LESSON 13 OF 13
What eight-figure eCommerce brands do differently
The margin profile behind lean scaling — and how to work out your own numbers.
The brands that make it to eight figures generally understand their numbers well enough to make confident decisions about ad budget, hiring and discounting — or they have a system that understands the numbers for them.
- •They know how much contribution profit they need to hit their goals.
- •They have realistic ad budgets rather than comfortable ones.
- •They have healthy margins — variable margin low, in some cases as low as 25%.
- •They have a low fixed cost ratio: fixed expenses small relative to revenue.
Keeping fixed costs at or below 20% of revenue takes the pressure off customer acquisition. It is that much less contribution profit you have to earn before anything reaches net profit.
The BottleKeeper profile
The things that let BottleKeeper earn eight figures annually with a very small team were not glamorous. Gross margins were around 85% — 85 cents of every dollar left after the cost of goods landed to the fulfilment centre. Fixed expenses were extremely low.
Together those meant the business could afford a great deal to acquire a customer, so it spent heavily on acquisition as it scaled, and could afford to because the space was there.
The cycle
High gross margins mean more contribution profit per order. Low fixed expenses mean more of that contribution profit drops into net profit. Net profit buys more inventory and more advertising. More advertising at healthy margins drives more revenue profitably — and the cycle repeats.
Start here: three calculations
First, calculate your variable margin without advertising. Add up your sales-related expenses. If you are unsure whether something belongs, ask: does this number go up if I make more money this month, and down if I make less? If yes, it is variable. If you would pay it even with zero revenue, it is fixed. This is not how your accountant will categorise it.
Put advertising you can ramp up or down within a day or two into its own bucket. Then divide your variable expenses by revenue to get your variable margin.
| Variable margin | What it means |
|---|---|
| Under 40% | Reasonably healthy — lower is better |
| 40–55% | Okay; work toward 40% |
| Near or above 60% | Danger zone — advertising profitably becomes very difficult |
Second, add up your fixed expenses, divide by revenue and multiply by 100 to get your fixed cost ratio. Aim for under 20%. If you are at 50% and genuinely in a growth phase, take it relative to your own business — just know that the lower it is, the easier profitability becomes.
Third, use those two numbers to find your break-even ROAS at a given ad spend. Take a business with $100,000 in fixed expenses and a 50% variable margin before advertising. It needs $400,000 in revenue: half of that goes to cost of goods, shipping and fulfilment, leaving $200,000. $100,000 covers the fixed expenses, and the remaining $100,000 is the advertising spend — a 4 ROAS, and that is only break-even. Generating actual net profit means adding to the contribution profit that remains after fixed expenses.
There is complexity in doing this by hand, particularly when you want to see required ROAS move dynamically as budget changes. But the underlying logic is the whole system, and it is worth being able to reason about it whether or not something calculates it for you.