w/ Thomas Gleeson, StoreHero, ex-Shopify
What's behind the profit margin? Kurt Elster and Thomas Gleeson take a reflective look at e-commerce, dissecting common mistakes and revealing the path to understanding real profits. It's a conversation about numbers, but also about strategy, innovation, and the road to success. A must-listen for those seeking clarity on calculating profits.
The Unofficial Shopify Podcast
8/29/2023
Kurt Elster: Hello again, my friends. Today we’re gonna talk with an ex-Shopifyer. He’s gonna tell us about numbers, margins, profits. Thomas Gleeson is our guest today. He’s currently the co-founder at StoreHero, and he’s built what he calls a profit platform. He’s gonna tell us about profitability, calculating it down to the order level. That P-word, it’s important and it’s scary, and it’s ignored too often by people sharing screenshots of their revenue on Twitter. But he has quite the story about how he got into eCommerce and the time he spent at Shopify, so I want to pick his brain on that, and calculating profitability, and more. It should be an adventure into the wilds of eCommerce.
I’m Kurt Elster.
Ezra Firestone Sound Board Clip: Tech Nasty!
Kurt Elster: And this is The Unofficial Shopify Podcast.
Sound Board:
Kurt Elster: Thomas. Mr. Gleeson. How are you doing?
Thomas Gleeson: Hey, Kurt. How are you getting on? Very good. All good from my side.
Kurt Elster: You know, lovely weather here today. Where are you located?
Thomas Gleeson: Yeah. I’m on the west coast of Ireland here. First of all, just want to say really excited to be on the pod. I think I’ve been listening to… I think my first episode, I was trying to think before we came on. I think it was the CROSSNET episode probably 18 months ago.
Kurt Elster: Oh, yeah. With Chris.
Thomas Gleeson: Yeah. With Chris. Yeah. That was it. Exactly. So, tuned in for quite a while, and during my time at Shopify, this podcast was always intermittently coming up in various Slacks and different things, so it’s been quite the journey for you, as well, I assume.
Kurt Elster: Oh, absolutely. It’s always weird, because like in my head, maybe 100 people listen to it, and I know that’s not the case, and so when you hear someone’s like, “Oh, this publicly traded company, occasionally your show gets passed around in Slack channels,” every time I’m always surprised. And I suppose I shouldn’t be.
Thomas Gleeson: Not at all. Not at all. I mean, the cohort of guests you’ve had on over the years has been tremendous, and some of the episodes have been really, really insightful, so hopefully we can add a little bit more to that today.
Kurt Elster: Well, and so I want to go. Take me back to the beginning. How did you get into the world of eCommerce? What’s the first thing that brought you into it?
Thomas Gleeson: I had no choice. So, let’s start from the real beginning, I suppose, so yeah, I’m from Ennis in County Clare on the west coast of Ireland here. My mother has had an eCommerce business since 2004.
Kurt Elster: Oh, okay. Since when you could start eCom businesses.
Thomas Gleeson: Yeah, so this is actually pre-Shopify, so this was… We started on a company, I can’t even remember the name of the eCommerce platform at this stage, but my mother had to do a lot of the coding for the website herself. A lot of the payment processing had to happen through our house phone, so we were often… We were all trained in how to take an order over the phone, how to take credit card details. This was before everything got really, really secure, and everything else like that.
Kurt Elster: You’re just writing the 16 digits down on a napkin next to the fridge.
Thomas Gleeson: Oh, absolutely.
Kurt Elster: Not exactly PCI compliant, but you know, 2004.
Thomas Gleeson: Nothing was. Yeah. Really, really interesting. I suppose we saw the pains and the problems that went with building an eCommerce business right from the beginning. I mean, at our kitchen table we would have all known the problems if the checkout was broken that day, because that was the main… That was our mother’s main job. That was supporting the business. And if checkout was broken, which back in those days it was broken a hell of a lot more frequently than it is today, that was obviously a massive problem. Instead of hoovering the hall in our house, or cleaning our rooms, we were often doing SEO on her website and trying to build up keywords and meta tag type and all that kind of thing.
So, in terms of where eCommerce started for me, it’s been a while.
Kurt Elster: And so, even having witnessed that, having seen the trials and tribulations, you still followed your parents into that business world.
Thomas Gleeson: Yeah. Absolutely. So, yeah, that was 2004. I set up my first eCommerce business myself at 18 or 19, so it was actually a business selling personalized children’s books, so I used to write the books, and my granddad is a great artist. He’s a painter. So, he used to actually paint all the illustrations for the book, so I wrote probably four to five personalized kids’ books, and that was my first venture.
I had a couple of small eCommerce businesses after that again, but really, really exciting. Never made loads of money from them or anything like that, but what an education to get, to learn how to set up a website, how to source products, how to run a Facebook ad, how to set up a website, how to run an email marketing campaign. YouTube, Udemy, all great resources online, and yeah, such a really good education.
Kurt Elster: And from… Well, yeah, that’s a ton of valuable skills that you need as an online entrepreneur. And pretty much all of those things were things I learned through this podcast as I went. So, at what point do you end up working at Shopify? How did that end up part of your career?
Thomas Gleeson: Yeah. Really good question. So, I suppose… I think it was January 2019 I actually decided to move my personalized kids’ book business from another eCommerce platform to Shopify, so I ended up doing a quick few online courses, worked on that for a couple of months, got it up and running. I was doing a bit of work for my mom on her website. We actually migrated that around June of 2019. And then I saw an ad pop up online for a Shopify support role and I just thought to myself, “Well, I’ve been pretty immersed in this world for the last six months. What better way to learn about the platform than to go and work there?”
So, did a couple of interviews and yeah, I think I did my onboarding about a month after that around the end of July 2019, so yeah, Shopify, to be honest, an amazing experience. An amazing experience. I went in to really try and learn the ropes of how to run the platform probably with the end goal to build an eCommerce store myself, probably a bit more of a successful one down the line, but the more I kind of got into it, I suppose, I got a real love for more of the analytics side of things, and I suppose I was applying that to my parents’ business and really saw some of the drawbacks or some of the gaps that we had in our business and how I could really help them grow their business.
But the more I got into that role at Shopify, I realized I probably had a better skill for helping people grow their own businesses, and that’s the role I’ve kind of gone down, I suppose, over the years.
Kurt Elster: And so, what was your role there? It was support.
Thomas Gleeson: Yeah, so I started off in customer support, Kurt, so originally helping people onboard, so how do I add a product? My checkout is broken. How do I change my theme? So, I did that for one year, then I moved into Shopify Plus support, so the numbers got a bit bigger, platform was still the same, but again, really cool to see how different businesses of a larger scale, how they face their problems, how have they spotted opportunities and areas to improve their product roadmap as a whole?
So, I did that for probably seven or eight months, and from there I moved into a merchant success manager role, so essentially as an eCommerce consultant, so you’re advising on eCommerce and marketing strategy along with general Shopify roadmap, so I was in that role for probably nearly two years. So, originally started off with brands mainly in the U.K. between $5 and $15 million, and then the last probably year was in the region of maybe $25 to $100 million.
So, between my own eCommerce businesses, mom’s eCommerce business, and then actually being front and center with all of these really, really large Shopify brands, it was an amazing experience for me to really be at the front line of a lot of these eCommerce businesses, hear about their concerns, hear about what they’re worried about, but also how they’re actually planning for the future, how they think about different things, and yeah, couldn’t have asked for a better experience, to be honest.
Kurt Elster: It sounds like you’ve got quite the eCommerce education here, like lifelong, starting with a family business, and then your own experiences, and then moving to Shopify, and then moving through those support roles, but kind of up the tier, where starting at support level, moving to Plus support, so like you said, similar vibes but different, bigger numbers. Different challenges in scaling. And then moving to that merchant success manager role, which you’re right, it’s like it’s a kind of support role, but it’s more consultant focused. What was the common theme to issues you saw? I’m sure there were several, but there’s probably one thing that kind of stood out to you.
Thomas Gleeson: Yeah. What were we really trying to help with? A lot of it was I suppose limitations merchants might have had in the platform, so we would have to try and, I suppose, consult with the internal product teams to A, help those features get built, or B, try and find a workaround with some of the interior internal teams to say, “This merchant has X problem. How can we get around that?” Whether that was going to be through a feature release by Shopify directly or through using a third-party solution through the Shopify app store. That was a lot of the work.
And generally, to be honest with you, and I know this from our own business at home, that a lot of eCommerce founders, like at Shopify my world was literally on the Shopify dashboard, but you have to remember these people are doing it, also doing customer service. They’re trying to source new product for next year. They’re worrying about rent, and rates, and everything else like that. And their Shopify world is often limited to a couple of… maybe a half an hour, two hours a day, whatever it is. So, a lot of my role at Shopify was really helping the merchants understand what the platform was actually capable of, and you get that insight, I suppose, from working with so many different businesses at their varying degrees of complexity, and of experience, I suppose, and understanding okay, I saw this work really well at this brand, but I could see from looking at your Shopify setup you haven’t set this up, so maybe this is something that you could actually implement.
Shopify Flow, enabling automation, I suppose, was definitely a massively part of that role. Often, you’d come across merchants who were doing quite mundane, unnecessarily mundane operational pieces within the business, but once you could turn on Shopify Flow, often it was a massive game changer and a hell of a time saver for a lot of businesses.
Kurt Elster: That’s kind of interesting. The way you describe that, the role, the client services role we adopt as an agency in our agency work really sounded no different than what you just described, at least like a lot of what I do is people come to you with a problem and you go, “Okay, well, these three other stores had a similar problem and solved it with this feature. Have you considered that?” And they’re like, “We didn’t even know that was an option.”
Thomas Gleeson: Yeah.
Kurt Elster: You don’t know what you don’t know. Or hey, we were told we can’t do this, and the answer is like, “Well, all right, just do it a little differently and now you can,” where it’s like it’s a workaround.
Thomas Gleeson: Yeah. Completely.
Kurt Elster: And occasionally you get like hurry up and wait, where you know it’s like okay, there’s this feature that’s right around the corner that’s gonna solve this. You just gotta hold out.
Thomas Gleeson: Completely. Completely. And I listened to your podcast last week on Shopify Editions. In a weird way, this is often a criticism of the platform, it’s like I can’t keep up to date. Well, it’s a good criticism. You wouldn’t want to be on an eCommerce platform that wasn’t innovating fast enough. Because they’re releasing so much and the product is advancing so much, this is good. But it also means that you need to try and stay as up to date as possible to really make use of the platform as a whole, because even when I think back to Shopify in 2019, the platform has advanced leaps and bounds since then. So, trying to stay up to date with all of the new product releases and features that the platform as a whole is capable of, it’s challenging, but spotting those areas of opportunity, I suppose, are what helps those brands grow, as well.
Kurt Elster: Five days a week I’m spending like many 20 hours in that Shopify admin, across multiple stores, with different configurations, and necessities, and even with that I still don’t touch every single feature. There are features I probably haven’t even heard of, let alone used, and so sometimes that’s frustrating in the form of FOMO, which I’m like, “I bet I’m missing something.” Even just after I recorded that Editions episode that went live… Well, first week in August. The week after, I played with a few features we’d talked about and I was like, “Oh, I kind of misunderstood this,” and so then I’ll have to… When I do the next episode, I’ll be like, “Correction here.”
But even then, it’s like I spend so much time in this, I eat, breathe, sleep it. And even with that, I still get stuff wrong about approaches. Until you play with it, you don’t necessarily really understand it. All right, Shopify has an interesting culture, and so do you think there was any influence from Tobi, Harley, that culture on the way you approach eCom and entrepreneurship now?
Thomas Gleeson: Yeah. I mean, yes, they definitely have their stamp on how the company runs. Very mission driven. Very merchant focused. I mean, that was probably the biggest thing I took away. You hear a lot of businesses that are merchant focused, or customer focused, but when you get down to the nuts and bolts of it, it’s more revenue focused. I can’t say that was the case in Shopify. Just going back to those feature release pieces specifically, a lot of the stuff that would have been even announced at Editions probably has come as a result of a feature request from merchants over and over again. Yeah. We were really taught to think like an entrepreneur, I suppose, from every level. We had great education internally, own your own development, that kind of thing. They really wanted you to think like a business owner as much as possible even within the constraints of what is now a very, very large corporation.
Kurt Elster: Do you have a fun memory, an inspiring story, a lesson, anecdote, something from your time at Shopify that stuck with you? Before we move on?
Thomas Gleeson: Yeah. I suppose for me it was all about trying to really help the business owners. And if I felt I could make an impact on their business, that was what really felt to me that I was doing a good job at my business, at my role, I suppose. One key part I suppose I remember was a business and a part of the business in the U.K. that were starting to struggle. Average order value was one piece that I suppose I had noticed hadn’t really moved, even though the sales numbers as a whole had increased over across the board. Their advertising costs had gone through the roof, and I suppose that contribution margin on an order level hadn’t really got a whole lot better for them, so what I actually did was I spotted some really good upsell opportunities that they were missing out on that I suppose I had seen in place with some other merchants I had been working on with.
They did implement it, thankfully, and they did see… I think it was a 15-16% uplift in average order value within the first three months that did continue to maintain throughout the business. That was a massive win for them. It actually changed the whole unit economics of the business as a whole. And for me, that was really, really rewarding, because they came to me with a problem. I could use my experience from working with other merchants to really point out some key areas of opportunity. In this case, it was average order value through an upsell mechanism. Worked really well for them. And yeah, it was cool to just change their business as a result.
Kurt Elster: And so, getting that, looking at those unit economics, getting the AOV up, that boosts profitability, I have to think.
Thomas Gleeson: Yeah. Absolutely.
Kurt Elster: That’s your passion project, right, is profitability and unit economics? Let’s switch gears to the importance of profitability. Why is understanding profitability not more important but more important now than ever before in eCom?
Thomas Gleeson: Yeah. I suppose to start, one of the main issues I see with eCom at the moment is that everybody’s orientated themselves to revenue metrics. Everybody’s looking for Shopify screenshots of their revenue. Your ROAS is a byproduct of your revenue. Your average order value is a byproduct of your revenue. Often, you see LTV metrics as a byproduct of single, just revenue alone. Unfortunately, that doesn’t take into account any margin, any contribution margin, profitability elements, that kind of thing.
So, I suppose my segue into this crazy world of profitability for eCom again actually started at home. My father is an accountant, so he was our accountant for mom’s business for as long as I can remember, as well. Yeah. I suppose over the years I was doing a spreadsheet for my parents on a Monday evening trying to pull together all of the core Shopify metrics, so not just our revenue, but our average order value, our number of sessions, our new customer rate, repeat customer rate, conversion rates, and also trying to bring in, I suppose, all of our core Google Analytics metrics, Google ads, Facebook ads, TikTok, Klaviyo metrics, and the operation expenses of the business. It was painfully manual, to be perfectly honest with you, but I did see the value that my parents actually got having these numbers at their fingertips.
Like a lot of businesses, I suppose, over COVID we saw quite good growth, and that manifested itself in higher return on ad spend. Now, as you might remember, at the start of the episode I mentioned we were doing SEO for our parents’ businesses for years. We actually didn’t launch a paid ad until 2016, 17, so over 10 years in operation, which sounds like a dream state for anyone operating an eCom business today. So, we didn’t need to spend heavily on paid advertising, but again, as we did over COVID, that ROAS got a lot higher.
Now, as that ROAS got higher over COVID, I was going to my dad and saying, “Look, we need to increase these ad budgets because this ROAS is really, really good.” And I’m not allowed to spend a cent in our family business without justifying it to the Nth degree, so what that forced me to do was to actually understand, okay, what is our break even point ROAS on a product? What’s our break even ROAS on a business level? To really understand how much room do we have to push, or do we need to pull back on our marketing spend in order to achieve profitability?
So, as I was going to my dad with that ROAS figure, he came back and said, “What is ROAS?” So, again, it forced me to understand what those unit economics actually looked like, and it took me a while to get there, but when I got there I noticed an issue at home as a result of that spreadsheet, but I also saw it firsthand at Shopify with a lot of the merchants where a lot of the eCommerce founders and operators today, they’re getting their financial advice and how to run the business from their accountant or their bookkeeper. And a lot of the time, that person isn’t strictly an eCommerce accountant, or an eCommerce bookkeeper, so for instance they’re just seeing the P&L at the end of every week, or every month, or whatever it is. But they don’t understand the metrics that constitute how that P&L has come to fruition, I suppose.
So, they don’t get conversion rates, or ROAS, or average order value, that kind of thing. They see total sales, OPEX, marketing spend, profitability, so essentially what a lot of these people are doing, a lot of the founders are doing, is taking advice from these accountants or bookkeepers who don’t really understand their business, and I think that was probably allowed to fly in the last couple of years when ad spend was much, much more efficient online. But as these ad costs have got more expensive, I suppose as inflation has just driven the cost of doing business up online, you really need to have a firm handle on those unit economics to really drive a profitable business today.
Kurt Elster: And when you say unit economics, we’re talking about being able to track these KPIs down to the order level, right?
Thomas Gleeson: Correct. Correct. Correct. Yeah, so there’s probably a couple of different facets within unit economics, really, so first one was the break even point ROAS, so like understanding your ROAS isn’t really much good to you unless you understand what your break even point is. You could have an agency telling you it’s 2 or 3, and that might sound great, but unless you understand what your benchmark is, or your break even point is, that’s going to be very different for every business. Understanding if that’s a 2 or a 3 isn’t really much use to you, so you need to factor in your product costs, your transaction fees, your 3PL costs, your shipping costs, and then actually understand, okay, what is that break even point ROAS on a product level? And then actually manifest that out over the course of the business as a whole, as well, to understand, “Okay, based on my run rate of sales today, this is my ROAS, this is my break even point,” and I suppose the arbitrage in the middle there is going to be whether you made a profit today or a loss today.
Kurt Elster: Walk us through it with an example of how knowing that profit on a single order is beneficial.
Thomas Gleeson: Yeah. Absolutely. So, for instance, if you had an order and you sold it for… I don’t know, $100, and you bought the product for $20, basic math would tell you that that profitability on that order is $80. But you might have to strip out your tax. You might have to also strip out your shipping costs, your transaction fees, your fulfillment costs, so your profitability on that order might actually be somewhere down around $50. That’s a big issue, I suppose, with a lot of businesses I see today, where they don’t actually understand what their true gross margins actually look like because they’re really just going off a revenue number and a product cost number, but eCommerce, you need to understand all those extra variable costs, because the devil is really in the detail there, and unless you have those unit economics and those variable costs really dialed in, you’re not accurate. You’re not reporting accurately on what your profitability actually might look like.
Now, hopping in at the end of every day to understand your order level profitability isn’t really going to be a whole lot of use to you. You might be getting hundreds if not thousands of orders a day. But popping in at the end of every week or every month and actually just sorting by, “Okay, this is the top 1% of profitable orders, and what is the genetic makeup of these orders? What has caused this subset of orders to be really, really profitable?” It could be orders that have really high margin. We mightn’t have given any discounts away. We might not have given any free shipping away. So, how do we replicate this as much as possible?
Now, I’d say most eCommerce operators will be able to tell you what that order looks like because they’re the ones they like to see all the time. But I actually think understanding the inverse of that is probably even more important from a profitability perspective in, “Okay, why is this subset of orders really unprofitable or really low margin making?” And that’s actually where we’re probably seeing a lot of people get even more value from the platform is okay, why is this order generating a 5% margin? Is it because we’ve given them a welcome 10 discount? We’ve given them a free shipping threshold and we actually haven’t made much margin on the product even before those discounts? A lot of the time, business owners are in a bit of shock when they actually see the margin that they’re making on an order level, and I suppose understanding yeah, those really profitable orders, that’s important. But understanding the really unprofitable orders will also help you, I suppose, maybe think about your discounting strategy better, thinking about your markup better, thinking about your promotion strategy all through the lens of profitability, I suppose.
Kurt Elster: Do you think for merchants who are tracking profits, that that most common mistake they’re making is looking at profits with rose colored glasses and being like, “Oh, well, this… These are the really profitable orders. I’m doing good. I’m so smart,” because they’re ignoring the other orders that may actually be costing them money? And then we hand wave that away with, “Well, we’ve acquired those customers. They’ll come back and make a second purchase. We’ll make it up then.” Is that… Do you think that’s the most common mistake? What is it?
Thomas Gleeson: Yeah. That’s a really common mistake, as well, just really focusing on the good without trying to focus on the ugly, unfortunately. They’re probably twofold, as well, in that it’s really difficult to actually ascertain if you’re profitable or not on an order because there is so much scattered data, like Shopify won’t tell you what your shipping costs are, or your fulfillment costs are. You can’t see your products in your transaction fees. But depending on your average order value, that fulfillment cost and that shipping cost is going to be quite a material percentage of what your average order is. For instance, if you have a $50 AOV and you’re giving away free shipping and you work with a 3PL, that could be $8 to $9 of variable cost that you’re not accounting for on an order level, which is pretty significant, and you’re getting towards 20% of your margin. 20% of your order value that you’re not actually accounting for in terms of variable costs.
So, making sure that you have a data platform in place that can actually centralize all of that for you is going to be incredibly important.
Kurt Elster: It sounds like we’re moving into your app. You have an app, a service, called StoreHero, and you described it to me as a profitability platform. Well, let’s start with what it is.
Thomas Gleeson: It probably has come as a result of all my experiences at home with our family business, working in that spreadsheet, and from working with Shopify merchants over a number of years, whereby I just saw a big gap in merchants really understanding their numbers. So, what we have built is a profitability platform for eCommerce DTC brands to centralize all of their eCommerce, all of their marketing channels, and also all of their financial operations to get a true sense of those margins, unit economics, and their profitability. So, they can log in each day and have a full view of all of those variable costs, all of those true margins and contribution margin figures, all the way throughout their business.
Kurt Elster: What was the moment when you realized that you should pursue this? When did you say all right, I’m gonna build this thing?
Thomas Gleeson: Yeah. I mean, a lot of eCommerce businesses today, they are operating on a solid basis, but unfortunately with the nature of any business sub $5 million, it’s gonna struggle to have the resources to maybe pay for an internal data analyst. And okay, I was doing this spreadsheet for my parents for quite some time, and I would often just send the spreadsheet on a weekly basis, but I would get the feedback from my parents that this is just a wall of numbers. I need something to actually bring this together and tell me what’s going on.
So, like a lot of businesses, they’re not getting to the position even where they have that set of numbers, or they don’t know how to actually comprehend what any of it means, so I suppose yeah, I started working on that maybe four years ago. During my time at Shopify, I was doing a college degree at night, so in my final year we had to do a thesis, so I did thesis on actually turning the spreadsheet into a real business, and then towards the end of my thesis I met my co-founder, Carl, who has actually started to work on something similar, and we launched in December of 2022.
Kurt Elster: Oh. All right, so this is a relatively new thing for you.
Thomas Gleeson: Yeah.
Kurt Elster: What were some of the challenges you faced this year trying to build it? Building an app is hard. I assume this is your first. And this one is not simple.
Thomas Gleeson: No, it is definitely not simple. Yeah, look, what are the challenges? I suppose every eCommerce business is incredibly dynamic and unique. There is a lot of similarities. Any business from zero to $40, $50 million on Shopify is using a relatively similar stack, but yet they’re also unique and dynamic. You really need to cater for all those different businesses, their unique needs and wants. They’re all using Shopify. They’re all using GA. They’re all using Google ads, Facebook ads. A lot of them are now using TikTok ads. They all have variable costs and operational expenses, as well.
That part wasn’t too difficult, but I suppose trying to build the edge cases as to how you want to enable merchants to customize the platform to their needs, but also not bring in too much, where you’re trying to solve for everyone. Because unfortunately if you try and solve for everyone, you end up solving for no one because they can’t… The product just gets overly complex and it’s not really much use to anyone at all.
So, we probably made a conscious effort to maybe pull back on going really deep in certain areas for the benefit of everybody else using the platform, so that it’s simple, and easy to use, and that you don’t really need to be a data analyst to understand the platform. You can log in here every day and really just start making decisions off the data that’s there.
Kurt Elster: Right. There are similar tools as far as reporting, analytics, business intelligence platforms, and I find them all so dense, obtuse, and intimidating that ultimately they don’t particularly get used. And so, is there anything unique or special about your software that’s gonna set it apart from those?
Thomas Gleeson: Yeah. Really good question. I suppose we probably conducted interviews with over probably 200 different merchants at this stage. Many of those merchants were using other platforms, as well, and what you’ve just alluded to there was probably a lot of the feedback that we got in that okay, the data is all great here but how do I use it? Because it’s really complex and every business owner, every business we’re working with is going to have somebody using the platform that has a completely different level of experience. We’ve tried to really put a keen focus, I suppose, on the simplicity, really starting with the onboarding down to how the data is actually presented, so that when you do log in… I mean, eCommerce is difficult, but if you can have your data structured in the right way, it’s actually quite straightforward.
There’s probably two ways to make decisions. One is understanding and the other one is by using data. Using your understanding is probably a bit more complex because there’s a lot that goes into that, but if you have your data structured in a certain way, the decisions are often obvious, so we’ve tried to really make that front and center of the platform throughout. Our onboarding only takes probably 10 to 15 minutes and once that’s in place, you can really start making better decisions immediately based on your order level profitability, on your contribution margin, on a business level, on a new customer level, and yeah, to be honest with you I think we’ve done a good job even interviewing a lot of the customers that are already using the platform that we’ve done quite a good job in just making things as simple as possible throughout the platform.
Kurt Elster: It’s a hard thing to accept the phrase fun and easy and unit economics. Those things together don’t really jive for me. How do you think you achieve that? How are you making understanding these things accessible?
Thomas Gleeson: Yeah. I mean, probably the main metric we’re really getting businesses to focus on today, it’s not revenue, it’s not ROAS. It’s actually this thing called contribution margin. So, essentially it’s your revenue minus your total cost of goods. So, making sure that you have not just your product costs in, but your shipping costs, your transaction fees, and your fulfillment fees. And any other variable costs that might go along with fulfilling that order minus all of your marketing costs.
So, unfortunately we have a situation where a lot of business owners are just constantly trying to maximize their ROAS, or maximize their MER, or whatever it is, but getting to understand that absolute value and your contribution margin dollars, or pounds, or euros, or whatever it is, that’s what we’re really trying to educate merchants on trying to understand to grow their business properly. So, again, your contribution margin is your profit before your operating expenses.
I suppose just to give a bit of an example of how I’ve used this at home for our business, our family business is quite skewed towards Q4, so typically, I suppose, like a lot of eCommerce businesses as well, we’d have a quieter summer than we definitely would have a winter, and often over the years we would pull back on marketing spend over summer because the revenue figures were low. But our operational expenses were always gonna be relatively static, so often we’d be loss making or just about break even over those summer months.
But because we have the data at hand now, we could actually see that the underlying unit economics were actually quite strong, but we were only just generating enough contribution margin to actually generate a profit after our operating expenses. So, I suppose this year we’ve really doubled down. We’ve actually nearly doubled or tripled the advertising spend. The contribution margin has been up by about 30 to 40%. But all that increased efficiency is actually just thrown directly to the bottom line because we have the same operation expenses in July that we would have largely in November. Might be a small variance, but it’s immaterial. So, again, we’re starting to see more and more agencies, I suppose, brands get their agencies to report on contribution margin, as well, as opposed to just their ROAS, because it is a really good indicator as to how efficient your marketing spend is as a whole.
And again, not looking at your ROAS as just a revenue number, but your contribution margin as an absolute figure of your profitability.
Kurt Elster: And how do you think that contribution margin aligns with what successful marketers are looking for today as we become more distrustful of ROAS reporting?
Thomas Gleeson: Yeah. Really good question. So, ROAS reporting, attribution issues, they’re well documented. So, the contribution margin isn’t going to take into account anything that Facebook or Google say. It’s literally just taking your total spend, your total revenue minus all of your cost of goods, minus your total marketing spend, and irrespective of what Facebook or Google are gonna say, this contribution margin figure… We’re not listening to any of those platforms. This is actually what’s left at the end of the day. And as long as we can keep increasing spend and that number keeps going up, brands are scaling their ad spend in the confidence that they’re doing the right thing for their business.
Kurt Elster: And if you’ve done 200 interviews and this thing’s been running less than a year, any success stories to share from a brand that’s been able to use this to really understand and grow?
Thomas Gleeson: Yeah. One brand we’re working with in Ireland here at the moment, they probably had been putting too much faith in their agency to just report on the ROAS and their revenue numbers of the business. But I suppose once we’ve really dug into the platform, we could see from their Facebook and Google ads account that they were definitely underspending in a lot of areas and trying to actually maybe reduce the scale of the spend to improve the ROAS.
So, for instance, they might want to spend 10K this month, but actually spending 15K at a slightly less ROAS was going to result in a much higher contribution margin for the business at the end of the day. And that business is actually… I think their profits have gone up by 80%, 90% this year, year to date. We started working with them in January. They were one of our pilot users. So, we’re just about to release a case study on them in the next couple of weeks I’d say, hopefully they’ll allow us to put their name to it, but yeah, it’s worked really, really well to be honest with you. But again, it’s partly been a bit of a mindset shift in this idea of contribution margin sounds like a real accounting term. But essentially, it’s really, really important for every eCommerce business to really understand. Okay, as these ad costs go up, and as your supply chain costs go up, what is the maximum profitability of this business before my marketing, before my operation expenses? And once you can understand that and get into that frame of mind with your marketing spend, it’ll just enable you to grow your business a hell of a lot more.
Kurt Elster: That’s gotta be rewarding. Your experience, your theory here on how to calculate business KPIs for a business intelligence dashboard, has helped an eCommerce brand succeed and be more profitable. That’s gotta be rewarding.
Thomas Gleeson: It is. It is. And really, it’s at the cornerstone of everything that we’re building in that if I knew how to actually think about unit economics and contribution margins seven, eight years ago, we would have grown massively at home for our family business. But I didn’t, and this area of a weird intersection between marketing and accounting is probably only starting to come to the fore now for a lot of brands, and I just see that over the years I’ve probably seen so many brands that probably haven’t done as well as they could have done because maybe they hadn’t got their data in the right place. Maybe they were focusing on the wrong metrics. But Facebook and Google are still gonna be the most probably desirable channels or the most profitable channels for most businesses, but they’re still… There’s still a lot of confusion for a lot of businesses out there in not fully comprehending what those unit economics or profitability actually look like.
So, I suppose we’re just trying to bring the tools I would have seen at higher level Shopify stores to the masses so that every eCommerce business can be in a position that they can just log in every day and actually see the numbers that matter to them and how they can scale their business by doing so profitably. I mean, a lot of SMBs in particular, scaling your ad spend is terrifying. You want to add an extra zero to my Facebook ads budget? That’s terrifying for a lot of eCommerce businesses. But you can actually have your data structured in a way that you understand the true impact from a profitability perspective. I think you’re just in a much better position to grow your spend confidently with a lot more clarity, as well.
Kurt Elster: What’s your vision here? You’re early on, but where do you see StoreHero going? Where do you want to go next with this?
Thomas Gleeson: Yeah, so at the moment we have about 50 paying customers scattered throughout Ireland, the U.S., Australia. We’re really trying to hit the U.S. a lot harder in the next couple of months, as well. We’ve actually just launched a white labeling solution for agencies, as well, so they can actually white label the StoreHero platform and just start reporting on that contribution margin figure for a lot of their brands, as well.
We see AI as a massive play down the line. We don’t want to get distracted by it right away. We have a hell of a lot of work to still do. But we think about AI… I think the best businesses are gonna be built with the fact that they have a proprietary data set built within it and I think we’re confident in that, in that we’re pulling the most important data from all the resources that eCommerce operators today are operating with, and I do think down the line that it will be a massive play for us in the AI space.
Kurt Elster: You know, my experience with ChatGPT suggests it’s really bad at math. Phenomenal at copy editing. Math? You can really throw this thing for a loop with just some basic arithmetic. I don’t know that I want… I’m not ready to have ChatGPT do my bookkeeping yet.
Thomas Gleeson: No, no. Absolutely not. Absolutely not. But that’s probably why we don’t want to get distracted by it right away. We do see a big play for it down the line. But like anything, it’ll get a hell of a lot better down the line, so we’re probably just trying to wait around for that a little bit.
Kurt Elster: For sure. And all right, if you could give one piece of advice to our listeners, what’s the thing that they need to know to thrive in eCom with a Shopify store?
Thomas Gleeson: It’s not rocket science. Genuinely. You need to start getting away from revenue numbers and focusing more on your profit numbers. This has never been more important, I suppose, in today’s landscape where your ad costs are through the roof, and generally the cost of business is going up. I think over the years a lot of businesses have probably got away with having those marketing and finance functions operating in silos. That was probably masqueraded by cheap ads and ROAS on Facebook over the years, whereby your marketer didn’t need to speak finance and your finance team did definitely not want to speak marketing. So, trying to get those two functions in unison, I think, is how the best brands are going to grow today.
Kurt Elster: That is fabulous advice. And for your service, how do we find StoreHero?
Thomas Gleeson: Yeah. Perfect. You can catch us over at StoreHero.ai, or you can catch us on LinkedIn, as well.
Kurt Elster: So, in my notes here I see you have a special offer for our listeners. Tell me about it.
Thomas Gleeson: Yeah, so for today’s episode, anyone that comes on and will mention The Unofficial Shopify Podcast, we’re actually offering 20% off, and monthly consultation calls for the first three months to really dive in and help you understand all of the key metrics that matter to your business.
Kurt Elster: A fabulous deal. StoreHero.ai. Check it out. Oh, there’s AI in the TLD. Oh my gosh. Thomas Gleeson, StoreHero, thank you so much. And to our listeners, if you enjoyed the episode, subscribe. Swipe up on the show art. Check out the show links. Leave a review if you listen on iTunes and it supports that and you’re feeling charitable. Or join our Facebook group, Unofficial Shopify Podcast Insiders, and we would be happy to have you. Until then, keep selling, my friends.