124. [Problem Solved] Reaching Profitability

[Problem Solved] Reaching Profitability

Jordan Buckner: [00:00:00] Welcome to Problem Solved, the Startup to Scale mini series co-hosted by myself, Jordan Buckner and Aaron Gailmor, founder of Brass Roots. Now Aaron, most brands I talk with are on the search for profitability, mainly because the financial markets have really dried up for all companies, but primarily CPG brands right now.

But you know, in my opinion, this is something that brands should have been looking at doing all along to a degree to really build a foundation for their business. But you know, you're on that journey now with Brass Roots and I know you've achieved some profitable months with your business.

So first off, congratulations on those, second, I love to learn kind of what it took to really get there. 

Aaron Gailmor: Yeah, thanks Jordan. First of. You know, the headline of like we hit profitability in the first quarter of this year, and that was great. I will say the several months leading up to it, Took and maybe could even extend that to like a year leading up to, it was painful.

You know, there are a lot of [00:01:00] decisions that I contemplated frequently and reached out to mentors to talk through. But ultimately what got us to profitability was extreme. Focus and the focus came down to focus from a product and product line perspective and even a skew perspective, flavor choice for example, and size choice as another example.

And then. Also focused from a sales channel perspective. And ultimately it was purely calculation of what is getting us currently the most profitability from a product line, skew and channel perspective. And that led us to make a lot of decisions thereafter that created profitability for us.

Jordan Buckner: Let's break down each of those. Cause I think there's some really rich stuff there. So I think one thing that you mentioned is around focus on profitability, right? It's like this idea, you have to begin with profitability in mind in order to get there. Unless you're one of the [00:02:00] lucky few that just stumble upon making money.

But for the most rest of us that doesn't really happen. And so what are the things that kind of prompted that. Mindset set shift in getting to profitability? 

Aaron Gailmor: Yeah, it was necessity. At the end of the day, it was me seeing what was going on in the capital markets for small businesses and knowing that ultimately we had to start putting place pieces into place at that moment, which was really you know, February, early this year, mid January, February Where we'd be profitable for several months in the case that we couldn't access any capital for that period of time.

And I should really say it was more November, December of 2022 when we really started to put those pieces into place. So that mind shift, ultimately it was a survival mindset. That's what it was. 

Jordan Buckner: Yeah. I mean, I think this journey of building and running a C P G brand is wild, right?

Like with TeaSquares, I remember we had a growth mindset. We raised a couple hundred thousand [00:03:00] dollars, but at the end of the day, like we were losing hundreds, we're spending and losing hundreds of thousands of dollars every year and, about you. But like that took a mental toll on me just getting there and then realizing.

We went out to raise another fundraising round. The market at that time wasn't quite where it allowed us to raise as well. And I was the same way. I was forced kind of into the getting to break even and having to make decisions to get there. Yeah. 

Aaron Gailmor: And, you know, , I found myself several over the past few years, always looking very far ahead.

Oh, the costs, you know, are scale will bring us reduced cost of goods sold over the next year to two years, to three years. We'll get to the margin profile we want or, we need to spend now. And applying this cus cost of acquiring this customer. , by two years down the road, we'll have this many customers and the business will be in great shape The minds.

Set shift is really looking at today, like instead of doing three year models, which I always found to be silly, I'm doing [00:04:00] weekly cashflow modeling. That's what I'm doing and that's what I think. It's a really hard thing to do. But it's. Ultimately gonna set you up for better decisions and sustainability.

Jordan Buckner: Yeah. Right. And it comes to like building that foundation where, you know, as best you can, all the dollars going out and all the D dollars coming in. And I really like that you mentioned the piece on margins and the fact that margins. Don't increase in the way that you expect them to with scale, because you have all your expenses that come in at scale as well.

And so I do the same thing. I recommend start with the margins you need from the beginning. If you can't get there, don't expect that they're gonna come later. 

Aaron Gailmor: Yeah, I think enough to add to that, I think once you calculate your costs today, just add 10% because you're probably off by at least 10% when you can, you know, calculate shipping or anything like that.

Right. You might as well just add 10%.

Jordan Buckner: Well, and then there's inflation, right? We've experienced that in the food industry, just like everything, all the prices growing up from commodity costs to shipping to [00:05:00] corrugate, right? Like, every time you go to buy an ingredient, the price could fluctuate.

You can't fluctuate the price of your Sacha and seed. It's like buy the week. Yeah, exactly. So, Well, I mean, along with that as well, you know, you, you mentioned this as well, so like reviewing your products and channels, define unprofitable product lines and cut them. So I know I've known you for a long time, you've had some really delicious, unique products over the years and not all of them are with us today.

Can you walk through kind of the thoughts and decisions around that? 

Aaron Gailmor: Yeah, yeah. We cut it's a long story of why this product line existed, but we had a high protein puff line and. It used a little bit of Sacha and cheap protein to get the protein up, but the minimum order quantities for that are huge.

Basically every time I wanted to run that product, I was spending at least 200 grand, which is unsustainable for a small business. We don't have that balance sheet. Not only that, but my cost on that product. From the the year in which I developed it [00:06:00] to the year in which I discontinued it, my costs had risen at least 30%, which is also unsustainable for a small brand.

So my margins were razor thin. And then the last piece though is just, it was our business had changed into really a Sacha Inchi for company. We wanted to own this niche of Sacha Inchi. We wanted to pioneer it, and the puffs were a little bit of a separate consumer, a little bit of a separate product line in a super competitive category.

So in hindsight when I say it like that, it's like, well, yeah, you should have made this decision three years ago. Right? But it's just not that easy in practice. But ultimately , we ended up you know, discontinuing that product line and it's helped tremendously. It also had a separate warehouse, a separate manufacturer that's added shipping costs and storage costs.

Jordan Buckner: I mean, yeah, that's so hard because as founders, right, we get into this because we have an idea for our product, something that we love. We just wanna bring that out into the world. And , it sucks when the reality is that it's too expensive or that the [00:07:00] customers are too expensive to reach at scale.

And a good product doesn't make a good business all the time. And a lot of times you have to make , those tough decisions. And I hear you've done that. How about channels? Are there any channels that you found to be more profitable or better for you than others? 

Aaron Gailmor: Yeah. Yeah. So we ended up really focusing on Amazon because it's a super low friction marketplace.

People are shopping there. it's like the biggest grocery supermarket in the world and everybody's shopping there at once. And so that's why we wanted to go to low friction because we already have a high friction meaning, High barrier to entry product or high barrier to purchase product cuz people don't know Sacha Inchi.

So we focused on Amazon. We'd also been growing there and we found customers were naturally going to Amazon to find us. When we were first introducing our brand and our products to them, that's where two thirds of them were going to find us. And so we just leaned into that at the end of the day and [00:08:00] said, you know, if we're trying to funnel everybody to our website. We probably have a third of the sales, so we need to push people to Amazon, and that has ended up helping us pretty tremendously. Like as an example, our subscribers basically quadrupled during the few months where we switched our focus from our website to Amazon simply because people are used to purchasing on Amazon.

And they know and trust the subscription system there. They don't have to put in a credit card, things like that so that gave us visibility. We now have more visibility into future revenue streams, right? Cause people are subscribing at that rate. And so it's worked out very well for us on Amazon.

Jordan Buckner: Yeah, I mean, I'm very pro-am Amazon myself as well. I think just in terms of the transparency with like the numbers and being able to see all the costs, right? Amazon can be expensive but it's comparable to a lot of retail channels, right? It's expensive compared to your own D to C from a cost standpoint, but it's comparable if maybe not more inexpensive than [00:09:00] selling in retail because you actually can see those costs coming.

Aaron Gailmor: Yep. And you know, the other thing, brands should keep in mind that you can get a brand. You know, Amazon has the brand referral fee basically, so you can recoup 10% of their referral fee if you're pushing traffic from off Amazon sources, influencers, Instagram, whatever it is, you can get 10% of your margin back.

Through this program with Amazon, it's really just them trying to get more traffic from your websites ultimately. But it's still, that 10% is a big deal. 

Jordan Buckner: Yeah. And as you mentioned as well, right? Like I always tell. Tell other founders go to where customers want to buy your product. If you try to deviate them on another path, as you mentioned, you're gonna lose maybe two thirds of them just because of the friction there versus, you know, I look at myself as a consumer.

If I hear about a product, I go into Amazon, I'm like, oh, crap, 30 seconds later, I already bought it. Right? Like I don't have the time to regret my purchase because it's so easy to buy. 

Aaron Gailmor: Exactly. 

Jordan Buckner: Exactly. So [00:10:00] love that. And then, I mean, I think the other areas is right, reviewing your business structure, how you're producing your product, your S G N A, your sales and general admin, expensive overhead.

What changes did you have to make in Brass Root there? 

Aaron Gailmor: Yeah, yeah. You know, we had to cut our team down just straight up, cut our full-time team down. So that came in by. About, you know, 40%, basically a little bit more, 40% on a dollar basis. And these are people I really liked and like their quality of work, we just you have to unfortunately decide is the business gonna stick around or am I gonna be do I never wanna fire anybody and never wanna let anybody go.

And you know, I evaluated every component of our business and how necessary it was to the strategy over the next six months rather than like the strategy three years down the road. So we made a lot of good decisions unnecessary decisions, I would say. And, you know, a lot of these things we also dropped agencies third parties.

So we don't have , a retail broker anymore. Because it [00:11:00] doesn't align with our strategy, right? Like our near term strategy. I'm not trying to get into 10,000 retail doors in the next year. It's just not gonna happen. I'm not set up to do that. And so, We don't have that. We actually currently don't have an online agency either.

So we've actually been, in the near term, been bringing Amazon knowledge in house and doing that all in house. So we're just extremely, extremely streamlined and I, you know, I've had to learn new things, which actually brings some fun, additional fun things back into the mix, quite honestly. And yeah, we had to slim it all down.

Jordan Buckner: Those tough cuts can be really tough. I've been in that situation myself. I had to let go of employees and it's a big challenge. I know a lot of founders , will fire too slowly, in fact as well. And because it comes from a place where you're , I like this person. They're doing good work. It's not them, it's the business.

Like it's not them, it's me, but it's the business. And that's really tough. And as long as you do that gracefully and with dignity and with respect and don't kind of spring it on people, then you know, of course it's [00:12:00] gonna suck for them. But in the end of the day, they're gonna be understanding, they'll move on , to what's next and what they need to do.

But as you mentioned, like . Those changes and those cuts from personnel to agencies are definitely necessary if your business is gonna continue to survive and to eventually thrive. 

Aaron Gailmor: Yeah. The other thing, Jordan, I think worth mentioning real quick is I've thought about what, how we got to this point and have been able to achieve that.

You have to find every partner is super critical. Like even your 3PL is really important because at a certain point things aren't gonna go exactly how you planned. And so you wanna have good relationships with the people that matter at your 3PL or you know, your, certainly your manufacturer if you're co-manufacturer, to the point where you can ask.

For help or like, Hey, gimme a little bit of time to pay this, or you know, I think having those good relationships with , and where you're communicating and you're updating people on everything and what you're doing to improve the business is critical because you'll need those relationships at some point too. [00:13:00] And we have. 

Jordan Buckner: I think that's so important to make and right, like if you're asking for extra terms or a little bit of reduction, of course they're not gonna love it, but they're rather get their money eventually than never at all. And so I think those are key. Now I think one of the challenging parts in this space is that getting to a point of profitability is it's.

Great. But growing the C P G brand is also really expensive because of the fact that most people who buy products don't buy it indefinitely. So there's always gonna be attrition. So if you're not adding customers, then your revenue is going to kind of change over time. Tell me about your thoughts on like what does it take from at the next step if you want to grow your brand, once you kind of hit that profitability step.

Aaron Gailmor: Yeah. Yeah. I think, you know, and I've had some conversations with other founders in this arena. The clear sentiment and realization I've had is that you can't especially if you're small but even if you're big, if you're a brand and your consumer facing brand, you can't rest on your [00:14:00] laurels, nor can you rest on your existing customer base.

Right. And , where you can just assume they're gonna be there for you. And keep, cuz you are fighting against, Huge budgets from other brands and other emerging brands that are fighting for your customers all the time and their attention. And ultimately you will, people will churn, your customers will churn.

And so you certainly have to keep , in the long run, in even the medium run you have to. Have enough money to be marketing to your existing customer base and new customer base. It's just, it's not gonna work in the c p G space and that the consumer facing brand space, if you're not spending much money on marketing, which we haven't been doing, you know, we've started to do.

Again, I think all brands have to, at some point be reinvesting in their brand in that respect. 

Jordan Buckner: Right. Like it's building that strong business foundation, but you need to have the margin, the spend on growth. That's [00:15:00] ideally, I mean, it has to be higher than the cost of acquiring those customers, right?

Like even if that's squeaking on , a thin margin after that, you have to be able to keep adding. That's so key. Aaron thanks so much for talking about profitability. one thing I always advocate for brands is to. Build to that point of profitability first if you can, and then decide how you wanna grow the business from there.

Either. If you have the cash flows, continue to build it. If you wanna take on debt to grow, you have that option. Or you can take on equity. But at least it gives you a couple more options because this is, it is an expensive business, and if you wanna build a large company or a growing company, then you need money from somewhere.

Either your customers, a bank or investors. And so make sure that you know as much as you can, you can help control that destiny. 

Aaron Gailmor: Yeah, a hundred percent. Thanks, Jordan. Thanks, Aaron.