2003,
32:22
not 2023, get the numbers right.
32:23
Matt, uh, after that sort of brutal confronting the brutal facts in 2003,
32:28
that review, Lego didn't just identify problems, they actually acted on them.
32:35
Uh, we can see the results now, right?
32:37
I mean, they're an insanely, uh, popular brand.
32:40
They discovered, in effect, the adult customers, the ones who they assumed
32:44
were detracting from the brand.
32:47
Can you believe that were actually a massive opportunity.
32:51
They streamline their product range.
32:52
They rebuilt their understanding of who their customers were.
32:56
And the net result of all of this, lemme give you some numbers.
32:59
Nearly 20% compound growth.
33:02
Over two decades.
33:06
Oh, that's insane, isn't it?
33:07
Love, I would love those numbers.
33:09
Uh, in 2017, they even created an internal document, which was literally called
33:15
Blind Spot to remind leadership about the opportunity that they had missed, and then
33:20
by 2020 they'd launched an entire 18 and over product line specifically for adults.
33:28
I have bought Lego as an adult, right?
33:30
And the review didn't just save the company.
33:33
It has utterly transformed it, and I think you can all see that.
33:38
So that's a Lego story.
33:40
Hopefully that's rounded off that circle.
33:44
And it's all of this is backed by some pretty compelling research.
33:47
Let me tell you, there's one, there's one secret actually.
33:51
If you do these reviews on a regular basis, there is one additional secret.
33:56
This is that saving the best tall last thing we do on the podcast.
33:59
Because if you stay around to the end, you always get the extra nug nugget, right?
34:04
Um, this is that one saving the best tall last.
34:07
It's all to do with having an accountability partner because
34:11
studies show that if you do, you increase the likelihood of achieving
34:16
your goals by how much do you think?
34:20
Just sit there and think, I dunno how you feel when you hear words
34:23
like accountability partner.
34:24
A lot of people go like, oh, really?
34:27
Um, but listen, I'm gonna give you the number in a second, but
34:29
I honestly think about it, right?
34:31
What is the likelihood of you achieving your goals?
34:34
What is the increase, sorry.
34:36
In the likelihood of you achi achieving your goals, what percentage
34:40
increase do you give yourself by having an accountability partner?
34:45
What's that number in your head?
34:46
5%, 10%? I don't know.
34:49
It's 95, 90 5%, you want to be almost twice as likely to achieve your goals.
34:56
That's one heck of a jump, right?
34:58
Um, especially when you compare the fact that actually it's just 10% when you
35:04
give, uh, when you just do it yourself.
35:06
So without the accountability partner, you are twice as likely
35:08
to succeed at achieving your goals if you just go yourself.
35:12
It's a 10% chance.
35:14
Always worth bearing in mind when you're setting your New
35:16
Year's resolutions as well.
35:18
That is saving the best till last.
35:20
Let that sink in 95% versus 10%.
35:24
So I think reviewing in isolation has limits.
35:27
You know, you'll be kinder to yourself maybe than you should be.
35:30
Uh, you'll miss the blind spots that others are gonna catch for you.
35:34
And if you guys are anything like me, you've had those sorts of moments where
35:37
you've explained something to a friend or a business partner or maybe a board.
35:41
Remember, and just saying it out loud made you realize how crazy it sounds.
35:50
I have so many good ideas in my head that as soon as I verbalize it, I
35:53
go, that's just stupid, isn't it?
35:55
Yes.
35:56
Uh, and that's the power of not doing this alone.
35:59
And it's one of the key reasons.
36:00
Quick plug, uh, why we created the e-commerce Cohort, which is a free
36:05
monthly group where founders share the challenges they're going through.
36:09
They give feedback, hold each other accountable.
36:12
Um, there's a WhatsApp group for the sort of ongoing conversation between the calls.
36:17
It's super low key, but the account, the accountability piece is genuinely.
36:23
Powerful and, um, we're loving running cohorts, so if you want to join Cohort.
36:29
Uh, you can definitely find out more if you're doing this review and thinking, I
36:33
wish I had someone to talk this through.
36:35
That's what cohort's for.
36:36
You can find out more information at eCommerce Podcast dot net.
36:41
Go to eCommercePodcast.net and you'll find information on there about Cohort.
36:44
There's a, a link right at the top says Join Cohort.
36:47
So go click that and have a little read, um, and just let
36:50
us know if you wanna join.
36:51
It'd be great to see you in one of the groups.
36:53
Okay.
36:55
So let me close because what I want you to take away from this,
36:58
right, let's, let's summarize
36:59
number one, you've got to do the review.
37:02
So block in a day to do the review.
37:05
Treat it like a board meeting with yourself.
37:08
Don't let January arrive without understanding, uh,
37:12
what has happened this year.
37:14
I don't let January arrive just thinking about this, coming out in January.
37:17
Don't let February arrive.
37:21
Without having taken the time to do this right.
37:23
Number two, so you, you are wanting to do the review, use the framework.
37:26
Number two is use the Slingshot framework
37:28
right?
37:28
I think it's a really good framework.
37:30
It covers everything you need to know.
37:31
Go through those seven areas, sell story, tech stack, marketing,
37:36
optimization, experience and growth.
37:39
And for each one, ask what worked.
37:41
And what didn't and what did we learn?
37:45
You can use the freebie, like I say, track the numbers.
37:47
Number three, get your metrics in place so you can do your year on year comparison.
37:51
And number four: watch out for the Genius Trap.
37:55
Especially if the business went well for you last year.
37:58
Don't use a review just to prove how smart you are.
38:01
We all know you are smart.
38:03
Use it to confront the brutal facts with that spirit of faith and adventure, that
38:07
the future can and will be different.
38:10
And number five: don't do it alone.
38:13
Find someone to share your finding with, uh, get that accountability partner.
38:17
It makes such a massive difference.
38:20
And as I mentioned, I've put all of this together in the year end review
38:24
workbook that walks you through all seven areas with specific questions,
38:29
with metrics to track, and there's space to capture your lessons and goals.
38:34
It is completely free, and of course, the link is in the description, uh, below.
38:39
All we just heard of to website eCommercePodcast.net.
38:42
Click on the resources link and just search out this guide.
38:46
Uh, all I ask is you download it, work through it, and
38:49
let me know how you get on.
38:51
And hey, if no one's told you yet today, let me be the first.
38:54
You are awesome.
38:55
Created, awesome.
38:56
Yes, you are.
38:57
It's just a burden you have to bear.
38:58
You are a genius.
38:59
We know you're a genius.
39:00
You don't have to prove it with the review.
39:02
You are a legend.
39:03
Absolutely.
39:04
Thank you for being with us here at the start of the year.
39:07
May I wish you a very, very happy New Year and an insanely prosperous 2026.
39:14
I'll see you in the next episode, but that's it from me.
39:16
Thank you so much for joining me.
39:18
Bye for now.