The Growing Pains of two 10m Per Year Amazon Sellers

Richard Morgan
April 11, 2018

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Nick and Fernando join to talk through Growing Pains of two 10m Per Year Amazon Sellers.

Met in college, started four years ago in ecommerce and stumbled along until hitting FBA and in first month made a lot more in first month than in six months with previous ecommerce solutions. Hit the 8 figure mark this year.

Fernando has always been into entrepreneurship, out of college worked in Finance for a bit and then into tech and then startup and building business. Just hit the three year mark selling on Amazon.

Fernando was employee number two at a Ycombinator startup. Both have eaten broken glass and baptism of fire through the startup scene ups and downs.

How did you start on Amazon?

Friends were in ecommerce and so wanted to build a standalone site
Similar to Tim Ferriss niche on health etc
Working with partners but 75% were a pain in the ass
Wasn’t growing as fast as they wanted
Started looking at creating products so they could control their destiny on where they were sold
Selling on eBay was the backup plan
But why sell on eBay if we bought everything on amazon
Then they stumbled across FBA and the Amazing Selling Machine
Seemed simple enough and they did it
Started in March and sold more in a month than in six months doing it on their own shopping cart

Problems from Success

First year was so much success in $2.5m revenue
Have a tech background so
Increase top line revenue was the aim and so just added product after product to achieve that
BUT..margins were shrinking across the portfolio
Finance report card would come 4-6 weeks after and so a time lag in what was happening becoming visible
Dreaded the report card showing margins shrinking
This was the 2nd year and looking to triple the revenue
Why were margins so poor – had excuses for it (hiring more staff, etc)
Ended up with the position of only 4 months of cashflow left!!

Cashflow Headache

Had raised several rounds of finance with banks, promisary notes (a customisable way of structuring debt – interest only for 2 yrs)
Really favourable approach for inventory businesses
Had just 4 months left of cashflow
Knew we were in trouble but a big challenge was expensing the freight up front
Some months were super profitable as the freight was low and other months freight was high and we were negative
Working late in the office and going through the profitability of the products over time
We saw that one of our best performing SKUs doing $50k profit per month had dropped to $15k profit over 60 days
At the same time hiring people and adding profitable SKUs as well – so this was hiding the problem until the end of the 60 days
Had to cut costs and people – so what were the ‘essential functions’
Really focussed the company on 80/20 to get it fixed
Did a per-SKU ROI to understand which were core SKUs and which were eating cash

The Layoffs

Had to layoff great people and difficult
Did it all in one-shot
Specifically for FBA businesses, your margins are a lot slimmer and a huge payroll of people in LA didn’t make sense
Really needed to get better at the analytics and reporting
Kept more people with analytics background
Each person had a single major task to focus on for the next 90 days
We had also ;just’ given offers a week before to two people
Brought everyone that was going into a room and explained where the company was and it was sad and difficult
Then the next group that was staying were brought into a room and buy-in was sought to ensure stability in the company

The Turnaround

After the 90 days focus period
Losing the headcount brought us back to breakeven
Had a huge backlog of products that carried us through the year end
A big thing was clearing out inventory that was slow moving or dead inventory
Needed to be 100 or 150% cash efficiency
Everyone was gung-ho in making this happen
And one of the guys that stayed on said it was the best experience of his life going through this rollercoaster

Rapid Growth

How did the stacking of SKUs come so quickly
First few products were decent with $20k / month and decent margins
In month 5 hit a category that was on fire – every dollar invested brought $5 back
These were doing $100k / month revenue
The cash we needed was to keep those in stock
With the loans from family and friends really helped finance the company in the early days
We were aggressive with approach and debt to expand that category really well – a huge advantage over competitors
This kind of led us not to be so disciplined because we were so lucky in the beginning

Changed Strategy

Still stacking SKUs but changed strategy
We realised from that lesson that we were expanding into a new category just after we’d find one that was successful
The downfall was moving to ew categories too quickly
We now go as deep as possible into our category that’s winning – because Amazon is so competitive
We cannibalize ourselves before someone else does
Lengthen the product life cycle when we find a winner
Launching as many as possible, minimising the number of factories working with and maximizing our economies of scale
Operate with 10-20 products out of the same factory to help with negotiating costs down through bulk purchase

Shipping Optimization

We didn’t optimize our shipping
Now we have dedicated people on Inventory Planning and Logistics
At the time we got in trouble as the same person handled inventory planning and supply-chain
Spent $270k in air shipments
Q4 storage was $80k / month within Amazon
Now use a 3PL on East and another on West Coast
All shipments from China go to the West Coast
We have someone looking at sales and arranging drip-feed shipments into FBA as needed

Marketing

Amazon give favour to new products – 14 days window of love
Aggressive with PPC out of the gate
Product Selection is key, if you get it right and are adding value then it’s a lot easier
Not as competitive products and ones we can add to on value to and dominate
Cannibalising ourselves or others
We do major keyword research
And target those aggressively with PPC
Using Sean Smith (friend of the Seller Sessions show)
And a specific launch strategy
If you choose the right products you don’t have to do much more than PPC

Scaling and Maturity

Systems are key as well as People
Working with 30 manufacturers with 200 SKUs
Amazon US, Canada, Europe
Really need processes and people follow them to be able to manage it all
The people we were hiring was just to fill roles – was rushed
We are now more proactive
Got a HR recruiting person who has joined the team bringing structure and quality
Bring people with experience – cheaper and enthusiastic younger is good but maturity of the business needs more experienced people
Marines > Army > Military Police – levels of maturity