Podcast 20: Three Growth Paradigms – How to Think About Rapid Growth

Everybody, welcome to the Nerd Marketing Podcast. This is Drew Sanocki, live. It’s not live. If you’re listening to this at some point, it’s not live. What do I say? Podcasting from New York City. It’s better if it’s live from Times Square. Live from Times Square, this is Drew Sanocki, the Nerd Marketing Podcast. That sounds better. We’re going to say it’s live, even though it’s not, obviously by the time you’re listening to it, but hey, everybody, this is Drew Sanocki. I’m broadcasting live from Times Square, New York City, center of the universe. We’re talking about growth. We’re talking about eCommerce, and today’s topic is karmaloop.com. It’s going to be the next episode’s topic and the next episode’s topic.

Basically, we’re going to walk you through what happened at that retailer, so this was a bankrupt retailer last summer in June 2015, losing hundreds of thousands of dollars a month. I want to say 500K. Don’t quote me on that. I was part of the team that went in and purchased the company out of bankruptcy. I came on board as the CMO, and within 10 months, we had gotten the company to break even, sold the company for more than we bought it. I can’t get into details, but this is the story. That’s an amazing growth story, and probably the most important thing is I’m not an idiot. We just got confirmation that I am not an idiot because the stuff I teach on this podcast actually worked at this retailer, so there is your stamp of approval. I know what I’m talking about as evidenced by this latest case, but we’re going to dig into that.

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We’re going to talk about growth, how I think about growth when I go into a new company like this, how you can think about growth at your own retailer, getting some really good successful things happening in a short amount of time. I’m going to talk to a couple of people at Karmaloop about what happened in their part of the business, but the topic of this episode is really … Let’s step back a second and talk about growth paradigms. What is the perspective I have when I go into a company? I work for a private equity fund now, so if they hire me to go into a company, they want what’s called 100 day plan. They want an immediate ROI in their acquisition. They want to really move the needle in a short amount of time.

It’s a mindset I take with me when I start my work, and it’s one I think any of you who are running your own business can adopt and really think about how to move the needle. When you think about growth paradigms, I think about three main categories. The first is tactical. Tactical growth strategies are really what you read about anywhere online. Choose a growth hacking blog. These are the tactics. This is about optimizing what you’ve got to get more growth. What color works best to increase your checkout conversion rate? Or where should your email opt-in form go? Or how should you structure a product page or cross sell or within your Facebook ads? How many characters are the best in a headline? What color images work best to garner higher clip through rates?

These are all tactics, and there are many great blogs out there that lay these out. Some of my favorites are Quick Sprout, Neil Patel’s blog, or Ryan Dice over at Digital Marketer. There’s no shortage of tactics. On one hand, that’s the benefit because whenever I read these blogs, I get inspired. I learn new things. It’s also the drawback because too many tactics can be overwhelming. I call it tactical maneuver hell. I go to a conference or I read a blog post. I end up with hundreds of tactics that I could try at my own business. I have no idea how to sort them, where to start, and it really stresses me out. There’s always that creeping feeling, like you’re not doing enough.

There are guys out there like Nemo Chu and Sean Ellis who are just great growth minds, and they have this framework for sorting through the tactical maneuver hell. Nemo talks about putting all these ideas up on a board, sorting them by using a implementation and expected payoff, and basically working from the top down. It’s an approach he used at Kissmetrics. Sean Ellis articulates the same thing in his ICE score, so you can look up that, but both these guys are talking about ways to get through the chaos and the chaos being all these growth tactics that you can implement.

Another issue with the tactical approach is that, number one, it’s overwhelming. Number two is that the focus tends to be really on revenue and user acquisition and just really getting some quick wins there. It’s not often on return on ad spend or it’s not often on lifetime value or profitability. Again, I’m generalizing here, but focus tends to be a little bit more on revenue than profitability.

The second category are strategic growth paradigms. In case you can’t see me right now, I’ve got my MBA hat on here. It says Stanford MBA on it. This and $2 will get me a cup of coffee, but this is the stuff we learn at business school, which maybe if I became the global head of eCommerce at Pepsi Co., I would be using this, but I think it’s a little bit less relevant to the everyday small business owner, but these are things like … Here are some great ones. Michael Porter’s Five Forces. If you have heard of him, great. He was an HBS professor who laid out five forces that determined the ultimate growth and profitability of a business, buyer power, supplier power, competitive rivalry, threat of substitution, and threat of new entry.

The logic is if you’re suppliers are powerful, they can dictate terms to you, drive up their prices and drive down your margins. If there are a lot of substitutes to your product, then your margins are going to be lower. If there’s a low barrier to entry in your category, then your margins are going to be lower and growth would follow from that, so that’s Michael Porter’s Five Forces. Another great book is Good to Great by Jim Collins. Jim Collins looked at hundreds of growth stories where he looked at these companies that were growing year over year over year through booms and busts and he distilled it down to a handful of factors that predict and sustain growth.

One of my favorites is his concept of a hedgehog concept or this flywheel of growth, and what he means by that is the growing companies are the ones that do one thing very well. It’s a thing that lights their passion, a thing that they can be the best at the world at, and a thing that makes them money, so if you get those three things together, passion, best at, and makes them money economically, you’ve got a flywheel of growth and that’s something that sustains growth over time, so that’s Good to Great by Jim Collins.

One of my favorite growth books is by this guy named Victor Chang, former McKinsey consultant. He wrote Extreme Revenue Growth, and this is a bit more of an encyclopedia of growth techniques and strategies, but if I were to sum it up, I’d say that my big take away from that book is that you got to focus on customers that have a burning problem, number one, and then even more important than that is the growing companies are the companies that have a distribution advantage in getting close to that customer and selling that customer their solution. Distribution, in particular, is something that not a lot of companies think about because most of the people listening to this podcast, we’re all online. Our distribution is the Internet, but if you can get a distribution advantage, it really, really helps grow your business.

I like to talk about OPN, other people’s networks, so as a distribution advantage, the more you can leverage someone or some other property that has a distribution advantage, the better you’re going to grow. The immediate example that comes to mind is really influencer marketing or celebrity, like look at what companies like the Honest Company did when they leverage a celebrity’s distribution advantage, but it doesn’t have to be just a celebrity. Power distribution, Extreme Revenue Growth by Victor Chang.

These are great books, and I don’t mean to throw the strategic category under the bus. They’re all really great books. I enjoy reading all of these things, and when I ran my own business, they all helped me think through strategically how my business could possibly become a hundred million dollar, billion dollar business, like that, and you’ve got to devote some time to those thoughts. What you’re not going to learn from the strategic category though is how to manage a Facebook ad or how to build out a simple online marketing funnel.

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I don’t have my glasses on. Is that Jim Collins in there? In Power Editor? Is that Mr. Collins over there? You got Power Editor open, Jim? No, no. Victor Chang’s not at home right now tweaking his email subject lines. Maybe he is and he’s listening to this podcast and now he’s pissed at me, but I’m guessing that he’s probably not, so you’re not going to get that level of implementation in tactics from the strategic category.

The third category is one I happen to be partial to. I call it the operational or campaign category, operational level, and really this sits between strategy and tactics. I think it marries them very well, and I’ll summarize it as follows. There are really only three ways to grow a business mathematically. Increase the average order of value, average order size. Number two, increase the frequency of purchase or the number of purchases per customer over time. Number three, increase the total number of customers. Those are three buckets, and all the tactics from the first category of growth, the tactical paradigm, they all really can be fit into one of those three buckets, and these are powerful because you don’t need massive change in order to double the size of a business.

Here’s the math. If you increase average order of value by 30%, which is more than doable for any company in a year, if you increase frequency of purchase by 30%, in other words, bring 30% more of your customers back to buying again, again, easy to do in a year, and if you increase the total number of customers for your business by 30%, this is probably the easiest to do because you just pay money to get more customers to your business, although it’s the most expensive, then you’ve doubled the business. The math is, and if you don’t believe me, 1.3 times 1.3 times 1.3 equals 220%. It’s pretty cool, huh?

What I like with this operational category or this campaign level category is you go into a business, you bucket all the marketing tactics, and you think about strategy, but really you bucket them into these 3 categories, AOV, frequency, and number of customers. You sort them within each category and you pick off the best. You pick off the best tactics first. Your goal is to increase that bucket by 30%, and then you move on to the next one. I like working from back to front. In other words, most businesses think they need more customers. What they actually need is more revenue, and to me, that means if I optimize my average order value, optimize my frequency at purchase, which is really retention, then I’ve got a great engine when I go to buy traffic or to acquire more people on the front end. That is the operational level.

As far as what’s best for you, strategic, tactical, or operational, it really depends on your own business and where you are. If you are the CEO of a potentially billion dollar business someday, if you’ve just got something great going on, you probably will enjoy geeking out on the strategic category of growth strategies and just thinking about what Collins would do in your case. If you, on the other hand, are in the weeds a little bit more, if you’re the marketing implementer, you may be attracted to the tactics. You might get lost on Quicksprout or Digital Marketer and really geek out on that stuff. If you’re the private equity investor, that brings us back to our Karmaloop story, I think you’ll like the operational level.

The private equity funds want an immediate return on their investment. They want to buy a retailer like Karmaloop, and within 100 days, they like to see a plan that really gets them an ROI on that acquisition. That tends to be the mindset I adopt in a case like Karmaloop when I go in as the CMO. How am I going to double this business in 100 days. I take that operational framework, AOV, frequency, and number of customers, I bucket all the tactics, and I get to work. You rarely double the business in 100 days, but believe me, you move the needle. Karmaloop, we moved the needle, and in 10 months, sold the business again. In the next couple episodes, I’m going to start detailing how exactly we did that, what worked and what didn’t.

In the meantime, if you want a summary of this episode, you should go to nerdmarketing.com/the episode number, I believe it is 20. I could be wrong. Yes, I think it’s 20. Go to nerdmarketing.com/the number 20, and you’ll get a cheat sheet, which summarizes everything I’ve talked about today, as well as the transcript for this episode, and I’d say if you’re thinking about starting or just getting started in eCommerce, if you’re a newbie, check out nerdmarketing.com. Go to my start here page, and on there, I’ve created some cool resources. One is a nice tier sheet on my top 5 eCommerce marketing tools. These are free tools I use every day to grow a business. Another one’s my million dollar business cheat sheet, and that details the story of how I got from zero to a million at my first retailer in a year.

Both are going to help you launch and grow your eCommerce venture. You’ve already got a successful eCommerce business and you’re doing 7 figures per year and want to get to 8 or 9, I encourage you to check out my Growth Machine Mastermind. This is a play by play of what I talked about today. It’s the exact process I used at Karmaloop. The Growth Machine Mastermind is a full year where I walk you through how to double your business and we do it together. You can find out more information about that at nerdmarketing.com/mastermind. Lastly, for those of you on a mobile device right now, if you text nerdme, one word, nerdme to 44222, again, that’s nerdme to 44222. I will text you back with all my freebies and downloads for this episode. Thanks for listening. Again, next episode, we’re going to get a little bit more into the Karmaloop story and how we moved the needle there, so tune back in. Thanks.