Built to Sell (For E-Comm) – With John Warrillow – 264
In episode 264 of the AM/PM Podcast, Tim and John discuss:
- 02:10 – Just What Is It That Makes A Company Valuable?
- 04:20 – Why Did John Write “Built To Sell?”
- 06:00 – How John’s Book Changed Tim’s Outlook In Business
- 07:10 – Focus On Building A Business That Can Thrive Without You
- 10:45 – What Are The Biggest Mistakes That Small Businesses Are Making?
- 15:20 – If You Want To Build A Valuable Company, You Need To Build A Brand
- 20:40 – The Primary Motivation For The Majority Of Entrepreneurs
- 25:00 – It Is A Risk To Be Dependent On A Single Platform?
- 29:30 – The Value Of A Subscription Model In Any Business
- 32:00 – How To Properly Execute A Subscription Model Business
- 39:20 – How To Get A Copy Of “Built To Sell” By John Warrillow
Tim Jordan: In this crazy world of e-commerce, one of the hottest topics is how to sell your business. Frankly, most people are doing it wrong. A lot of the information I hear is just absolutely well, frankly, it’s bull crap. And a lot of people that are giving information don’t really have any experience in the matter. Today’s guest actually started teaching me unbeknownst to him about three years ago, with this methodology called “Built To Sell” and building your business to sell. It’s going to be a great episode. Make sure you listen to the end, here we go.
Tim Jordan: Hi I’m Tim Jordan and at every corner of the world, entrepreneurship is growing. So join me as I explore the stories of successes and failures. Listen in, as I chat with the risk takers, the adventurous and the entrepreneurial veterans, we all have a dream of living a life, fulfilling our passions, and we want a business that doesn’t make us punch a time clock, but instead runs around the clock in the am and the PM. So get motivated, get inspired. You’re listening to the am PM podcast.
Tim Jordan: Hello everybody and welcome to another episode of the AM/PM podcast. And as you know, the e-commerce business world is booming right now. Finally, as COVID restrictions are starting to lighten up, I’m starting to go to more events, and more conferences, and more masterminds. And this community is growing so fast it’s unbelievable. Everywhere I go there is more and more sellers. Small sellers, but also big sellers. There is more and more large brands, more large money pouring into the industry investing in specific brands, starting their own brands, and sometimes even buying out sellers. One of the real hot topics is that thing about buying sellers is the acquisition space. All of you that are listening that have any idea about Amazon know the term aggregator we know about Thrasio, and then all of the other aggregators. I think we’re up to like 180 or 190 now, that are buying up Amazon businesses.
Tim Jordan: And most of those Amazon businesses were never intended to be real businesses. They were kind of accidents. They were side hustlers, solopreneurs that landed on something and turned out to be bigger than they thought it would ever be. When it comes to selling your business, though, there’s a lot of mistakes that you can make. There’s a lot of screw-ups and I don’t want to go over all of the same topics that all the other aggregators and brokers and acquirers talking about. Now today, I want to talk about something completely different and it is actually building your business to sell. And I am honored to have as a guest, a guy whose book, I just told him off camera legitimately changed the way that I set up and run all of my businesses now completely changed everything for me. His name is John Warrillow. So John, welcome to the podcast. I’m super excited to have you.here.
John Warrillow: Thanks for having me, Tim. It’s good to be with you.
Tim Jordan: So I’ll talk a little bit more, a little later about kind of how your training has influenced me. Right? Cause I think it’s going to be relevant to the listeners, but talk about how you became the guy that, you know, created this book built to sell. Like how did you become an expert at this? Give us, you know, the five or seven minute background story of John?
John Warrillow: Well, I’ve been four businesses in now started and exited the last one was a quantitative market research business. So not an e-commerce seller, not an Amazon seller, but in the service industry where we did quantitative market research for big companies, we had about 5 or 6 million in sales. We had big profit margins, like 20, 30% net profit margin. So I thought it was a really profitable business that could, I could sell. And I went to see a guy named Perry Mieli he’s an M and A guy in Toronto and I said like, what do you think it’s worth? And I just kind of rubbing my hands together, waiting for the answer. And he said, well, before I tell you the answer, like, let me ask you a couple of questions. I’m like, shoot. He’s like, all right, well, who does this? Who does the research?
John Warrillow: And I’m like, well, I’m involved in some of the research. And he’s like, all right, well, who does the selling? I’m like, well, you know, we work with really big clients. I’m involved in some of the selling. He’s like, all right. So let me get straight. You do market research, you do the research, you do the selling. And I’m like okay, you can put it that way. It’s like, I can’t sell your company. But I was like, but look at our client list. It’s like Microsoft and IBM and Bank of America and we’ve got profit. And he’s like, all that’s irrelevant. If your business is you, I can’t sell it. And I walked out of his office feeling like an inch tall and I committed to try to figure out if it wasn’t the client list, it wasn’t just revenue or profitability. Like what is it that makes a company valuable?
John Warrillow: And through, through Perry and others, I kind of came to learn that it needed to work without me. And so we put standard operating procedures in place. I got out of doing some of the selling. We put a subscription model in place and ultimately the company was acquired by a New York Stock Exchange-listed company. And it has a happy, very happy ending, but it was a very difficult meeting for me that first meeting all the way back, this goes back 20 years ago now, but it sort of kicked off this journey. I wrote the book built to sell, which was sort of a summary of some of the lessons I’ve learned through the four companies that I’d started. And that’s where we are today.
Tim Jordan: And that book tells a kind of specific story about a guy who has a marketing agency. How close is that to actual real-life events? Is this like historical fiction or is this an actual example?
John Warrillow: No, it’s, you know, I did own a little advertising agency. It’s kind of like Alex Stapleton, but no, it’s not, it’s not me. It’s not just a veiled sort of description of me. It’s an amalgam of a lot of the experiences I had. We also, in my market research business, our niche was helping big companies, Microsoft, and others market to the SMB space, small-medium business owners space. And through that, we interviewed some 10,000 business owners a year. And so I like to listen to business owners firsthand about the kind of struggles. And so I tried to inject some of that learning, both my own kind of from an autobiographical perspective, but also some of the stuff that I’d been listening to you from others into, in the book. I mean, I just heard so many times, like, you know, the book starts with Alex Stapleton being late for an appointment. I just heard so many times business owners kind of run off their feet, putting out fires. And, and so it sort of was natural for me to write it because I’ve heard it so many times from other owners.
Tim Jordan: Yeah. I can tell you the title of the book has turned into like a methodology for me, right? Like a motto build to sell. Right. And the first time I was introduced to this concept via your book was when I was running a sourcing and logistics and 3PL company. And I was just absolutely going insane I was working 80, 90 hours a week. I was doing all the quotes. I was doing all the specs. I was doing, you know, all the customer service. I had employees, but I wasn’t utilizing them. You know, I was still like the point man. Right? And it was just driving me absolutely insane. At the same time, I was trying to put content together and I was trying to do it all myself. And as we were building brands at the same time, I realized, Hey, there’s actually an asset here in like these brands that we’re building, but the rest of the stuff I’m building, there’s not.
Tim Jordan: And I had a guy who he was kind of marketing consultant, who was like, no, you’re just doing it wrong. It can be an asset, but one you’re going to kill yourself. Like Tim, you’re literally going to have a heart attack and you need to be able to build this to create long-term, you know, wealth long-term value. So he threw this book at me, Built To Sell. And you know, I’m not kidding when I say it kind of changed my outlook on everything from individual actions that I take when I’m starting a business to existing businesses and how I try to start pivoting them. So can you explain some John? I mean, I could explain it, but it’s kind of stupid for me to when you’re here. Can you explain some of the core values of, or the kind of the core messaging or methodology of this book Built To Sell that you think resonates the most with small businesses?
John Warrillow: Yeah. Let me start off with an analogy, because I think a lot of your listeners are parents. Everybody has parents. And I think the role of a parent can often be a really nice analogy for building to sell. Like when you’re, you know, a founder of a business, let’s say you’re an e-commerce seller, you’re an Amazon seller. It can be very tempting to focus on revenue. Like the Inc 5,000 is the 5,000 fastest growing companies. Everybody celebrates big companies, and it’s the sort of way we puff out our chest and kind of compare one against the other is like, how much revenue do you have? That’s the ultimate or how many employees is just a proxy for size. And, and so we’re kind of trained very early to focus on the size of our company, being the ultimate arbiter of our success.
John Warrillow: Yet, I think changing that way of thinking to being really about the of that you’re trying to build a business that can thrive without you, instead of making revenue, your goal, make your goal to be the parent of your company. And as parents, you know, in the early days you wipe the bum, you burp the baby, you feed it, you do everything. But over time, the goal of a parent is to actually get that teenager out of the basement, into the world, right? And, and you have to kind of get them independently working. And so it can be tempting to chase the next sale, chase the next shipment, the next new product. But if it’s going to make your business more dependent on you, it’s just like you’re running on a hamster wheel. So I think one of the kind of first kind of core ideas Tim is instead of being like chasing revenue for revenue’s sake, focus on your job.
John Warrillow: It’s not the CEO of your company. It’s the parent of your business. And the goal is to get your business to live without you. That’s the ultimate for a lot of parents. If someone wants their kid to go to Harvard or whatever, but most parents would be more than happy if their kid was a functioning, independent person in the world, who’s happy with their, their circumstances. And I think when we do that, as parents, we succeed equally when we do that as business owners, we succeed. So that’s sort of a– that’s not a tactical tip, but it’s a very philosophical one I think is important to consume.
Tim Jordan: And there’s a lot of ways to actually make that happen. And I’m sure you can, you can run through some tips. And I don’t remember that analogy, but I love it. You know, I think there’s a little bit of pride. A lot of times, you know, people that are starting a business, they want to be the boss. They want to be in everything. They want to make the decisions. They want the title, but you know, my buddies that have sold businesses and the people that have sold businesses are way happier after they’ve sold them or after they’ve exited. And probably the analogy could be the same for parents. You know, there may be a little empty nest syndrome, but gosh, it seems like everybody, I know that once their kids move out and they start going on vacation again and doing what they want to do, like life is a little bit easier.
John Warrillow: Have you ever seen people’s satisfaction levels? I saw this just the other day. I saw an article on this, when you, when people, when you’re 10, 12, and 14 years old, you’re like super happy. Right? And your happiness kind of drops in your twenties. It drops a lot in your thirties and forties. And then all of a sudden it starts to go up again in your fifties and sixties, I was like, okay, kids have left the house. Right.
Tim Jordan: Probably a correlation there, right. So what are some of like, I know we can’t go too deep, but talking about this idea of building something that can run on its own, so to speak. What are some of the biggest mistakes that you see small businesses making? I suspect you’re gonna say things like keeping a key man is the key man, or, you know, some of those things, what can you share as the biggest mistakes?
John Warrillow: Let me share a different one. And I think it’s probably germane to a lot of the people listening to this, especially if you’re an e-commerce business or an Amazon seller. I think one of the biggest mistakes we make is cross selling our existing customers, a new product or service. And that’s going to sound like really counterintuitive advice, because everything you’ve heard from just about every business pundit there is, what’s how you it’s eight times or 12 times cheaper and easier to cross sell an existing customer new product. And that’s true. It can also go to dilute your attractiveness to an acquirer. Because an acquirer, when they look at your business, they are going to make a– they’re going to make a determination on one question, and they’re going to ask this question of themselves behind closed doors. You’re not going to be in the room when they ask the question of each other, but they’re going to go into a conference room they’re going to close the door. And they’re going to say a simple question, which is, do we need to buy this business? Or should we just compete with it? And if you’re cross selling a bunch of commoditized products that you are not differentiated offering, they’re not going to buy your company. If they will, they’re going to buy it at a very low multiple, because they can literally, the alternative is to compete with you by lowering their price very slightly and winning all of the business. What I think you’ve got to think about is what is your point of differentiation? Because the more differentiated your product is the more valuable it will be in the eyes of an acquirer. Like Warren Buffet as an example, when he looks at making investments in businesses, he’s looking for companies with a deep and wide competitive mode. Why? Because it gives you pricing authority, right?
John Warrillow: Pricing authority means you can charge a little bit more for your company than your competitors. When you’re pricing authority gives you better margins, better margins allows you to invest more in sales marketing, and you all of a sudden create this sort of competitive shield against your rivals. And I’m reminded of Stephanie Breedlove, a woman I interviewed on Built To Sell radio. This goes back a couple of years ago now, but she built a little payroll company. She did payroll for parents who have a nanny to pay. And so this is like a very early days company. She reaches $300,000 in sales. It’s Stephanie and one employee. And she has trouble growing. And she’s like, “Okay, how do I grow?” So one road she could take would be to cross sell her existing customers and new products, right? So she could say, okay, well, I’ve got–, I’m doing payroll for these busy parents who have a nanny to pay. Maybe I should do what else do busy parents need? Maybe they need lawn care or, you know, meal delivery services. That’s something busy parents need. If she’d done that she would have undermined the value of her business. I’ll tell you why in a second. The second road, was that she could take the much harder journey of finding more parents who have a nanny to pay. It’s much more difficult to do that, right? But she chose to accredit the latter. She went and found more parents who have a nanny to pay. She built the company up over 25 years. Okay, she went from $300,000 to $9,000,000 in annual sales. This is 25 years. This is a very, this is not Google. This is not Tesla. This is a 25 year journey. And she builds it up to 9 million revenue, 10,000 customers.
John Warrillow: And she looks out in the landscape and says, who would want to buy this business? And she sees Care.com. Care.com is like the Angie’s list of care provider. You probably know you plug in your zip code and it gives you five star babysitter rated people in your local market. And she says, okay, these guys have 7 million subscribers. All of whom have babysitters they need to pay. So it would need a payroll service for nannies. And she goes approach to them and says, “Look, why don’t you buy my company?” And they look at it and say, great, 7 million subscribers. If 1% of our 7 million subscribers by Stephanie’s payroll service, that’s 70,000 customers. She’s built this business on the backs of just 10,000 customers, long story, short Care.com acquired Stephanie’s little $9 million business for $54 million. We talk about in the e-commerce space, a multiple of EBITDA and, you know, Thrasio buying for two and three times EBITDA.
John Warrillow: Breedlove sold her company for six times revenue, not EBITDA, six times revenue, $54 million. That’s what I’m talking about. When I talk about point of differentiation doing one thing better than anybody else. And if she had made the mistake of just going around and selling a bunch of ancillary services to parents who have a nanny to pay Care.com would never have bought her company, they only did it because she had one thing, one specialty, she was differentiated and offering it. And it was the one thing she did better than anybody else. And so, again, I think, especially for e-commerce sellers, where there’s this temptation to just bring it a container from China, there’s gotta be some other thing we can sell to these guys on Amazon. Yeah, for sure. If you want a transactional business, but if you want to build a valuable company, you need a brand and a brand as a point of differentiation and has a niche. It has one thing it does better than anybody else. And that’s what I would say is one of the kind of core ideas of building the sell.
Tim Jordan: There’s so much value there. I wish I could spend like two hours digging into that. I work as a, kind of a strategic advisor to a lot of people in this industry. And I see some deal flow. I see some people that are trying to sell their businesses and I kind of help them, or I see some of the acquirers and maybe give them some advice. And I think what you’re saying is so accurate because people will build this rolodex of products that they want to sell, or that they are selling. You know, they’ve got 25 SKUs and most of them are crap. And they think that a high valuation, now those valuations of EBITDA has gone up. You know, we’re seeing 6, 7, 8, 9, you know, 9x right now, which is pretty
John Warrillow: Is it that right now? That’s fantastic.
Tim Jordan: It’s going up substantially. But the problem is, that may only be on the core SKUs, or the core products, or the core brands. So people that are building businesses that are based on a bunch of crap, you know, it’s very devalued. And honestly, a lot of times these acquirers that acquire these businesses just shut off 80% of the loser SKUs. You don’t shut them off. So the businesses that are getting the really high multiples right now are the ones that are based on one specific niche. They’ve got one audience, they’ve got branding. They haven’t put all their eggs in one basket for platforms. We’ll talk about that in a minute. And I’ve actually built something right? Now, before we get into some of this more actionable stuff. I want to ask you this, just the premise Built To Sell the word “sell” is kind of the keyword there. And a lot of people would probably say, “Well, Hey, what if I don’t want to sell my business?” If we’re building to sell, are we building with the plan to immediately sell? Or is there more to it than that?
John Warrillow: No, there’s more to it than that. In fact, I do speeches for entrepreneurs prior to the pandemic. I, you know, I started most of my speeches off with a very simple question, which is, you know, how many you guys want to sell your business? And like, no hands would go up in the air. If it was like an EO meeting or a whatever industry event, maybe one brave person in the back would kind of half raised their hand. And then I’d ask a different question. I’m like, okay, nobody wants to sell. That’s fine. How many of you would like to know you could sell if, and when you’re ready? and like every hand goes in the air, right? Because I think we all want to know we’re building a valuable asset and I use the analogy those day of our home. There’s a house right across the street from ours that just went on the market. And what do you think? The first question I asked my wife was?
Tim Jordan: What’s the price per square foot? Or how much is it?
John Warrillow: What are we asking? Right. Yeah. Price per se. I didn’t, I wasn’t that sophisticated. I just thought like, what are they asking? Because I kinda know how big it is. I kind of know sort of similar to ours. And I’m like, is that because I want to sell my house? No, we just moved here. It’s because I want to know the value of my asset is going up. And the same thing is true of your 401k. When you open up the statement is because you want to retire. No, because you want to know the stocks that you have are going up in value. That’s really the kind of idea behind built-to-sell. It’s like, it’s like, you want to build an asset, not run on the hamster wheel, right? Just hocking products, you bringing in containers of unbranded products is just running on a treadmill to nowhere. You’re not building an asset. You’re effectively just running on a treadmill. Whereas if you’re building to sell, it means you’re building a valuable company that you could sell when you’re ready. And that’s, that’s a very different mindset.
Tim Jordan: So if we’re talking about building the cell, a lot of times we’re thinking about the future, you know, Hey, what is this going to be able to, you know, allow us to do 2, 3, 5, 7 years from now. But I think that building to sell also creates an immediate lifestyle difference too. Can you explain that a little bit?
John Warrillow: Yeah. I mean, look, I interviewed a guy named Danny [inaudible]. So Danny is based in Brisbane, Australia, and he ran a cabinet making company, runs a cabinet-making company, I should say. It’s called, it doesn’t matter I can’t remember image cabinets, I think is in Brisbane, Australia. And when he started with us, he had 65 hours week work weeks. He was working 65 hour weeks and he called one of the guys on our team named Rowan Wood and said, look, I just want to sell, I can’t work 65 hours a week anymore. It’s just way, way too demanding. And Rowan’s like, okay, well, let’s look at why you’re working 65 hours a week. And they started to figure out all the ways that Danny was kind of running his company and was sort of in the mix. So like employees wanted approval on something they’d come to Danny. If a customer wanted a quote, they’d go to Danny. Right. And so Rowan’s like, why don’t you, why don’t you just kind of document your processes for all the stuff and get yourself out of some of the doing. And he does that. He creates standard operating procedures, which I know is something you talk to your listeners about a lot. And in the process of creating standard operating procedures, he gets his hours down from 65 hours a week down to five hours a week. Danny doesn’t want to sell this company anymore. And that’s the irony of it, right? Like he called Rowan and he said, I want to sell. Right. Because I’m going crazy. And Rowan’s like, okay, let’s get your business ready to sell. Let’s go through standard operating procedures together. And then he’s like, you know, this is great. I’m just cashing checks. I’m working five hours a week. It’s perfect.
John Warrillow: And that’s the irony of it. I think you’re absolutely right. There’s this lifestyle benefit of building a business that’s not dependent on you. And I think, look, I think a lot of entrepreneurs, if we, you know, if we try to peel back the layers and try to understand like what motivates us. Yeah. Does some people want to become the next Jeff Bezos? Absolutely. I think that’s the minority of entrepreneurs. I think the majority of entrepreneurs, their primary motivation is independence, is freedom. It’s the ability to do what they want, when they want, with whom they want. Nobody telling them what to do. That freedom is what you get. When you have a business that’s not dependent on you. The irony is the opposite is when you build a business and you’ve lived this firsthand when it’s, it is kind of, you’re holding it together with duct tape and you’re spinning all the plates.
John Warrillow: Like it’s the worst-case scenario in the sense that like with a 40-hour week job, you get home at five, you’re done, right. You go to the gym or you go to have dinner and like it’s done. You’ll deal with it tomorrow in a company is, you know, like when there is never, you know, I had a chance to interview Tim Ferris and I said, why did you sell BrainQuicken? The company that he sold to get into the business of writing books and so forth. And he’s like, John, it felt like my brain was running computer virus, antivirus software. Like I could get it down to four hours a week of running BrainQuicken. But I was always in the background, churning through the processes in my mind, it was always weighing on me. And that’s why I sold BrainQuicken.
John Warrillow: And it wasn’t because I, you know, I was working 65 hours. It was just because my mind was constantly churning in the background. And so I think you’re absolutely right. I think there is tremendous benefit in lifestyle benefits, in getting the business, not to be dependent on you, like Danny learned. And then it also makes it a sellable asset. And as Tim did it, you know, maybe something at some point you want to sell because you want full and adulterated freedom. And that’s what happens. I think when you actually do sell.
Tim Jordan: Yeah. I love that. And that’s one thing I’ve described so many times to people is even if you don’t want to sell, you want to live the lifestyle that being able to sell a forge, right. Replacing yourself, always firing yourself and hire, you know hiring someone to replace you. And that’s so tough in this world of like the laptop lifestyle and, you know, people wear shirts now in Hollywood that just say, you know, hustle, like, it’s almost like we’re being taught and indoctrinated, like the harder we work, the more hours we put in the better we are, you know, if we can post selfies at Starbucks at 1:00 AM, you know, doing something, building a funnel like that’s cool, but man, it is tough. It’s so tough to be effective. I think it’s tough to be effective. One reason is because most of our business, we suck at, you know, if I took like the 10 things that my businesses need, I’m only good at like two of them.
Tim Jordan: So why am I going to keep doing these things and not replacing myself with someone that’s better than me, but also, you know, it’s kind of a touchy subject, but man burnout and anxiety and depression with entrepreneurs is so freaking high, right? I mean, if we’re operating at a level where we’re working 65-70 hours a week and we’re subject to that stuff, we’re not going to succeed anyways. We’re going to probably torch that business or run into the ground because we’ve completely killed ourselves trying. So yeah, building to sell or, but it’s listening if you haven’t gone on now is not just building it to sell, but building it to be in the position where you could sell, meaning you’re not stuck in the middle of everything. You can actually take a day off. You can go on vacation and turn your phone off. You don’t have to check your emails 27 hours a day.
Tim Jordan: Right. You don’t have to do it. So going back specifically to e-commerce, you know, you mentioned kind of the concept earlier of putting all your eggs in one basket, and most of our listeners are Amazon sellers and there’s this giant debate of where should we be selling? You know, what should we be doing? And I have stood on some of the biggest stages in the e-commerce space and said, raise your hand if you’re an Amazon seller and all these people raised their hand, and I said, you’re an idiot. You should not be an Amazon seller. What do you mean? You should be an e-commerce seller or a product seller that sells on Amazon. You shouldn’t put all your eggs in one basket. If we are looking at building something that we can sell, do you think as an M and A advisor and all that good stuff that you are now, that there is risk to being very specific to one platform or one sales channel or one type of sales model?
John Warrillow: Absolutely. Yeah. It’s like building your home on rented land. It’s it is absolutely a risk to be too dependent on a single platform. And it happens all over the place. You know, Amazon can be your best friend. It can be your worst enemy as you know, I think if Amazon has grown phenomenally over the last couple of years over the last decades, but certainly, in the last couple of years, it’s just gone to a completely another level. And so for those folks who are, who are ranking on Amazon, though, they have tape, they have, you know, the old, the old adage that rising tide lifts all boats. It has happened for a lot of Amazon sellers because Amazon has grown so phenomenally from an M and A perspective, and think from the acquirer’s perspective, the acquirer is looking to de-risk their purchase.
John Warrillow: That’s effectively what they’re trying to do when they look at your business for like, is this business going to continue to succeed without you? And one of the things they look at is what’s called platform risk. So if Amazon, for whatever reason, the change of winds change with trajectory, change of strategy starts to move you down the rankings for whatever reason, nothing that you necessarily did, or God forbid, delists you. You all of a sudden go out of business. And they know about it, acquirers– sophisticated acquirers, like Thrasio and others know that for sure. So they are looking at your business and saying, what’s the platform risk. I think, you know, I– have you ever had Ben Leonard on the show? I have. I love Ben Leonard. Yeah. Great, great guy. If you haven’t had a chance to listen, go back, AM/PM Ben Leonard. I think it would be a great relisten, but for those who didn’t listen to that episode, Ben built a company called Beast Gear.
John Warrillow: It was a workout like workout straps and workout gear. And he built it up and was really cognizant of this platform risk because he was selling on Amazon. But what he did was he tried to make efforts, to get a relationship with the consumer off of Amazon. So for example, when he, you know, he shipped a skipping rope and inside the parcel, there would be a note saying, Hey you know, keep in touch on Instagram and tag beast gear. And when somebody tagged Beast Gear on Instagram, he personally, Ben Leonard personally, would get back to them in the early days with an instant message. And every time he’d build rapport with these people hitting PRs and so forth, and he’d say, Hey, if you’d ever considered buying again, use this coupon and buy it direct from beastgear.com and he’s building up a database of consumers.
John Warrillow: So when he went to get acquired, yeah, he had a lot of his revenue from Amazon, but he also had a customer list of people that bought directly from him, made him much more valuable as an organization. I interviewed a guy named Ady Pienaar South African guy built to sell radio. He had a cart abandonment software. So, you know, cart abandonment when people put it in their cart and choose not to buy it for whatever reason, his software was a Shopify reseller, Shopify affiliate effectively. So you could get it in the Shopify e-commerce store. And as Shopify exploded in popularity, Ad Pienaar’s company went in lockstep. But when he went to sell it, the acquire looked at it and said, yeah, but you’re kind of dependent on Shopify. And what if Shopify builds their own cart, abandonment software, and effectively puts you out of business overnight. And he took a discount on the value of his company because of that. So again, it’s platform risk is a risk. And it can be a double-edged sword. If your platform is growing, if you’re in the app store, if you’re in Shopify, if you’re on Amazon, it can be a tremendous tailwind. And at the same time, the more dependent you become on one platform, the riskier you are, and therefore the lower the value you have in the eyes of the acquirer.
Tim Jordan: So, you know, we’re not going to have a ton of time to continue, but there is one hot topic that I want to hit. And it is about subscription models. You know, there’s been a lot of talk about subscription boxes about subscribing and save on Amazon. How are you seeing this concept of subscription models affecting valuation? Well, frankly, values of e-commerce businesses right now? And how do you suggest people start trying to digest this concept, maybe implement this idea?
John Warrillow: Look, subscriptions is a game changer for any e-commerce retailer. If you can get from a transactional business model to a subscription business model, it has a transformational effect on your valuation. You know, it can be 2, 3, 4 times more valuable on a dollar for dollar basis to have subscription revenue. And Amazon knows this is why subscribe and save exists, right? It’s why all these companies have moved to subscription. And again, it has, it has a profound effect on your valuation. I’m reminded of a guy named James Murphy. I interviewed years ago on built to sell radio. He built a company around this product called the Vivascal. You ever heard of Vivascal no, it’s it’s hair loss treatment for women and women lose their hair for different reasons than guys. It’s usually hormonal. And so this, this actually works and he got clinical studies to prove it.
John Warrillow: He got Reese Witherspoon to endorse it. Like it became a thing. He sold it on all kinds of different channels. Walgreens, in retail, and e-commerce as well. A third of his revenue came from recurring people who bought it directly from him. It’s something you need to apply to your hair on a regular basis. So you run out, it’s got a consumable attribute to it. And so he had, when he sold Vivascal, he had a third of his revenue was subscribers that bought directly from him. When he sold his memory survey at 55 million euros in revenue sold for 165 million euros. Again, three times not profit, three times revenue never would have happened at that kind of valuation had it not been for the subscription business model. So I’m a huge believer in the transformational effect. Again, it also gives you a direct relationship with your consumer right now, if you’re an Amazon seller, Amazon owns the customer, they own the contact information.
John Warrillow: They’ll tell you how and when they’re going to communicate to the customer, you get a subscriber who buys directly from you. You’ve got a subscription relationship. You’ve got that relationship with the consumer and that’s what acquires value beyond anything else. So, I think if you can create a subscription model for what you sell. And the key I think is especially in an e-commerce space, identifying something that consumers run out of and here, what I think the mistake a lot of people make is that they try to create a subscription model for anybody who buys their product, right? And the secret to creating an effective subscription model is to first segment your customers by buying trigger, like, what is it that makes them go to Amazon or to your website to buy from you? What’s the buying trigger and segment them into homogeneous buckets. Because I think you’ll find that each segment has a different reason and some have a consumable need for your product and others have a one-time need and trying to create a subscription offering for everybody is a recipe for disaster. I’ll give you an example. Are you familiar with the company Hbloom Tim?
Tim Jordan: No.
John Warrillow: They are a subscription-based flower company, Bryan Burkhart and Sonu Panda founded out in New York and they wanted to get into businesses selling flowers and flowers, like retail flower shop
Tim Jordan: I will tell you that I am, because I am actually subscribed to a recurring flower subscription box from Amazon.
John Warrillow: There you go. So they’ve, they’re competing now directly with Hbloom. Hbloom was the first one, the pioneer in this space. So they looked at flowers and they said, this is a terrible business, right? You have flower stores, farmer cuts the flower off the stem starts to die. Typical flower store throws out half of its inventory every month expensive retail space to kind of intercept customers. It’s a terrible business model. And they said, okay, well what can we do to change it? Well, we could do it on subscription and recurring basis, right? So now, remember the flowers, consumers really buy flower. You’re an anomaly, Tim, that most people buy flowers on mother’s day and Valentine’s day, right? Like they don’t buy flowers all year round. Who do you buy flowers for, by the way? Like, why did you get a subscription? So
Tim Jordan: Then they’re not for me, but my wife loves flowers. She comments, and I am just too forgetful and lazy to ever buy them regularly. So doing research on Amazon, I realized, Hey, there is this subscription box on Amazon for flowers. And I think I just hit the one click purchase and was going to try it once and earned some brownie points. And I think that was nine months ago when they just keep coming, which probably shows the power of subscriptions that people just keep getting them. And now she loves them. So every, you know, the 20th of every month or something, she gets her flowers and, you know, I get the love for it.
John Warrillow: That’s awesome. Well, that’s the model that Hbloom really pioneered. And I love that most people can’t buy flowers mother’s day and Valentine’s day. And so these guys Burkhart and Panda looked at and said, okay, who buys flowers? Who needs flowers regularly? And again, they segmented all the reason people buy flowers, weddings, funerals, birthdays, whatever. Turns out, this is one little segment, probably less than 1% of all flowers purchased. They buy flowers on a recurring cadence and that is hotels. Five-Star hotels want to give a very prestigious image. So when you go up, it’s like, okay, I’m at the Ritz Carlton. This is a fancy thing. Cause there’s a $200 bouquet of flowers. Hbloom says, these guys need flowers regularly. They’re the one flower purchaser who has a reason to buy regularly. And so they bundled up their flower subscription and sold it to hotels.
John Warrillow: Typical lifetime value of an Hbloom subscriber, a hotel who buys flowers on a recurrent basis is $4,500. Typical transaction in a flower store is like 70 bucks right? So, think about what that does to your economics. And again, we’ve got a lot of e-commerce sellers will talk to you, like, think about the impact that has on your economics. On one level, you’re trying to buy advertising, stimulate demand to get someone to make a $70 purchase, right? Of which your know your margin might, your gross margin might be 30 bucks. On the other hand, you’ve got a consumer. Once you make one sale, that sale is worth $4,500 to you. You can now invest a whole lot more in search. You can help fest a whole lot more in a sales team to go call on every hotel, because you know, you’re going to capture $4,500 worth of value. And that’s the difference. I think the average spoilage rate in a flower store I mentioned is 50%, right? 50% of inventory goes bad. It’s rotting in the fridge. Typical spoilage rate at Hbloom and a given month would be less than 2%. Why? Because they only buy flowers for the number of subscribers they have.
Tim Jordan: Yeah. So knowing exactly how much they have to have for that month. So that keeps..
John Warrillow: For folks who are like, yeah, like I’m going to bring in a container. I got somehow figuring out if I’m going to sell this stuff through. And I don’t know how many widgets to buy it. I want to be under, but then I don’t want a bunch of sitting around inventory. Hello, subscription model. Because you only buy what you need to fulfill the subscribers you have. So it totally changes the face of your business if you’re able to adopt a subscription model.
Tim Jordan: And for those of you that are listening and thinking, well, I sell this widget. I sell this toy, whatever it is, that’s not good for subscription. Don’t be disheartened because the entire business model of subscription boxes has actually changed that. I am a member of a subscription box called Fish Vault, right? I love fishing. It’s $150 a month. And when I get it, it’s full of stuff. And I expect it to be different stuff every month. I expect fishing reels and towels and bait knives and like all sorts of weird random stuff. One of the products that I used to sell, it was cigar accessories. We got connected with a subscription box called bespoke post, and they would buy directly from us and they would buy large quantities that like very large quantities of time because our products went in their subscription boxes. So if you have a product that you don’t think that you can necessarily sell recurring, there may be an opportunity to partner up with a lot of other subscription boxes and get your stuff in there.
Tim Jordan: So it’s not as good as acquiring customer yourself, but it’s not a bad option, you know, kind of a bad secondary option, if you can’t do it yourself place to find those subscription boxes. By the way, is a website called crate joy, go to cratejoy.com. It’s a marketplace for subscription boxes. You can find, I think there are thousands of boxes start reaching out, show them your product samples. Hey, I’d love for you to have my stuff in your box and they’re looking for people to partner with. So it’s not necessarily out of the reach of anybody, even if you have a one-time purchasable product to get involved in these subscription systems. So John is we kind of come to the close of our time. Is there any other just last nugget of wisdom that you’d love to drop on our audience before, before we take off?
John Warrillow: I mean, I think we’ve covered a lot and probably the big kind of idea that transcends or the thread that kind of transcends the whole thing is that for your company to be valuable to somebody else it has to run without you. And so that you know, you can use subscription revenue to do that. You can create standard operating procedures. You can build a brand that people are loyal to, as opposed to you as an individual. Those are all things that really are effectively doing the same thing, which is kind of building a company that does not rely on you. And I think that’s the one common theme that, that transcends our whole conversation today.
Tim Jordan: Amen. And if you guys want to of course read this book that we’ve talked about, that I legitimately said, you know, changed kind of the way that I run my business. Now make sure to grab a copy of it, Built To Sell. John where’s the best place to go to buy these books?
John Warrillow: Yeah. I’ll give you one better, go to builttosell.com/ampm and we put together a couple of gifts for your listeners. One of them is the 9 subscription model checklist. So if you’re an e-commerce seller, you can take a look at which of the 9 subscription models that you could adopt. There’s a video series on the drivers, and then there’s a, the new book, the art of selling your business. There’s a workbook that accompanies that and you get that it’s all free. So just builttosell.com/ampm
Tim Jordan: Awesome. Great. We appreciate you so much for being on and appreciate all the good work that you do, putting out great content, and hope you have an amazing rest of your week. For those of you listening, if you found any value in this, please leave us some sort of review on whatever podcast platform you’re listening to, whether it’s Spotify or iTunes that really helps us get ranked. And we appreciate that love. Also make sure you if you’re watching this on YouTube to give us a thumbs up, make sure you subscribe to the channel and you can check out all of the other episodes, including the Ben Leonard one that John just kind of mentioned on ampmpodcast.com Thank you all for listening. We love you and we’ll see you next week on next week’s episode.
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