Why is it so challenging to break past the $20M revenue milestone? Read on to find out.
This content was originally published in he No Best Practices newsletter in August 2021. If you want exclusive access to my best insights 2x/month, you should sign up. Most of my newsletter content is never shared publicly.
There are a few major revenue benchmarks for a direct to consumer business, which Web outlined here:
These are the DTC milestones that you remember being a part of:— Web Smith (@web) August 20, 2021
— The very first sale notification
— The $100k year
— The $1 million year
— The $25 million year
— The $100 million year
— The “enterprise-sized” year
The paradox is that they each matter about the same.
Today I’m going to focus on the middle of the list: getting from $1 million to $25 million in revenue. Why? This is territory I know about from personal experience. Two of my former employers had ambitions to grow their eCom businesses to $25 million (and beyond), but found themselves trapped in a cycle of ups and downs that prevented them from getting there.
Getting to $1 million requires product-market-channel fit in a single growth channel. And once you’ve hit $100 million, your brand has landed on some kind of competitive advantage and/or cultural ubiquity.
But in between is where fortunes are made and lost. It’s the dividing line between a lifestyle business and an investment-grade asset. Here are three reasons that brands struggle to reach the $25 million revenue mark, and how you can navigate them.
Reason #1: Talent
It’s harder to hire the best eCommerce talent than ever before, whether you’re looking for help with operations, digital marketing, or any other discipline within the DTC/eCom space.
There are a few reasons. These skills are highly transferable between industries, so you’re up against a broad range of competitors. The discipline of selling things on the internet is also relatively young, and new areas of specialization are emerging all the time. There isn’t a single credential that signals someone knows their stuff, and BS artists abound.
This doesn’t mean that getting the right talent is impossible, but it does mean that smaller brands need to be very thoughtful about recruitment and the structure of their organizations.
Junior Talent & Turnover
Here is a good rule of thumb: if you’re not paying someone enough to afford the average rent for a studio apartment in their city, that person is going to view their role as a stepping stone. Don’t expect them to stay with you longer than two years, and don’t act surprised or hurt when they move on–no one wants to live with three roommates forever.
I am not trying to tell you that your brand’s starting salary needs to be $70k. But I am telling you to plan for the inevitable. Think carefully about how you structure roles, which specific tasks need to be performed in-house, and what your backfill plan is when someone resigns.
There are certain mission-critical yet monotonous tasks in eCommerce that could be considered “paying your dues”–customer support, writing product copy, setting up new products, and merchandising the site. If you decide to hire an in-house role to manage one of these tasks, you need to create standard processes, document them, and then cross-train as many team members as possible.
Otherwise, you will inevitably have two junior employees resign within weeks of each other, throwing the entire team into chaos and falling into a six month holding pattern where nothing meaningful is accomplished. I’ve seen it happen.
Finding The Right Senior Talent
A major catch-22 in getting from $10 million to $20 million in revenue: you’re too small to hire someone that doesn’t execute, but you need to bring in a more strategy-minded POV to maintain your growth trajectory. Essentially, you need a VP of eCommerce but you can only afford to hire a Manager.
You need someone who will help you navigate all three issues I’m raising here–not just throw a bucket of tactics at the wall because “it worked at my last job”. But you also need someone who can execute on their strategy and, occasionally, pinch-hit during periods of turnover (see above).
Definitely try to find the strategic/tactical Unicorn first. They do exist! But if it’s been 3-6 months and you can’t find a good candidate, consider bringing in more senior talent on a fractional basis. Then fill out your team with a talented tactical operator who is good at prioritizing and managing projects.
Reason #2: Diminishing Marginal Returns
Now we’re going to highlight why the right strategic support is so important. Web described $20 million as “escape velocity” for a business. Well, what are you escaping from?
Breaking through the $20m barrier is very unique because it is escape velocity in my humble opinion.— Web Smith (@web) August 20, 2021
You grow by maintaining your tried and true sources of revenue while finding creative, meaningful ways to build on them. But brands doing less than $20-25 million in revenue often feel like they barely have the resources to tread water.
It’s not enough to grow, you have to grow in the right way. To do this, you have to factor in the total costs and benefits of each new growth initiative you pursue. Not just the revenue upside, but the costs and resources that will be required for support, as well as the potential to distract you from core operations.
I’ll give you an example. A former employer was a brand with an eCommerce business doing somewhere between $8-15 million per year in revenue. They decided to sign a deal with a third party marketplace who would list our products but send us the orders to fulfill.
This marketplace was very hyped in the industry press, and seemed to be investing a decent amount in customer acquisition. Top line, this partnership was adding at least a million dollars in revenue per year to the eCommerce business.
But there were many drawbacks to that revenue. Operational support for the marketplace required an additional hire. They took a sizable, non-negotiable commission and charged a lot of fees. And they would aggressively mark down our products unless we were really proactive in opting out of their near-constant promotions.
At the end of the day, that extra million (give or take) was profitable. Less profitable than the main business, but not a loss. But the real cost wasn’t captured on the balance sheet–it was the time suck this new channel created for multiple teams. We weren’t going to reach $20 million on this marketplace, but it was diverting so much attention and energy that we couldn’t focus on other growth opportunities.
If you want to scale, you need to know when to turn down a dollar today so you can work toward ten dollars in the future.
Reason #3: Not Understanding “How We Got Here”
Businesses, and teams within those businesses, typically share internal narratives about “how we got here”. Some examples: “we grew last year due to a surge in customer acquisition”, “dark stretch denim is the foundation of our business”, “our eCommerce sales were down because customers are shopping in stores again”.
Oftentimes these narratives are built on a limited view of the data, or are just plain wrong. And without the right orientation point, it’s impossible to build a successful growth strategy.
Some examples: if you don’t understand where and how you are really acquiring customers, it’s hard to build an effective media plan. If you don’t understand which product categories and price points form the foundation of your business, it’s hard to build an effective assortment strategy.
There are a few things you can do to craft a more accurate internal understanding of the business and prevent things from going off course:
- Develop a reporting framework that smooths out seasonal trends so you can see what events really changed the trajectory of the business. I like a rolling 12 month average analysis for this.
- Check in on that reporting monthly, not just when something goes wrong.
- When you do see a new trend emerge, discuss it with a cross-functional group. Give everyone time to digest and develop hypotheses, and then hash it out. Bring diverse perspectives into the room.
- Create a high trust environment and hire honest people who are fulfilled by doing good work. This will reduce the likelihood that the narrative becomes biased by one person’s political ambitions.
- Bring in an unbiased third party mediator if necessary.
As a leader, one of your roles is head storyteller. You need to define an accurate and compelling narrative about how we got here and where we’re going. And then you need to let that understanding guide your decision making process.
Breaking Through The $20M Barrier
The reason so many brands plateau before they hit $20 million is because that is the inflection point where founder-entrepreneurs need to start thinking like managers. What does that mean?
If you start a business from scratch, you’ll find that there are certain aspects of the process that you enjoy more than others. Maybe it’s art-directing photo shoots, maybe it’s managing your brand’s Facebook ad spend, maybe it’s something else entirely.
Breaking through a plateau will require some difficult decisions. You may have to delegate your favorite work to someone else. Or the business might require a new operating model that jettisons your favorite work entirely. To make good decisions, you have to let go of biases formed based on “what I like”, which is hard.
And honestly…not every brand has to break $20 million in sales. You have to be honest with yourself about what you want out of the business and what you want out of life. But if you do decide that growth is the way, be mindful of the three potential hurdles mentioned here.