GE 144: Drew Sanocki On Why Expanding a Business Too Fast Can Actually Lead to Bankruptcy (podcast) With Drew Sanocki

Drew Sanocki

Today our guest is Drew Sanocki, founder of Nerd Marketing. Drew writes about e-commerce and bootstrapped his own retailer in 2003, grew it into a national brand, and sold it in 2012. He now spends his time advising e-commerce executives on how to achieve growth.

In today’s interview we’ll be talking about how expanding too quickly can lead to bankruptcy, how he grew a drop ship retailer from zero to a million in revenue in the first year and a half, and why he pays comedy writers to write his product descriptions.

Download podcast transcript [PDF] here: Drew Sanocki On Why Expanding a Business Too Fast Can Actually Lead to Bankruptcy TRANSCRIPT

Episode highlights:

  • [2:34] – How expanding too quickly can cause a behemoth company to go bankrupt. Once a company grows unprofitable it starts to cascade.
  • [3:14] – Drew discovered the world didn’t need another design brand, they needed a better way to sell design. He started a drop ship retailer that went from zero to a million in revenue in the first year and a half.
  • [4:01] – In 2010, Drew noticed there was a lot of VC-backed competition and it was a good time to sell. Which he did.
  • [7:51] – Design Public’s success was SEO based. To have unique product descriptions, Drew paid comedy writers to create them, and developed a tool for users to submit product photos and receive a purchase discount.
  • [9:30] – For the future, Drew is passionate about direct to consumer brands. Building brands that resonate with certain customer segments.
  • [15:59] – Drew is focused on achieving results through customer segmentation. His favorite tool is Excel and he teaches his clients basic segmentation tactics.
  • [17:40] – Customer analysis will tell you what is driving your business
  • [22:24] – Internal struggles within their own team slowed down the early process of Design Public.

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Disclaimer: As with any digital marketing campaign, your individual results may vary.

Full Transcript of The Episode

Show transcript
Drew: You know, you do the same amount of marketing work to optimize a $100,000 revenue company as you do to optimize a $100M revenue company. If you can focus on SEO or focus on whatever you skillset is - if you're a Google AdWords person and you grow revenue 10%, it's the same amount of work to do it at a $100M company as it is a 6-figure company. And yet the payoff is so much bigger. So I think there's a strong argument to, if you're in a consulting capacity, going bigger.

Announcer: Do you want to impact the world and still turn a profit, then you're in the right the place. Welcome to Growth Everywhere, this is the show where you'll find real conversation with real entrepreneurs. They'll share everything from their biggest struggle to the exact strategies they use on a daily basis. If you're ready for a value packed interview listen on. Here's your host, Eric Siu.

Eric: Hey everyone. Just a quick heads up that we're giving away a eBook called, "29 growth hacking quick wins." We co-authored this book with Mattan Griffel of One Month. It'll give you a solid base on where you can create growth ideas from. All you need to do is text "quick tips" to 33444. That's the word quick, Q-U-I-C-K, and tips, T-I-P-S as in sugar, to 33444 and you get instant access.

All right everybody. Today we have Drew Sanocki who is the founder of Nerd Marketing. Drew writes about eCommerce and has bootstrapped, or did bootstrap, his own retailer in 2003 and he grew it into a national brand which he eventually sold in 2012. Drew how are you doing today?

Drew: I'm doing well. Glad to be here.

Eric: Thanks for being here. Why don't you tell us a little bit about who you are and what you do?

Drew: Sure. My name is Drew Sanocki. I started an online retailer in 2003 called Design Public, which was a retailer of, still is a retailer of modern, contemporary home design products. I bootstrapped that, grew it through 2011, 2012 when I sold it to a private investment group. After that I started consulting for PE funds, or Private Equity funds, and ultimately joined one. I'm what's called an operational partner. An operational partner does diligence on potential deals, and if we find one we like I may get involved, operationally, in growing that company. In that capacity I'm currently the CMO of a online retailer called Karmaloop which is up in Boston. Karmaloop went bankrupt a year ago at this point, and we bought them out of bankruptcy. Now we are growing them back to profitability.

Eric: That's a fantastic story. I remember when I was, I think in middle school, I used to buy a lot stuff from Karmaloop all the time. It's such a crazy world that we're in.

Drew: Karmaloop was $100 million retailer at one time.

Eric: Yeah.

Drew Sanocki Page 3 of 11 Drew: Before they went bankrupt.

Eric: How does that happen? I guess you can't too much into details, but how do these things happen to behemoth companies?

Drew: You know in their case I think they expanded too quickly. The classic case, they ended up taking venture money, and maybe that caused them to push down their foot on the gas and expand into a lot of areas that probably they shouldn't have expanded into. Once you get unprofitable and things start to cascade, you often can't stop it. They ended up bankrupt.

Eric: Makes sense. The company that you bootstrapped initially, talk to us about that company. What you did exactly, what were the key drivers that led you to selling it in 2012?

Drew: Yeah. That company, I was initially very passionate about modern design and wanted to do something in the space. Tried producing my own line of furniture but after going to an early trade show I quickly discovered that there was a lot of design out there already. The world didn't need another design brand, what they needed was a better way to retail it and to sell it online. Started a retailer, the retailer took off. We went from 0 to a million in revenue in the first year, year and a half. It was 100% [drop ship 00:03:46] so we treated it like a software company. Drop shipping for those who don't know, we didn't hold any inventory.

Grew it, bootstrapped it. We kind of saw the writing on the wall in 2010, 11. There were more and more VC backed competitive companies. We figured to really compete with this model we might have to raise money. We figured it was a good time to sell. We were lucky enough to find a good team to buy us.

Eric: Okay. Can you reveal the number that you sold for?

Drew: No.

Eric: Okay. Can you give us some rough range?

Drew: Contractually I can't.

Eric: Okay. No problem at all. Give us an idea, you got the revenues from 0 to 1 million quickly, at the high point what was that at?

Drew: I also can't talk about that.

Eric: Wow, okay great.

Drew: Higher.

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Eric: Okay. Higher is good. I'm going to have to assume so I would hope so. Let's talk about the key drivers of growth, since you can't talk about those numbers maybe we'll try to back into some stuff. How did you go about acquiring, let's say your first hundred customers for Design Public? It's Design Public, right?

Drew: Yes. Yes.

Eric: Okay.

Drew: It was an SEO driven business. I think we chose a great market to go into. Modern design is tailor made for SEO because you've got a lot of brands, so people don't search for a chair, they'll search for an Eames lounge chair in black. If you get good at SEO you can have your site ranked for a number of different brands, or product categories. There's a real long tail there. In 2003, 2004 there weren't a lot of competing retailers doing the same thing. Design Within Reach was a bigger brand but they were really more focused on their catalog than online. At least for the first 5 years we operated without a lot of competition, whenever we had a product we ranked number 1 or number 2 for it, just a lot of trends in our favor. People going online to shop more, that led to our initial customer acquisition.

Eric: Okay. When people start eCommerce companies, when you're competing, when you're drop shipping especially, you're going to have a lot of the same products that other people have and the product descriptions are likely the same. I'm imagining that if you have a ton of different [SKUs 00:06:02] it's hard to have custom descriptions for each and every single one. How did you go about having, quote unquote, unique content for Google to get those first page rankings?

Drew: We had custom descriptions for every product. Yeah, it took a long time.

Eric: Okay.

Drew: We did a lot of automated stuff, I remember building a little tool to automate our meta descriptions and our title tags and stuff, to make them look kind of unique, even though they were being automated. But at the end of the day, we were bootstrapped so I got on Craigslist and hired a lot of work comedy writers in LA to draft our product descriptions. I felt it gave the site more personality, because you hit the nail on the head when you're drop shipping it's really hard to differentiate. The 2 big ways we were able to differentiate was in our product copy. I looked at guys, or catalogs, like the J Peterman catalog that were known for good copy writing, and I said, "This is one way we can differentiate."

Another way was in our imagery. When you drop ship, most of your vendors give every drop shipper who carries them the same product images. To differentiate there we built a little tool to get user submitted photos. [inaudible 00:07:13] the inventory we couldn't photograph the product ourself, plus it was pretty expensive to do that. We just encouraged our customers to send us photos and we put those right on the product page.

Drew Sanocki Page 5 of 11 Eric: Was there any incentive for them to put custom photos up?

Drew: Yeah. I think they got a 10% off their next purchase.

Eric: Smart, smart. Get the other people to the work, especially I think that's a little easier once you give them 10%. I want to dive back into the writers that you hired, the comedy writers. I've never actually thought of that before and I think that's genius. How does that process look? What are you paying these people? Walk us through the process.

Drew: This is ancient history. This is probably 10 years ago at this point. You find one and usually if you find a good one they've got friends who want to do it too. I think we paid a couple hundred bucks per description, showed them, over time built out a process manual on how many words it should be and how they should ... We basically taught them SEO, where do you use some keywords? They were able to innovate around it. It was a pretty good effective system.

Eric: You said you were paying a couple hundred bucks per description?

Drew: Maybe, back in the day, yeah.

Eric: My God, that must add up. How many SKUs did you guys have?

Drew: We ultimately had 50,000, but that number is more ... There are a lot of the same item but different colors and things. Obviously they don't need a different product description.

Eric: Okay.

Drew: We did a lot of 80-20 analysis too, so we're not going to focus our efforts on the whole long tail of products, but let's focus on the 20% that are really driving the business.

Eric: See, that makes a lot more sense. Instead of spending maybe $5 million, I should say, on product description, you're only focusing on the ones that are driving a big majority of the revenues, right?

Drew: Yeah. That kind of gets to what I do now to grow companies. I do a lot of customer segmentation. Really for almost every online business, including content businesses, you find that 20% of the customers, 20% of the readers if you're a content business, drive 80% of the transactions, page views, engagement. Whatever the metric is you have, that 80-20 rule in effect.

Eric: Got it. Okay. That totally makes sense. You've done eCommerce for a while, you're very familiar with it, where do you see eCommerce going in the next 10 years or so?

Drew: Personally I'm passionate about direct to consumer brands. Amazon kind of owns everything else but if you can develop a brand that resonates with a certain customer

Drew Sanocki Page 6 of 11

segment, then I think you're okay. That's what I look at buying now in my role at a private equity firm.

Eric: How do you evaluate ... If you're doing due diligence, let's say you're doing due diligence on a company like Karmaloop, great company before everything fell apart. What's your process? This is probably a really loaded question but at a high level how do you go about evaluating somebody?

Drew: For me the diligence is more on the digital side. They've got guys doing financial diligence who are looking for accounting irregularities and where they might make money,rhaps on the operation side. But when I go in I look at the marketing side. In Karmaloop's case, there are huge assets there. They were getting tremendous traffic every month. 50% of that traffic are just kids typing in Karmaloop, Great brand awareness, I saw that as a huge asset. Also huge mailing list, millions of people on the mailing list and a fair amount of them are active too. That's another huge resource.

You see these 2 resources, and then I say, "Are they really leveraging both?" I saw big opportunities across SEO, SEM. The company wasn't fully optimized on certain marketing channels. I really like getting into customer segmentation. I will go back and look at 5 years of transactional data, figure out what kind of customers are driving the business and then look at their marketing and see if they are targeting those customers. In Karmaloop's case they weren't. They weren't always targeting their best customers. That to me was an opportunity.

Eric: Makes sense. I'm sure there's marketers listening right now and they're like, "I want to get into PE in some way, shape of form, this sounds really cool." How did you go about getting involved in a operational partnership role at a PE firm?

Drew: You know I just started consulting for these firms. It's my personal network. A lot of guys I went to business school with are at private equity funds. I learned pretty quickly that they have a need for marketing. Almost every PE guy I talk to is asking for referrals to agencies or contractors, because they're really sharp people who often have a finance background. They're at square 1 in Google Analytics and are always looking for good people who know digital. My consulting practice expanded to the point where it made sense to partner up with 2 firms in particular and help them on the marketing side.

Eric: That makes sense. It sounds like the key take away here is to keep doing great work and keep growing relationships.

Drew: Yeah. Your audience is mostly marketers, right?

Eric: Mostly marketers, I would say half/half marketers and entrepreneurs.

Drew: Yeah. I think the big take away, at least for the marketers is, you do the same amount of marketing work to optimize a $100,000 revenue company as you do to optimize $100 million revenue company. If you can focus on SEO or focus on whatever your skill set is.

Drew Sanocki Page 7 of 11

If you're a Google AdWords person and you grow revenue 10%, it's the same amount of work to do it at $100 million company as a 6 figure company, and yet the pay off is so much bigger. I think there's a strong argument to, at least if you're in a consulting capacity, going bigger.

Eric: I like that. Before we even started the interview you talked a little bit about how you're really focused on maximizing customer lifetime value. Can you go into that a little bit?

Drew: Yeah. Any business, certainly in retail, has 2 groups of customers. You've got your, I call them the minnows, and they are your bad customers. They're customers who often order once and never come back again, or maybe they take up a lot of customer service time. Then you've got your whales, on the other end of the spectrum. The whales order several times, they pay full margin, they don't return anything. If you look at the numbers you often find the whales make up 5% to 10% of your total customer base and they drive 80% of your revenue.

If you dig deeper, you find that these whales share certain acquisition channels, even within an acquisition channel. Maybe more of them come from AdWords than from Facebook, or likely they come through email than from Facebook or something like that. But even within that channel certain ad groups, certain ads even, certain bits of copy are more likely than others to drive a high lifetime value customer, to drive a whale. Marketing essentially becomes first identifying those whale segments, and then putting your time and effort into growing the channels that are contributing to acquiring them.

Eric: Okay. When you do your work today, even if we look back at Design Public, what tools do you have in your toolbox right now that you consider critical?

Drew: Excel, really. Excel's the big one. I'm in there modeling all the time, and increasingly SQL and [R 00:15:01], which is another data analysis tool. With a very simple Excel model, and if you go to my blog, I walk you through how to do this. If you sign up for my list I'll send you my model. It's basically for more retailers than you would imagine, it costs just as much to acquire a good customer as it does to acquire a bad customer. If the question is how do you add another million dollars incremental revenue to your top line? There's a very strong argument to going out and acquiring more whale customers, as opposed to the hundreds more minnow customers that you would have to acquire. It's really just figuring out your customer acquisition cost and lifetime value, comparing those to your numbers across a variety of marketing channels.

Eric: You have on, and we're going to link to all this in the show notes, you have links to how to set up all these models using Excel and all these other tools.

Drew: Yeah. It's one of my favorite things to do when I speak. I know Eric, you and I are going to speak at a conference together in a couple months, maybe I'll do it there.

Eric: Yeah.

Drew: It's really have everybody open their computer go into [GA 00:16:10] and start walking

Drew Sanocki Page 8 of 11

them through some basic segmentation. If they're like most retailers, or most business owners, they've never done it. They hear segmentation and they just think, "That's something Amazon does. You need big data to do that," but you don't. You pretty quickly can find out segments around your best customers and your worst customers and then really see how the best ones drive your business.

Eric: Yeah, I love this. I love this, I love this, because people are, especially marketers, especially we're all focused on looking at the latest tactics and executing on the latest tactic, but we don't really take a step back and say, "Okay, how do we really utilize Excel to its maximum to figure out what other valuable insights we can dig." I think there's a great video out there, I think it's called, "You suck at Excel," on YouTube. The stuff that you're offering right now I think is awesome. I'm definitely going to download it because it's critical to scale and build out stuff, without this stuff you're not going to be able to, right?

Drew: I think you get caught in tactical maneuver hell. Where you read blogs, and me as a business owner when I read blogs I get stressed out because I make lists or I go to conferences and I come back with a notepad filled with action items. I'm like, "Where the hell do I start? Do I start with conversion rate optimization or email subject lines or fixing AB testing my paid ads?" Whatever, I need context for all that and I think strategically about customer analysis gives you the context. It's going to tell you what's driving your business, and start there. For your business Eric it might something very different than it is for Karmaloop. It could be a different channel, it could be email versus Facebook and whatever. You get the sense, you want to build the business around your best customers. Once you figure out what that is it puts all the other tactical maneuver hell into context.

Eric: Yeah. Just to be fair, you look at technology startups today, there's more tools available and people are thinking about this stuff a little more. I would say I think we can, just as marketers especially, we can spend a little time on this, spend a little investment and then just help our company just by knowing this stuff.

Drew: Yes. Certainly if you're bigger and it makes economic sense you look at Custora, RJMetrics, Kissmetrics, there are a number of companies, SaaS companies that talk about lifetime value, and track it back to acquisition channels. But if you don't want to go that you route you can do it with a spreadsheet and that's what I talk about at Nerd Marketing.

Eric: Okay. I'm staring at your about sentence again, where it says that you grew Design Public into a national brand. Obviously a lot of SEO came into play, but what else did you guys do to grow it into a national brand? I guess the question to you would also be, what does a national brand look like?

Drew: That's a good question. I think a national brand means you're talked about in national press. We were in the New York Times a fair amount, GQ, Esquire, a lot of big national magazines talked about Design Public. I would say since we sold it more competitors have emerged I think of national brands now, it's a much more crowded space than

Drew Sanocki Page 9 of 11

when we did it, but to me that's what I thought when I thought of what a national brand means. [inaudible 00:19:37] you're a player on the national field, in the national press.

Eric: Okay. SEO did well for you guys. It sounds like there's some PR involved too. Is there anything else you guys did that was a significant driver to get that national brand?

Drew: Yeah. I don't know if you read, Good to Great by Jim Collins. Okay, the flywheel of growth, you got it that there's something you do that self reinforces. SEO was great for acquisition in the early days but what really mattered was the emergence of the design blogging community. In 2003 to 2008 we saw more and more people getting their design news from blogs, as opposed to from magazines. Now it's obvious, but back then it was a new phenomenon. When the choice was take out a $10,000 ad in Metropolitan Home, or Dwell, or try to get Maxwell at Apartment Therapy to blog about you, the answer was clear. We should court design bloggers. What's the one thing design bloggers want to talk about? They want to talk about what's new, so we said, "Okay, if we can be about what's new, then we can the design press to talk about us and consumers buy because they read about us in the design press." That was our cycle.

It meant building a company that could merchandise quickly, that could add product quickly, could get that product in front of the design press. That really dictated our push marketing, a lot of our email marketing and things like that, to get new product in front of the design press. Then to take the result in traffic from that, get them to sign up for our list and buy product and use that money to source even more new product. That was the cycle we had going, it was a nice little [inaudible 00:21:29] like a content marketing cycle. It's all the content we produced, it was about new product. We'd push that to the design bloggers, the readers of the blogs would come and buy product from our site and it went right back into merchandising more new product. I think that cycle, that flywheel of growth was what drove our business in the early days.

Eric: I love it. If I were to [distil 00:21:49] it, my interpretation is great content marketing coupled with, they call it influencer marketing nowadays, it just kept repeating and growing over and over, right?

Drew: Yeah. It obviously has to resonate with your customers, and I think in our case it did. That was a huge contributor to our early growth.

Eric: Okay. Tell us about one big struggle you faced while growing Design Public.

Drew: I think one of the biggest struggles was internally with our team. My business partner and I wanted to take the business in one direction, because we were growing so quickly in the early days, we hired from the design industry. We didn't want to build a design business, we wanted to build like Amazon. We butted heads with our own team, and I think it slowed down our process a lot in the early days in many ways. We brought people in from the design world because they could answer the phone, because they could pick up the phone and talk design. They could design with anybody who called in. Those people were also resistant to the automated nature that we wanted, the automated elements we wanted to bring to our business.

Drew Sanocki Page 10 of 11 Eric: Okay. I guess if you were to go back and redo it again, what would you change about the situation?

Drew: I probably was underestimating company culture and the impact that could have on how quickly you can change. I would have been quicker to fire quite frankly, to get rid of people and to replace them with people who shared my vision. I think as a first time entrepreneur I was probably a little bit hesitant to do that and ended up holding on to some people longer than I should have.

Eric: Completely guilty of that too. All right, I'm going to switch gears right now. If you were to give yourself one piece of advice at 25 years old, what would it be?

Drew: 25 I was in the Navy. I think, "Start," would be the advice. Start the rest of your life. I think I acted at 25 like I had all the time in the world. I look back at certain jobs I did back then, I'd punch a clock, I'd get out of there and I would play video games. I don't know. I would kill for that kind of time today because I know what to do with it, but today I'm married and I have 2 kids. I wouldn't trade that for the world, but my entrepreneurial life has to happen Monday to Friday, 9 to 6. That's the time, everything else is off limits. Back when I was 25 and single and didn't have obligations I had all the time in the world. I should have tried to start 10 companies back then.

Eric: Well said, well said. You were in the Navy, can you share one productivity hack you have that ... I guess you have to share one productivity hack.

Drew: I have so many right now, but I think one of the Navy things, just the importance of process was huge. I guess it is a productivity hack. I think research has backed that up, that you've got to focus on the inputs in order to get the outputs. So many people want the output, they want the book, they want to have written the book, they want to have created the $1 million company, that they ignore the process. They get caught up in tactical maneuver hell, which we talked about.

They try everything and they're just taking shots in the dark. What actually they should focus more on is what we called in the Navy SOPs, Standard Operating Procedures. For me the standard operating procedure is Monday I get up and I write for my blog for 30 minutes, then I move on to working on Karmaloop or looking at their analytics dashboard. Whatever it is for you, just that mentality that you're going to do the work and ultimately you're going to have something to show for it. I'm going to have the book, I'm going to have the blog, or I'm going to have the million dollar company.

Eric: I like that. Now if you even look at Google Trends a lot more people are talking about morning routines and how it sets the whole tone for the day, the week. It's sets the tone for your life I think. It's all about habits. I like how you're approaching it.

Drew: Yeah. I love James Clear's work, Every other post is about creating the habits as opposed to focusing on the results, and the results will come.

Drew Sanocki Page 11 of 11

Eric: Right, right. I like that. Okay. Well if you were to recommend one book to the audience what would it be?

Drew: Do you know who Perry Marshall is?

Eric: I do.

Drew: Yeah, so Perry Marshall's, "80-20 Sales and marketing," book is awesome. It's something that everybody knows the 80-20 rule. I've probably known it for 20 years, but until I read his book it didn't really drive home just how important that book is for marketing and how much it can save you time. Tim Ferriss talks about it too. I don't know, maybe it's the way Perry writes or something but it resonated with me as a marketer. For the kind of work I do where I do a lot of customer analysis it became blatantly obvious that you can save time and become more effective at the same time by focusing on few customers, your best customers. I recommend that book, I don't know if you've read it Eric.

Eric: Yeah, great book. I also recommend the audience, I know that we recommended one book but, any of Perry's books are good because he's one of the great marketers of our time. I like that recommendation. All right, well Drew this has been fantastic. What's the best way for people to find you online?

Drew: You can email me at [email protected] My blog is I'm on Twitter, @DrewSanocki. Yeah, check out my blog, I've got a nice autoresponder course there that talks about how we got a million in our first year, and also gives you some of the spreadsheets to do some of the analysis that I talked about today.

Eric: Yeah. Make sure to check Drew at the Seller's Summit Conference in Miami. I'll be there as well in May, so I will see you guys then.

Drew: Sounds good.

Eric: Hey everyone. Just a quick heads up that we're giving away a eBook called, "29 growth hacking quick wins." We co-authored this book with Mattan Griffel of One Month. It'll give you a solid base on where you can create growth ideas from. All you need to do is text "quick tips" to 33444. That's the word quick, Q-U-I-C-K, and tips, T-I-P-S as in sugar, to 33444 and you get instant access.

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