Eric Ashman is former President and Chief Operating Officer of Group Nine Media, one of the world’s largest digital-first media companies, the former CFO of the Huffington Post, and most recently President of DTC apparel brand M.M.LaFleur. Eric recently launched a management consulting firm based in Cambridge, Massachusetts, focused on helping venture-backed founders navigate the challenges of growth, scaling and building value.
The below content appeared in a recent newsletter article by Eric Ashman and has been edited for content and clarity.
“Think about buying clothes online from a new-to-you brand. Chances are that you fill your cart with several different sizes and a wide variety of styles so that you get a feel for the pieces and how they fit your body. You may only keep a few items and send the rest back, which gives you the information that you need to make future orders – but is very expensive for the company you ordered from.
Think about something else that you might purchase regularly, like a cheeseburger. They’re great when they’re fresh, but after a little while the bun gets soggy and the burger gets cold. If you want a cheeseburger, you might be more likely to order it in person at a restaurant than through a delivery service.
When purchasing an expensive, complicated software implementation, you will want to work with an outstanding direct sales team to guide you through the implementation. By the end of the process, all of your questions should be answered and the project should be on the path to success. This is where free trials and mediocre sales teams just don’t make the cut.
All of these serve as examples of different sales channels that a customer uses each and every day. When founding your startup, choosing your initial sales channels will be one of the most important decisions that you make.
“Box, the cloud-based content management company, was founded in 2005, initially focusing on the consumer market for sharing files. In 2007, Box pivoted to the enterprise and started building an enterprise sales team. The company still uses free trials of its product to promote discovery but relies on the enterprise sales team to consolidate usage under corporate-wide licensing agreements. Today the company has nearly $1 billion in sales and counts 99% of the Fortune 500 as its clients.”
Your sales channels are crucial to finding and scaling product-market fit.
Every Channel Will Have Trade-Offs
No matter what sales channel(s) you choose to use, you will see differences in your margin profile and cash flow. Cost of sales, return rates, sales & marketing, and level of expertise of staff will all be factored into your decision of which sales channel to pursue. Your specific cash flow requirements will vary, and accessibility to future funding or debt financing will make some sales channels more viable than others.
For example, working in the e-commerce space looks much easier than it is. What seems as simple as setting up a Shopify site, uploading your inventory, and adding product descriptions, is far from reality. How will customers find your site? Without a physical storefront, what are your options to get the word out? Digital customer discovery has become more expensive and less efficient over time. Larger products that are expensive to ship and products that are frequently returned can destroy your gross margin.
Wholesale relationships can lower your gross margins more than direct sales, in addition to complicating inventory management. But in the right situations, wholesale partnerships are an effective marketing platform to reach new customers you would otherwise never have access to.
Traditional retail locations are extremely expensive to maintain, but the in-person experience should produce lower return rates. You will face capital-intensive leases, build-outs, complicated inventory management, and the challenges of hiring and retaining in-store staff. Your store employees will represent your brand to your customers each day, so expect to train and manage them to be an asset rather than a liability. The trade-off of these challenges is the the opportunity for greater customer engagement and brand awareness.
Consider these different trade-offs and how they are affecting your operation. Use the Build-Measure-Learn feedback loop to test different channels and determine if your initial ideas were good ones. Don’t rule out the possibility that it may be time to pursue an entirely new sales channel.
“Warby Parker was founded in 2010 as an online seller of eyewear with an innovative ‘Home-Try-On’ program. But early on, Warby understood the power of physical retail to build brand awareness, better control the customer experience, and manage the logistics costs associated with the online try-on program. So in 2013, they opened their first retail location in New York City. Their retail expansion continues today, with plans to open 40 more retail locations in 2022, bringing their total count to over 200.”
Vanity Metrics Should Not Influence Decisions
It can be hard to admit to yourself, but your chosen sales channel may not be the right sales channel for your business. Strong gross sales, increasing order volume, and the creation of new customers all sound like you’re going in the right direction. But not if they come at the expense of deep discounts, constant promotions, and unsustainable marketing tactics. High return rates and logistics costs will also leave you digging a hole you might not make it out of.
Net sales, gross margin, and unit economics are the true metrics that you should be basing decisions on. If they aren’t, you’ll find yourself burning through cash.
“You can have the right product for your target market, only to find that your startup cannot scale because you’ve chosen the wrong sales channel.”
Time to Change Sales Channels? Here’s How.
Once you’ve established that a sales channel is not a good fit for your startup, don’t fall victim to the sunk cost fallacy. Prepare yourself for slower growth or even to shrink your operation. These may be your best options to stay afloat in the long term – even if they hurt in the short term.
In the ideal situation, you’re using multiple sales channels and at least one offers an opportunity for scalability. If this is the case, you can focus your efforts on your most successful sales channel while shutting down the others. Growth may only slow temporarily or not at all.
In the situation that you aren’t utilizing multiple sales channels, you will find yourself in a much more challenging situation. In this case, you should slow growth and spending in your single sales channel to reduce cash burn, creating space to start testing new channels.
Don’t forget that any new sales channel needs to be launched using the same product-market fit framework. The Build-Measure-Learn feedback loop should not be abandoned, and the Viability pillar of product-market fit should be supported. Scalable growth can and should be tested into, and target metrics respected as you lean harder on the new sales channel.
Changing sales channels will have an immediate impact on your staff. Sales channels that you are closing will likely result in layoffs of some of your employees. New sales channels will require new hires with the appropriate skills and experience. Hiring and firing are not fun or easy, but shifting existing employees into roles that they don’t belong in will only hinder the progress of your entire team.
Changing or adjusting sales channels is a complex process and one that is hard to execute properly. But if your cash is running out more quickly than you expected, it can be the saving grace for your business. You will never reach profitability and realize the full potential of your startup if you’re trying to grow a sales channel that can’t scale.
