The Challenges Of Scaling An E-commerce Business To $39M/Year
This is a follow up story for FactoryPure. If you're interested in reading how they got started, published about 3 years ago, check it out here.
Hello again! Remind us who you are and what business you started.
FactoryPure is an eCommerce company founded by two brothers, Eugene and Mike. We sell heavy equipment like generators, pellet stoves, and other machines to households or small business customers.
We are consistently among the fastest-growing private companies in the United States and are on pace to generate $39M in revenue this year on around 1,800 orders/mo with a headcount of 15 in our Texas HQ and warehouse.
Find a mentor in your industry who has built a business structured like yours.
Tell us about what you’ve been up to. Has the business been growing?
Our revenue growth rate has slowed from the previous year (which was +55% YoY) due to the aftermath of some supply chain issues and the general slowing of the economy this year. Still, we generated an additional $3M in revenue versus 2021.
As this business matures, we have to take additional steps to enable scale - we’ve built a new HQ from scratch so that we could increase headcount and inventory capacity, and we are implementing an ERP to give our business a new operating system.
There has certainly been an operational recomposition - we’ve begun outsourcing some sales tax reporting and insourcing web development, bringing in some fantastic talent, including a full stack developer, director of paid search, and another accounting team member.
On the marketing side - in addition to the director of paid search, which was a big step in turning that $1.5M+ activity into a standalone position - our strategy has expanded from conversion targeting alone to general brand-building. We rolled out national XM ads this year and are still evaluating the impact - the attribution side, as in all of the marketing, is very difficult to nail down. At the same time, we aren’t expecting to convert sales from these ads - it’s more for brand recognition when people are presented with paid search impressions.
We typically get over 250k unique visitors per month - conversion is a particular challenge in our industry since we sell an expensive and technically complex product that has a long pre-purchase research phase, and the vast majority of visitors have low intent.
Our conversion rate has decreased from 0.51% to 0.37% - the ads space has gotten more concentrated as Covid accelerated a shift to online channels, so the cost of sales has increased. This is exacerbated by a lower willingness to pay given declining economic conditions this year. We anticipate a rebound on these counts in 2023 or 2024 as sentiment, and the cost of liquidity, improve.
Monthly Sessions, 2022
We’ve made some solid inroads in fraud detection - we use a combination of NoFraud and Signifyd to vet orders, and we’ve been able to fulfill significantly more orders this year that look like a fraud but prove valid when you look closer.
We also communicate closely with our customer service team to get a sense of buyer behavior in edge cases - did the customer ask questions that legitimate customers tend to ask? Did they engage in any kind of pre-sale pressure tactics? The combination of tech, external reviewers, and organic internal assessment has been helpful. This level of white-glove attention makes particular economic sense for our business at $1,600+ AOV.
What have been your biggest challenges in the last year?
Sales tax has been big. The new economic nexus laws have made life difficult for a lot of mid-size eComm sellers. We have to collect and remit sales tax in 40 states, and this will increase in 2023. Each of them has a proprietary portal with unique rate structures and reporting requirements, and webstore platforms like Shopify have a number of limitations on that front.
Overall, I estimate our total cost to comply with sales tax collection and reporting requirements is over $100,000 per year (not including the actual tax collected and remitted). This includes the costs of maintaining the systems that are storing/processing the data (leveraging Parabola and Airtable to extract the data from Shopify and run some cleanup), getting the returns professionally filed, compliance advisory services, and the fact that we are charged credit card processing fees on the sales tax we collect. We have to remit 100% of collected tax to the states, so we lose 2.5-3.4% of whatever we collect due to payment fees. Some states give you a small credit for timely filing, but it’s usually immaterial.
Accurate collection and reporting is getting more expensive as the regulatory environment has pushed more merchants into the market for compliance services, while states constantly change their requirements and rates.
Separately, every business has unique challenges based on the type of product or service they sell. By “type,” I mean things like size, weight, value, frequency of purchase, customer profile, and the like. We sell products, like generators and pellet stoves, that people typically purchase once every 5-8 years at most, so our remarketing approach is totally different from that of a company selling clothing or consumables.
They are also extremely heavy and expensive to ship, so we don’t take returns - if there are issues with the units, they must be repaired locally under the manufacturer’s warranty. This is just the economics of the product, but it is frustrating for customers and creates chargebacks and bad reviews in the rare cases where something goes wrong. We’ve implemented some simple steps - like custom stickers on the freight loads instructing customers to inspect for damage before accepting - but it’s difficult to empirically track the effects of some of these things.
Part of our shipping and returns policy
If this all sounds tragic - keep in mind that we are still steaming ahead and have continued to grow quickly even as these challenges emerged. Building a lasting business seems to me like surviving in the wilderness - a daunting undertaking but perhaps more natural than you anticipate, especially if you come in well-informed and work to maximize your resources at every turn.
What have been your biggest lessons learned in the last year?
Try to get expertise before you know you need it. Particularly with regulatory compliance at various levels - federal, state, and local - it helps to have a good CPA and attorney who specialize in your industry, with whom to have regular check-ins and discuss potential issues proactively.
Your reporting and operating requirements may change as the business grows in revenue, headcount, geography, or lines of business, and it’s hard to come across some of these things just from internet research. There could also be civil implications - matters between you and your customers or competitors - to proactively address. The challenge is to discover these before somebody comes knocking.
We also probably should have started building out a better operational infrastructure sooner. We have a headcount of 15 now, and there is a lot of manual work to track notes for customer service cases, returns/reverse logistics, or accounting issues. We are still using a lot of disconnected gSheets and Excel files for critical functions when we should be on a more robust digital infrastructure.
ERP or other software implementation only gets harder as the business grows. We consistently said “this is too expensive” or “this is too complicated” for our current needs - but since you have to run the business with a 1-2 year timeframe in mind, you should probably start standing up these kinds of things a while before you think it makes sense to do so.
What’s in the plans for the upcoming year, and the next 5 years?
Internally, we want to continue tightening up the sales tax collection and reporting process, implement an ERP that ties our systems together well and bring some more expertise in.
Externally, we continue to expand our catalog, and we will eventually hire more business development specialists to continue hunting for more brands.
Longer term, we should expand vertically into installation services by building out a nationwide referral network of electrical installers and technicians. We are constantly asked for recommendations, so this would create another revenue stream and create a more complete offering for customers. We’d also love to explore some simple manufacturing, likely on the accessories side, for simplicity. We have some ideas about gaps in the market or what kinds of things customers tend to ask for when they buy the machines we sell.
What’s the best thing you read in the last year?
Still reading it, but Noise by Kahneman, Sibony, and Sunstein has been a great view into understanding how life and society work. “Noise” refers to the unexplained variability in the outcomes of various processes.
They consider things like doctor’s visits: you could go to three different expert doctors with the same symptoms and get three different diagnoses. In insurance, you could similarly get three underwriters/actuaries with similar demographic and educational backgrounds, but three different answers in terms of how to price the risk of an insurance product.
This is separate from the idea of bias, which is when outcomes tend to converge for a group based on some characteristics. Our experience in life, and in business, is a combination of both bias and noise.
Separately, I like the Freakonomics series of podcasts, including People I Mostly Admire and Freakonomics MD. They similarly explore the underlying mechanics of how things physically happen in society, business, the economy, biology/nature, and so forth.
Advice for other entrepreneurs who might be struggling to grow their business?
The advice really depends on what you are selling and how you are selling it - so find a mentor in your industry who has built a business structured like yours. The challenge is completely different for a retailer like us versus someone who is manufacturing a product and building their own brand or providing a service/platform.
You can use your networks from work, school, and friends to connect with someone with the right business profile or reference some third-party platforms that connect entrepreneurs with mentors.
You can also leverage free resources, like SCORE, which is an SBA-sponsored organization that connects entrepreneurs with mentors. I am a SCORE volunteer and have connected with a number of entrepreneurs who have questions about eCommerce, accounting systems, or hiring/HR.
When seeking out a mentor or advisor, think not only about the industry but the area of expertise. If you are trying to get your accounting system sorted out, for example, you can find someone who runs a business of similar size and with similar numbers (order volume, cash flow volume, AOV, etc) - doesn’t have to be someone who has built exactly the same kind of business.
Leverage online forums as well - we are a member of eCommerceFuel, which has been a great source of insight for us.
Are you looking to hire for certain positions right now?
We need a CFO/controller role with a particular emphasis on ERP/accounting systems, GAAP inventory costing, and SALT (State and Local Tax) compliance. We’ve not made a public posting yet but you’re welcome to add me on LinkedIn if you’d like to discuss it!
Where can we go to learn more?
If you have any questions or comments, drop a comment below!
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