An Unexpected DTC Deathtrap - Incremental Initiatives

Incremental = DTC deathtrap

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As management, the highest leverage use of your time is ensuring your team allocates their time into initiatives with the highest returns.

The more cash flow you generate, the more important it is that your management team can allocate effectively.

With scale, it becomes incredibly easy to fall into the death trap of allocating into incremental initiatives.

Why?

• It’s easy to confuse them with Easy Wins (you’ll see below)

• They can be quick and satisfying, and do not require a lot of thinking.

• The team has not been trained on how to estimate the impact of an initiative or have benchmarks from their management team.

This is the most common reason direct-to-consumer brands fail to grow fast from ~$5m - $10m → $50m+. Allocating resources into low return initiatives will erode growth faster than you think!

It’s easy to deploy $1m across a business, but what about $10m or $25m?

One person can allocate $1m, but $10m requires excellent allocation skills from your team.

This simple two-part framework is how we think through and teach the art of allocation within our portfolio companies.

There are two parts to it.

1. Impact VS Effort.

2. What is Meaningful Impact?

Part 1: Impact Versus Effort

Let’s start with a visual…

The DTC Deathtrap of Incremental Initiatives…

The bottom left quadrant is a massive death trap that will annihilate growth.

Most founders know to avoid the Money Pit quadrant - it’s not rocket science…

Literature on impact VS effort will say that tasks falling into the Incremental quadrant should be done when there is “extra time available”.

That is a bad way to look at it because literature that says that is offering advice to managers at companies with $250m+ in revenue.

As a fast-growing brand with under $50m in revenue, the “extra time available” phrase does not apply.

Here’s why…

• If a business with under $50m in annual revenue has “extra time available” and can’t think of higher yield initiatives, then it’s a sign of bad management. Management’s job is to ensure everyone is focused on projects that generate high returns on investment. That’s what leads to exceptional growth.

• There is no shortage of projects you should in your pipeline that fall into Easy Wins & Big Bets. You are not running a massive old company with decades of optimization.

• Spending time on incremental initiatives lowers growth rate substantially. It’s simple math. What would happen if you invested all of your money in a company that returned 10% a year instead of 200% a year? Returns would be horrific.

• It’s easy to fall into the trap of working on incremental tasks because they do move the business forward, and can be satisfying to complete.

My friend Dave Rekuc summarized it nicely…

“The bottom left quadrant is so pernicious because the true impact is always less than estimated and the true cost greater.”

Examples of common initiatives you see in DTC that can be classified as Incremental…

• CRO. People love this. Running elaborate A/B tests - which have some bug that tanks data - that will not produce much lift even if things go well. Why are you testing button colors when you have not tested pricing, free shipping tiers, or offers?

• Custom apps. Spending 100+ hours to build a merchandising app is cool, and probably fun, but a bad use of time if your offshore team can handle it for a fraction of the cost - and with more flexibility. Dev teams love suggesting you build an in-house version of X app on Shopify that only costs you $4 a month. Do not let them do this.

• Dashboards. All departments are guilty of wasting a ton of time building out some crazy dashboard with extensive automations. CFO-types love it and it’s a huge waste of time. When I was with my friend Sean at Ridge, his dashboard was easy to read and relatively straightforward - and he runs a 9 figure business. You do not need some custom built beautiful Tableau dashboard for your dog blessing company with $11m in revenue.

What is the antidote?

It’s very simple.

1. Make sure your team understands how to prioritize initiatives and allocate resources. Sharing this article with them makes it easy.

2. Set high return targets, expressed in a quantitative way.

3. Religiously hammer 1 & 2 in - hold your team accountable.

Let’s tackle #2. But first, subscribe? It’s free and my blogs will always be actionable & practical.

What is Meaningful Impact?

What is a quantitative definition that you can use to assess how how impact a given initiative has?

The two most common financial metrics for this are MOIC & IRR.

MOIC = multiple on invested capital. If you invest $1 and receive $4, then MOIC is 4x.

IRR = internal rate of return. Discount rate that makes the net present value of an investment equal to zero. I like IRR because it accounts for time.

You can not consistently calculate MOIC or IRR for any initiative in a startup environment.

What you can do, is run quick analysis to ensure you aren’t focusing on something that would fall into the Incremental quadrant.

I suggest setting a “high” target. Something like 4x - 5x MOIC within 12 months.

That number seems high, but there’s a lot of nuance to this…

• High targets give you a nice buffer for failure or underperformance. It also encourages you to take substantial swings which prevents you from underdeploying capital. Sitting on excess cash in a business is a sign of bad management.

• Few initiatives deploy 100% of the required resource up front. Factor this in when calculating target returns and the target is far less daunting. For example, if you have net 30 terms from receipt of goods on a new supplier with better pricing, you do not actually incur the cost for 30 days AFTER receiving the product. This means you had an additional 30 days of sales before spending a dollar - with the exception of the time spent sourcing.

• Factor in raw dollar costs and the team’s time required.

• The grayer and less quantitative the impact, the bigger the expected return on investment needs to be.

How Do I Implement This?

1. Rinse your team through this blog post. Here’s a button to make it easy. It’s big, pink, and ugly:
   

2. What is your target growth rate? What about EBITDA & revenue? Once those are set, work backwards to determine the IRR you need on initiatives in the pipeline.

3. Make a big list of initiatives and map out what expected IRR is per initiative. Be sure to break out when the associated financial or human costs will be incurred - and when returns will be realized. This changed the internal rate of return substantially!

4. Review each initiative to make sure everything is on track.

5. When a team member has an idea…ask them if it meets the targets you outlined in step 2. Never do the math for them. Always ask them to do it and show you their thinking.

Notes:

• I wrote this quickly. Please comment if you would like something explained better or feel I missed a critical piece of information.

• Impact VS effort is a concept lifted from lean manufacturing. It’s beautiful because it can help everyone from your executives to front line production workers on your manufacturing team. Ideation from everyone improves massively with this simple matrix.

• Please share with your teams and subscribe. :)