Podcast transcript
Introduction
Hi everyone and welcome to another episode of Marketplace Masters, the show where we uncover really working for modern e-commerce operators and agencies.
Paul Sonneveld
I'm your host, Paul Sonneveld, and today we're gonna take a closer look at something that sits behind every growth story or every struggle, your profit and loss statement. Whether you're an Amazon seller, DTC brand, or operator running multiple channels, understanding your P&L is the difference between short-term survival and long-term scale.
That's why today, I am joined by Sam Hill, Sam is the founder and CEO of Ecom CFO. Sam works with a whole range of e-commerce brands every day to help them clean up their numbers and unlock real profitability. He's just released the Q1 2025 edition of his P&L benchmarking report. Very interesting. One of the best looks you'll find into what's really happening financially in the e-commerce space today. Sam, welcome to the show. It's absolutely great to have you here.
Sam Hill
Thank you so much for having me, Paul. Yeah, I like to think that we're the only place that you could actually see this data. That's the ultimate goal.
Paul Sonneveld
It's a great report. I've read through both your report from last year and the Q1 edition, and it's really fascinating reading. So can't wait to dive into that. Before we do, quick reminder to our audience, this is a live episode. So use the LinkedIn comment section to ask your questions or the YouTube comment section to ask your questions and we'll do our best to answer them or I'll do my best to get Sam to answer them. Let me just rephrase that. Awesome.
All right, Sam, let's just jump in. Before we get into the numbers, I'm just curious, right? You're a business owner. I know what it's like running a business. You're always busy, busy, busy. Why did you even do this whole benchmarking exercise? It's an enormous amount of time that goes into it. Lots of data gathering. What drove you to start this benchmarking initiative?
Sam Hill
Purely selfish.
Paul Sonneveld
Honest answers are good.
Sam Hill
Well, I mean, we're called Ecom CFO. Oh, we might've just lost Paul, but I understand the general direction of where we're going. I'm still here. I'm just putting the spotlight on you there. Oh, thank you so much. I was on another podcast and the host had internet problems. So I just started ranting for 20 minutes until he came back and hopefully gave the audience some value.
So yeah, so why did we do this? I literally get the same questions over and over and over again every time our firm talks to clients during financial reviews. And that is, how do we compare to others? What are you seeing in the market? And I finally said, why don't we answer this question more definitively and systematically for all of our clients? and for the industry at large to see here's what happened, here's what changed, and here's our analysis of the situation.
And so we put out the first one in January of this year that covered all of last year compared to trailing 12 months of the prior year. And now we're getting better and faster about publishing these. And this latest one that is really, this is the first time I've talked about the benchmark report publicly, so pretty excited. And this covers Q1 of this year versus Q1 of last year. And we're going to continue to do this quarter in and quarter out because again, I'm selfish.
We obviously want more business, but I also just I feel like that this is really needed in the market because you can go on Twitter X, LinkedIn and get screenshots and you can be in WhatsApp groups or the different e-commerce groups. see a lot of anecdotal or fragmented data, but we're trying to aggregate everything and give people real actionable insights and benchmarks that they can literally compare themselves to today and be able to make better decisions, plain and simple.
Paul Sonneveld
Yeah, yeah, absolutely. And just to note to our audience, if you've registered for this podcast, either you're watching live or afterwards, you will get access to the report as well. We'll make sure that we include that in the emails that go out after. So you are actually, it's not officially released yet, so you're actually probably the first to get your hands on the report before anyone else does. Sam, just a quick question. Methodology. How did you collect the benchmarks? What was your approach here? Just briefly.
Sam Hill
Yep. So, um, this is incredibly important because anytime you pick up a industry report or really a report of any kind, or even if you're just looking inside of MerchantSpring or Shopify or Amazon, knowing how the data is aggregated, what are the formulas involved, what is the time period? This is one of the most important things to understand because if you don't understand the methodology, then the data is completely meaningless. So we took about 20 of private company data and we made sure that it was apples to apples. All of our clients look at their information a little bit differently, but we want to make sure that it's consistent and give the industry the best apples to apples view as possible.
The Q1 report is just private companies. So, you know, we tried to look at less than $10 million businesses, $10 to $50 million businesses and $50 million plus. So we’ve segregated it by revenue cohort. Now, there's an added little twist that I think is not as relevant, but really interesting, and that's looking at public companies. So the elf beauties of the world, the Lulu's, the Yeti's, you can still compare yourself to these public companies. Now, how relevant that is to you is a different story.
But I do think it's really important and really interesting to read some of the public company 10ks and annual reports, especially in the particular vertical that you may play in if you're in apparel or wellness or particularly if you're in beauty. Go read Elf Beauty's 10K annual report. I mean, there's a treasure trove of information that's completely free and easy to access in about 10 seconds. So go read our report and go also read some public company reports. It's just going to 10x your data literacy.
Paul Sonneveld
Yeah, look, that's a great practical tip. You know, a lot of these companies, obviously they have much larger teams. They spend a lot of time preparing things, making sure everything is accurate, giving those industry insights.
Sam Hill
Yeah. Oh, sorry. Sorry to interrupt you, Paul. I just thought about this because you had a lot of global viewership because you are not American as we can tell, but a lot of non-Americans don't know where to go in the US to find those public company reports. I was working with a Dutch company actually that they were in the cosmetic space and they said, oh yeah, we aspire to be XYZ company. And I said, okay, are they publicly traded? And they said, yeah. And I go, okay, cool. We were on Zoom together and I just went to sec.gov and pulled their 10K.
And this particular client was just completely blown away because they didn't even know that data existed. So I know that each country's reporting requirements are different, et cetera, et cetera. But if you are not an American and unfamiliar with the SEC and the way that the US publicly traded stocks work, all that data is publicly available.
Paul Sonneveld
Yeah, sec.gov. Great tip. All right, well, let's dive into the report, Sam. You've just updated, you've got your Q1 data and report hot off the press, so to speak. To you, what stood out as new or unexpected compared to the benchmarking exercise you did in 2024?
Sam Hill
Yeah and. I think it's maybe a good idea just to do a little bit of showing instead of doing the telling so if you don't mind Paul I'm just going to share my screen just to give the audience a little bit clearer picture of like what do we even mean by a benchmark report what does this even look like what what am I talking about is this this large enough we need to increase it a little bit more.
Paul Sonneveld
I think we're good for now. Yeah.
Sam Hill
OK, great. If you only saw one set of tables or one piece of the benchmark report, this is where I would live. I mean, this entire thing is, I don't know, 30-ish pages. But this is the main thing that you need to know or your audience needs to know in one page. So what am I looking at? I'm looking at three tables. Each table is set up exactly the same. The one key difference is the revenue cohort.
So this top is the less than $10 million annual revenue cohort, the 10 to $50 million revenue cohort, and the over $50 million revenue cohort. And it shows the Q1 average for this year, the Q1 average for last year. This is a little bit statistician speak, but important. This is the absolute change and the percentage change, because both of those are really important and I think tell a little bit different story.
We don't need to go into all of that, I mean, you can plug this in and ask chat GPT as Paul you've already started to do and ask what is the difference between absolute and percentage change, but all of this is here and this really tells the story of the quarter. If you just want it read to you or you want to read it in words, here are the key themes for the quarter. And Paul, do you? I'm happy to continue walking through these, or if you want to pick out some of your favorites, either one?
Paul Sonneveld
No, look, I think obviously we've had a lot of uncertainty in the first quarter, right? So I think the question I'm really interested in is what's changed? What change have you seen looking at the benchmarks for 2024 and now, you know, Q1, you know, what are the big things that you point to and go, right, this is something's changed, something's different here. good and bad actually, or surprises that would be really useful.
Sam Hill
Yep. So also keep in mind just from a methodology perspective that all the tariff news really did not come about until late Q1 and more into Q2. Uh, so we have to, you know, kind of put that aside. Um, just, you know, I think really the most important story is point number five, that EBITDA was a mixed bag. Um, the story that I'm hearing from our clients over and over and over again are is last year was pretty good. But Q4 was either okay, slightly above or slightly down from Q4 in 2023.
And I don't think that our clients and the industry at large cut fixed costs deep enough. And that has really drug profitability and in this case, EBITDA down. Because the contribution margin was either flat or up kind of depending on where you fall in the cohort. But if you've added a lot of fixed costs hoping that Q4 was going to be amazing or hoping that 2025 was going to be better and it hasn't been, then I think, you know, and I'm a founder, you're a founder, we always are optimistic. But sometimes I think we need to rethink our fixed costs and live to fight another day.
And again, I'm just hearing conversation after conversation of, Ooh, like I'm not hitting my forecast. And so now I'm, I have too much fixed costs and I've got to do something about it. And unfortunately, a lot of times that is people. And so that kicks off a whole other, you know, just psychological effect and morale, et cetera, et cetera. But I think that is the biggest theme for the quarter and, you know, past Q1, what I'm seeing right now with our clients.
Paul Sonneveld
Yeah, thanks for that. That's obviously in the context of declining revenue. So I think the thing that really struck out to me in terms of that report, I don't know if we can bring those tables up again shortly, is looking at those different cohorts, quite different stories when it comes to a year-on-year revenue. Some quite dramatic stories I might add, actually. I certainly noticed, as I was looking through this, quite a big difference between the under 10 mil cohort up marginally, up 5%, or I shouldn't say marginally, that's a great result, I wouldn't lie for that.
Then that middle band really kind of flattered down, but then the 50 plus cohort seems to be, I think the technical term for it is that they've smashed at least the revenue numbers, right? you know, for me, there's a really interesting question here. Why are these trends not homogenous across all cohorts? And, you know, what do you think explains particularly that middle cohort being a little bit lackluster?
Sam Hill
Yeah. So, I mean, let's, let's look at the over $50 million cohort to start. And you know, this, this is the same theme that we saw in our annual benchmark report last year that really kind of the rich got richer. I mean, they have so many more resources to be able to, they usually have I mean this is only PNL benchmarks, but they also usually have stronger balance sheets. To be able to weather the storm longer, invest for longer hire more people, you know, they have the the balance sheet to be able to create their own content studios or you know go launch into do more wholesale and take more market share.
So there is a lot of advantages to being larger in e-commerce, especially because my fixed costs are so much lower as a percentage of revenue. I mean, if I look at the over $50 million cohort, their GNA or general administrative expenses are 6%. Whereas you get into the 10 to $50 million band that, you know, they're in the high teens, low twenties, and then you get in the under 10 and it's 30, 40% of revenue.
So, you know, because you still have to have, there is a floor of fixed costs for running an e-commerce company, period. You've got to have customer service. You've got to have operations. You've got to have, you know, a bunch of software to run your business. So there is a floor for those fixed costs. And once you have more revenue, then that becomes a much smaller percentage and you just have more dollars to invest. So I think that's really interesting.
I think going back to the net revenue growth story here and why this is different, for the under 10 million, I find that these companies are usually just more nimble. So they're able to respond faster than the step up, the middle cohort, the 10 to 50 million. And then the over 50, I mean, yeah, like wholesale, for example, has was a big theme for the year.
They're able to launch a lot of new products, whereas the companies in the under 10 and 10 to 50, they're just, you know, holding on and trying to optimise ad spend and optimise what their current systems are. they don't have the additional bandwidth to then say, Oh, okay, well, I also need to launch these 10, 20 new products this year. So I think those are some of the big themes.
Paul Sonneveld
I noticed on this table here, you use contribution margin and I feel like that's a term that's, that's often misunderstood. And I can see here there, some of these cohorts actually managed to improve their contribution margin, you know, year on year, particularly the middle one. I can't see the bottom one there. Others haven't. What, I mean, I'd love for you to just explain, like, how do you explain contribution margin to your clients, where there's misunderstanding? And what do you see in terms of these cohorts, right? What are your whether your clients or publicly available companies there, what are top performing brands really doing to improve their contribution margin here?
Sam Hill
Yeah. So contribution margin is probably the most important and also the most misunderstood, I think, in our industry. Several articles about contribution margin. Very simply, our definition, some people have different definitions. So again, going back to that methodology, we always have to make sure that we're apples to apples. But our definition is contribution margin is the cash leftover after all variable expenses.
So the biggest variable expenses are product costs, pickpack ship, ads, merchant fees. Generally speaking, there's some others, but we don't have enough time. So that's enough. Some people, you know, we have a debate about, okay, what do I include? What do I not include in contribution margin? That is much less important. What matters is you define contribution margin for yourself and that you're tracking and managing the same set of metrics with the same calculation, month in, month out, week in, week out, year in, year out. So that's the most important thing.
So I think in terms of, I'm going to skip the question at least for now on how to improve. The, I think the most important thing that I still see issues with is just understanding what my contribution margin is. And this other very basic question about what is good. So if we take a little tour in the benchmark report down to, we have a contribution margin section. And not only do we present the data, but we also present the percentiles, which I find, more importantly, our clients find particularly helpful.
Sorry, I got this weird… thing in the way when we try and hover over it, but yeah, so, so contribution margin percentage, we have the fifth. So the worst performing companies, the 50th, so average, and then the 95th, the absolute best companies and what their contribution margins are. So you'll notice, you know, we generally say 30% is the target and then anything over 30%. is great.
Once you get honestly into the 40s, the 45s, and definitely the 50s, I think it's actually bad because it means that you are probably under investing in the business. So you need to probably spend more on ads or change up your offer in some way, or maybe it's time to take that money and invest it elsewhere.
And then certainly on the flip side, you'll notice in the fifth percentile that all three cohorts are in this 10% range. So if your contribution margin is 10%, we have a real problem. And we need to really go back to the drawing board about what my unit economics are, what my pricing is, what my discounts are, what does it cost to fulfill my product?
And, you know, the business is most likely a lot less sustainable, you know, in the immediate term, we need to take immediate action if contribution margin is that low. And so, again, just using this benchmark report to orient yourself and define, OK, is it good? Is it bad? Where do I need to allocate my resources? I mean, those are all the important questions that I'm asking our clients and our clients should be asking themselves.
Paul Sonneveld
Yeah, it's certainly high single digit or really low double digit contribution margin. It's going to be challenging to keep the lights on, right. And to put to cover that fixed over it, obviously the size of the business. And, you know, there might be certain distributed type businesses or wholesale businesses that where this makes sense, but, in general for sure.
Which sort of brings me onto the next question I was going to ask you around blind spots. I mean, you sit down with e-commerce brands all the time. You know, and when you're, we're sitting down with them and reviewing like PNLs for the first time, you're talking to their CFO. What are the biggest blind spots that you notice? I mean, what, what are people just not looking at, or maybe just not focused on, what are those maybe light bulb moments in the minds of your clients when you meet with them for the first time?
Sam Hill
I have two quite unfortunate stories in the last month that just make the blind spot question very, very apparent. We've had two clients that I've had had some really hard conversations about, because the business is failing and they're at a point where we have to decide who we're going to pay. Are we going to pay the credit card companies? Are we going to pay the SBA? Are we going to pay the suppliers? Are we going to pay people? What are those order of operations?
And in both of these cases, the founders put in a lot of effort day-to-day and they worked really hard day-to-day and on the things that they thought would move the needle and they didn't give the financials the attention that it deserves. And that is required. And so you can put in all of the effort in the world, but if you're not reviewing the financials, if you're not understanding, am I making money? How is cash moving? Do I have enough cash? Then all of the effort that you're putting in to optimize your product listings, to optimize the website, to play around with the latest and greatest AI tool, all of that is irrelevant.
And so whether it's our firm or someone else, the most important thing that you can do is actually face your numbers. And because a lot of, and our clients are not that different, that part of the reason that they pay us is for accountability. It's because they have to face their numbers every month. I just encourage everyone, including myself, even though I run a CFO and accounting firm, I also fall prey to this. I want to go work on the fun marketing stuff and come on Paul's podcast.
But I need to make sure that I'm reviewing my numbers and understanding if we're profitable or not. Are we hitting our targets? Yes or no? And why? And I need to dedicate that time to make sure that I understand my financials because the universe doesn't care. The universe doesn't care how hard you're working. The universe cares about results and is going to reward you for results, period. And so it is on you. The financial viability and the financial performance of your company is on you. It is your responsibility. And if you don't take care of your numbers, someone else will, and you're not going to like it.
Paul Sonneveld
Yeah. Yeah. And that point, it might be too late. There are some good, maybe sometimes hard to hear words of advice, but yeah, I'm certainly having a regular cadence and, a good person in your business or, you know, working with a partner, someone like yourselves, really to hold you accountable is absolutely critical. I'm a bit like you. I'm not great at it, but luckily I, my business partner, he is really good at this and he forces me to sit down at least once a month and we go through this. So it's a good cadence.
Which brings me onto kind of the next, my next question as we sort of looking to wrap up here. Clearly, the economic uncertainty continues. As you mentioned before, we haven't seen the full impact of tariffs and the likes. To me, it feels like financial management of your business is more required to a greater degree this year than even last year. If a brand is really looking to restructure or really tighten their P&L this year, what are the top three areas that you'd recommend they focus on?
Sam Hill
Yeah, I've been thinking about this question myself. It's Again, it really just goes back to number one, do I need to make sure that I understand where I am today? Am I profitable? Yes or no. How much runway do I have? If I'm not profitable, um, so do I have two months of expenses, three months, three months of expenses, six months of expenses, et cetera.
I think before you even look at the P&L, I think times like these are a great opportunity to get back to basics. And by that, I mean, I was just on a client call last week and we were looking through his returning customer data and Shopify shows you the phone numbers of the customers. And I challenged our client just to call this customer. This client is a 30, $40 million business. They have a big team. He hasn't talked to a customer in probably three years. And I just challenged him to pick up the phone and call him. And he kind of hesitated and I said, okay, cool. I'll call him.
And so we were screen sharing and, I just started calling the first customer. And five in a row didn't answer. I have a random Alabama number. No one's going to answer. No one’s going to answer the phone from a random Alabama number. And then the sixth person picked up. And the guy was in, I think, New Jersey or Massachusetts or something. And I just said, Hey, I'm XYZ CEO of XYZ. Just want to thank you for your business. I'm the CEO of the company. I'm trying to improve our company. I would love to get your feedback on your experience, what we can do better, et cetera, et cetera.
And, the guy, he wasn't really willing to talk, but he just said, thank you. You know, I'm busy. Bye. But the point is that some of those customers are going to answer and some of them are going to talk to you if they're really happy or they're really pissed off. And I think getting back to that, why do customer, why are customers buying from you? Who are they? What are they like? What are they not like?
Just getting as close to the customer as possible before you think about, Oh, I'm going to change this button on this web. Or I'm going to use this new AI tool to do whatever, like, let's get back to why or what value are you providing in the world? And then we can, you know, also look at the P and L and say, okay, do I need to cut $10,000 a month? Do I need to cut $50,000 a month to maybe weather the storm? And then it's not going to be fun.
And you might impact somebody's life because, you know, I have families that I support and my company and you do too, Paul and, and our clients, our clients do too. That sucks. Um, But if you run your business into the ground, then the game stops for everybody. And we've got to make some hard choices. So, I think those are the conversations that that's really. No one's having in our industry or they are just behind closed doors because it's not fun to talk about bad stuff. Um, in a DTC e-commerce land, everybody's, you know, always up into the right, but these are the hard conversations that, that we need to be having.
Paul Sonneveld
Yeah. No, I think that's wise words there. Going back to what are the real pain points we're solving? Why are customers with us going down back to basics? And then, you know, I guess trimming, if you do have to trim costs, trim around that so that you can continue to deliver on that sort of solving that key pain point. Yeah.
Sam Hill
Yeah. And I don't know how much, well, I'm sorry that we're a little over, but, um, I've been reading a lot more history lately. And one of the greatest business books that I've read of all time is house of Morgan by Rob Chernow. And it's the history of JP Morgan as the enterprise and less of the person because there was multiple Morgans, et cetera, et cetera.
But what's given me a lot of hope is that JP Morgan started their business started by selling civil war bonds in Europe. And then they went to the Industrial Revolution and made money in a very different way. They went to World War II, made money in a very different way. Through the 50s and the 60s, they made money in a different way.
And today, they're JPMorgan Chase. We're never a retail bank for the vast majority of their 100 plus year history. So the best business owners are going to figure it out and make money and drive profitability and sustainable growth. It's just probably going to look different year by year, decade by decade.
And if we zoom out and picture ourselves in 50 years, how we make money and the value that we provide to the market today, probably going to look a lot different tomorrow. So a lot of hope and confidence that whatever the storm is, whether it's macro and tariffs, or if it's your Facebook ad account got shut down, it's all problems and they're all solvable. And the best founders are going to figure it out.
Paul Sonneveld
I think that's a great way to wrap up, Sam. Some good and encouraging words as many brands sort of try and weather some of these storms of uncertainty. So thank you so much. Appreciate you bringing the clarity, the data, and the insights to a topic that many in our space really need but don't always prioritise, as you said before, or always completely understand. Thank you for being generous as well and sharing your Q1 report. I really like how it brings like really a fresh lens on what does financial strength really look like going into this year. And we'll make sure to include it in the show notes in the email that goes out as well.
Sam Hill
Amazing.
Paul Sonneveld
Sam, thank you so much for joining me today. I really appreciate it.
Sam Hill
Thank you, Paul. Yeah. See you next time.
Paul Sonneveld
Take care. All right, everyone, that is it for today's live episode of Marketplace Masters. For anyone watching live or on the replay, as I mentioned before, we will link to Sam's full report and also provide some ways to connect with Ecom CFO as part of the episode descriptions and the like. Of course, don't forget to subscribe to Marketplace Masters either on YouTube or head to our website and check out our full library of episodes at merchantspring.io.
And of course, if you are a brand or an agency and you really want to get a better handle on your financials, specifically on the likes of Amazon or Walmart, feel free to head to our website and check us out. We'd love to give you a tour of our products. I'm Paul Sonneveld and see you next time. Take care.
