What it really looks like when an Ecommerce Business Rapidly SCALES…
Gabriel Gutierrez | Jun 14, 2016Reading Time: 6 minutes
- 0:12 Realities of Scaling a Business
- 0:30 Rapid Growth
- 0:43 Scaling Mode
- 1:00 Behind the scenes of scaling
- 1:25 Everything grows at same rate
- 1:50 Inventory costs
- 2:23 It can tie up a lot of your money
- 2:40 Advance Purchase
- 3:20 You got to have the space as well
- 3:49 We aren’t losing money but we aren’t pocketing money
- 4:32 Scaling back down
- 5:06 Be careful with rapid scale
- 5:53 Lets say you scale really fast
- 6:18 Everything is extrapolated
- 6:43 Don’t get caught up in the romance of huge scale
- 7:12 Closing Remarks
What’s up guys? Tanner Larsson here from Build Grow Scale. It’s a gorgeous Monday. I just dropped my daughter off at school. It’s already 78 degrees at 9am so it’s going to be a nice hot day today.
Just heading into the office and I actually wanted to talk about something that I’m guilty of doing a lot in some of the trainings that I do and stuff and that is talking about scale and the excitement of scaling your business and not talking about the realities of scaling a business, especially when we’re talking about a rapid growth.
If you’ve been following me for any length of time, you’ve noticed that one of our stores is blowing up right now. They’re all doing really well but one of them is just basically 50x right now, it’s growing at a ridiculous rate. We can’t keep inventory in stock, we’re getting containers all the time.
We’re scaling, we’re in scaling mode, which is great, it’s very exciting. It looks really cool on the outside and people are like,
“Man you’re killing it. Making so much money“
and it’s like yeah we are, but let’s talk a little bit about the realities of what goes on behind the scenes when you scale.
When your company starts growing at a rapid, rapid rate, like multiples, if you have a steady growth rate, it’s not quite as alarming, but when it happens like this you immediately have to turn over more inventory, so you have to have more inventory production, you have to have more raw materials purchased, you have to have more staff on hand, you have to have more money for ad spend. Everything grows at the same rate at which your turnover is, at the rate of your company.
If you were spending $10,000 a day on ads, now you’re spending $50,000 a day on ads. You’re going to turn that over, you got to have the cash flow to do that. If you were spending $100,000 a month on inventory, now you’re spending $500,000 a month on inventory, if not more.
It’s not even just on the inventory. That $500,000 covers the inventory for that month, for that current thing. It doesn’t count the inventory that has to be in production or the raw materials that you have to have an option on or some kind of purchase agreement on to guarantee that’s going to be available when you need it.
When you’re scaling and selling at such a rapid rate, you have to have multiple batches of product at different phases of completion at all times so that when one sells out, the next batch is arriving, and when that batch is arriving, a new batch is getting started.
It can tie up a lot of your money. It actually can tie up more money than you’re making because it’s not just the inventory that has to be sold, it’s 2 to 3 other batches of inventory at various different levels of completion, including raw material, especially on the scale side because you have to make sure that as you need product, the raw materials are available for the factory to have and purchase and they’re not spoken for by another company.
A lot of these companies will make you actually purchase in advance the raw materials or put a deposit down on them. It’s not like you’re paying for all of those things up front in cash, usually it’s about a 30% payment for each order that’s in production. We just put in one 30% was $38,000 and we had to pay for three of those.
That’s not counting the other 70% of each of those orders that’s due when those things are finished. Then you got your shipping charges and everything else. You got to have the space as well.
One of the things we’re encountering right now is we’re selling so much product, we’re having to bring in so much product, that even with the turnover, as we’re receiving and shipping out, we have almost no room in the warehouse.
We’re stacked to the ceilings; all of our shelves are bursting. We’re looking at storage units because we just don’t have the room. Not to mention that while we’re making a ton of money at the gross sale level, every penny of that money is going back out and more. I’m actually dipping into my money to float some of these extra purchases and the ad spend and stuff like that.
Am I getting that back? Yes I am.
We’re not losing money, but we are definitely not pocketing hundreds of thousands of dollars right now during this scale phase while it looks so exciting. I want you guys just to be aware of that.
When your company takes off, when it really starts growing, especially companies that have lots of costs associated with them, things like inventory and ad spend and things like that, it’s not uncommon at all for companies that are multi-million 8 figure businesses to be broke all the time because all their money’s tied up in inventory.
A really good friend of mine, Ed O’Keefe, owns a very successful supplement company that he scaled to the high 8 figure range and I was like, “Man that’s so awesome. Congratulations. That’s amazing“. He did that for so long and he’s like, “Dude we’re broke all the time. All of our money’s tied up in inventory. All of it“. He actually wound up scaling his company back down to a more mid 8 figure range and he’s more profitable now than he was when he was at the bigger numbers. He’s actually able to extract more money and do better things.
That’s the same thing with most other businesses as well. If you’re living off of your store right now, and you’re living off of your brand and you’re extracting money for it, be careful with rapid scale because you may have to stop taking money out of the company.
It’s much better to have a slower growth curve that’s more manageable so you don’t have to basically overreact and over purchase and over hire and everything else to try to account for it. Let a slower growth.
While it’s not sexy, it’s much, much more effective and your profitability will actually stay higher and, more importantly … It’s not so much the profitability will stay higher, excuse me. Let me just say that. The amount of money that’s available to go into your pocket will be much larger than if you encounter rapid, rapid scale and grow at too fast of a pace.
Let’s say you scale really fast. What happens and is it always like that? No. At some point you’re going to stabilize out and that money is going to catch back up and you’re going to get repayments on all of that money once it’s all turned over and things like that, and then you’ll have a larger operating capital to work with. Initially that’s what it’s like. Initially it’s, “Hey. Every penny that’s coming in is going right back out the door to keep up with the scale“.
Everything is extrapolated, everything is so much bigger. You’re having to turn over your ad spend so much, you have to turn over your inventory so much, you’re going to have to staff more, have to get extra storage space, have to get extra warehouse space. Even the packaging cost. Buying additional packaging if you do handle all the packaging yourself like we do. All of those things have to be taken into consideration and they’re nickel and dimes, but they add up really, really fast.
Not to scare you away from growing your business because you should be growing it, but don’t get caught up in the romance of huge scale and putting up all these massive numbers and you see all these people, “Oh look! We were at $2,000 yesterday and tomorrow we’re at $70,000“. Great, that’s cool, but let’s talk about what that really means and if it continues, just be aware that it’s going to cost a lot of money to make that a reality and keep it going. You will get that money back, but you got to be able to survive during that time.
All right guys. I’m pulling into the office right now. Sorry for the ramble. Talk to you later.