How A Cash Flow Crisis Turned This E-Commerce Brand Into A $22M Giant
What do you do when your rapidly growing business all of a sudden stops? Or worse, what happens when the growth curve doesn’t just level out but actually starts going the other direction? Companies that experience that early surge of success have to be careful not to overextend. Otherwise, a successful business today could be a bleeding machine tomorrow.
This is the story of Dazadi, an e-commerce brand that rode a wild growth curve up to its first small summit, only to end up hemorrhaging marketing dollars under the assumption that it would all be made back.
As the co-founder and CEO of Dazadi, Jason Boyce, puts it, “You really don’t know what you’re doing until you’ve lost $1M of your own money in one year.”
Despite that loss being tough to swallow, it did not kill the company. Boyce regrouped, made a few crucial decisions, and ended up calling out one big shift to bring the company to an even higher, more profitable summit. And they’re still growing.
How did he know that drop shipping was holding him back and that he needed to rebuild his shop using BigCommerce’s growth-friendly software? Let’s go back to the beginning.
Early success makes for difficult decisions
Dazadi first started in 2002, with Boyce and his brother at the helm. Neither had much business background and didn’t come from a very business-minded family. Boyce had a business degree, but when he joined the Marines, much of his management knowledge ended up diverted elsewhere. Returning to civilian life and diving into the business world, specifically, the complicated and highly technical world of e-commerce, was a bit of a leap, but they went for it head first. They had an idea they believed they could bring to life.
The first year proved to be a learning experience, but also a profitable one. They made $100,000 in year one, multiplied that to $1,000,000 in year two, and multiplied it again to $2,000,000 in year three.
Life was good.
Their website was originally built using osCommerce. Managed by their own team of developers, the shop was built on top of the open source platform that, despite being iterated and re-iterated upon, failed to solve some of the company’s biggest pain points. As a result, Dazadi ended up becoming extremely reliant upon marketplaces like Amazon, Sears and Wal-Mart. Since these marketplaces also took care of the company’s marketing needs, Dazadi’s leaders began to become weary of building their business on others’ platforms.
The strategy that nearly killed the company
Still, the company saw sales rolling in and continued betting big on marketplaces, while diversifying their product line, just for the sake of cornering a market.
“It’s really easy to fall in love with sales numbers,” Boyce tells me, reflecting on those early years of the company. “Seeing sales growth is exciting, however having more sophisticated profitability reports that include all costs down to the order level is hard. As a smaller company, we just didn’t have that visibility. Throw in rising marketing costs as a percentage of sales and you get a cash hemorrhaging business.”
They proceeded by digging themselves into an even deeper hole. “We actually started lowing prices, anticipating that we would take some short-term losses, even though we didn’t have any real data to back up that strategy,” remembers Boyce. “Our reasoning was that once we showed our vendors the kind of volume we could do when we were selling at marketplaces like our competitors, they would give us better pricing. They ultimately did lower our prices, but we were still drop-shipping items and couldn’t really compete with the big businesses buying truckloads of inventory.”
The big “ah-hah” moment came when Boyce and his team finally got the reporting right and saw how much money per SKU and per order they were losing. For example, one of their best-selling products was actually operating at a loss of about $20,000 per month.
“That’s when we woke up,” he said. “We couldn’t just blindly chase market share. We needed to get more specific.”
The shift that turned Dazadi around
Boyce decided that in order to be successful over the long term, the company would need to narrow their offerings and double down and drive more sales on their company website. They couldn’t afford to be as reliant upon third-party drop shipping suppliers and marketplaces.
“You never want to be in a position where your company is entirely based on someone else’s platform,” says Boyce. “We knew it was going to take us a few years to build customer loyalty on our platform, but we also knew it needed to be done. However, because of the nature of our business, we needed a pretty intuitive sales platform. Essentially, we were looking for a highly specific SaaS solution.”
Like many merchants, they initially turned to Shopify, only to quickly realize that the wildly recognized sales platform was nowhere near as robust as they needed for their kind of business.
“Shopify didn’t seem to understand the complexities of our business, or even the difference between shipping a two-pound clothing item and a 500-pound pool table,” says Boyce. “We also couldn’t do things like build custom fields for our orders, or show customers how long it would take for their order to arrive. Shopify is a great platform; it just wasn’t right for our business. We were looking for a long-term partner that could help us scale back up to where we were, and then some. We wanted something that would allow us to reach $100M in sales.”
So Dazadi went with BigCommerce, a SaaS solution that not only had the features they needed, but had several clients in the furniture space and understood their highly specific pain points.
“Once we had all these things in place, better reporting and our own functional platform, we were able to ‘cut the losers’ and get back to doing what we did best,” recalls Boyce. “We even made cuts like severing ties with all our drop shippers, which meant saying goodbye to about $2M of annual revenue. But we were playing the long game, and we knew it needed to happen.”
Dazadi came back quickly to gross over $22M in yearly revenue, perfecting its business model and drastically reducing its risk of marketplace reliance by building their own platform.
Lessons for upstarts
Boyce is eager to share his experiences, so as to help other business leaders avoid repeating his mistakes. “The best piece of advice I can give any entrepreneur would be to really ‘grip the mirror’ and be brutally honest with yourself about what you’re good at and what you’re not good at — and which strengths drive the most revenue,” says Boyce.
“Included in that analysis is which strength drives the most profitable revenue.” Reliance on third-party platforms, less-than-ideal tech or fulfillment options that involve slimmer profit margins might or might not serve your purposes well, which further underlines the importance of product-specific and customer-specific analytics when making strategic business growth decisions.
“For some companies in e-commerce, for example, that may mean sticking with marketplaces like Amazon. For others, that might mean building a brand via Facebook and driving web traffic,” Boyce notes. “But for smaller companies, like us in the beginning, it’s really hard to do both at the same time. Focusing on what you’re good at and becoming the best at that one strategy is the key.”
Originally published at www.forbes.com on June 26, 2017.