Consumer packaged goods (CPG) companies are difficult to launch. There are significant upfront costs associated with manufacturing and storing the product. Most CPG verticals are already crowded with countless brands. And with third-party marketplaces like Amazon capturing most online traffic, it’s a challenge to gather first-party data and win loyal customers.
With all those hurdles to consider, why would Colin Darretta, co-founder and CEO of Innovation Department, set out to launch a new wellness-focused CPG each year? Because he and his team have unearthed a winning strategy for establishing and growing CPG brands. The Innovation Department portfolio is at three wellness brands and counting.
The ultimate goal of Innovation Department is to get these brands to a point where they can walk on their own two feet. Colin says that the ideal trajectory for one of their brands is to grow to eight figures in revenue and then progress beyond the Innovation Department ecosystem to seek out venture capital and, ultimately, be acquired by a strategic.
While the team has seen success so far, Colin admits that the work has its challenges. Amazon is such a dominant force in online selling that CPG brands attempting to launch solely as direct-to-consumer brands often face hurdles.
The workaround that Colin and the team have settled on is to leverage Amazon as a tool, rather than to fight them for attention. While the ultimate goal of Innovation Department’s brands is to sell directly to consumers, the team has found that strategically launching on Amazon is actually a benefit.
With their pet wellness and gummy supplement brands, Innovation Department has launched a single hero SKU on Amazon. To omit Amazon from their sales strategy entirely would have been foolhardy, as most consumers beeline to Amazon to make purchases, circumventing Google and other search platforms altogether.
However, by offering only one SKU on Amazon, the team provides an incentive for consumers to eventually make the switch to buying directly from the brand. That first and second sale might happen with Bezos, but in order for consumers to gain access to a wider suite of products and special bundles with preferential pricing, they must purchase from the brand’s direct selling site.
While Innovation Department has found great success with this strategy, Colin acknowledges that it’s an approach that requires both capital and dedicated resources. He says any company attempting to sell a SKU on Amazon should be ready to burn between $50,000 and $100,000—perhaps more in crowded areas.
He also shares that one of Innovation Department’s secret weapons is its extensive collection of first-party data. With thousands of customer emails and phone numbers already on hand, losing some sales to a third-party marketplace, where they do not have access to that customer information, is less of a hit than it would be to a fledgling company.
Because Innovation Department remains in the narrow wellness space, there is also overlap between target audiences for each of its brands, allowing them to get more bang for their buck from their contact list. They will often reach out to existing customers in their network to workshop new product ideas and gain buy-in before a launch. That gives them a head start in online selling that other standalone brands simply don’t have.
Beyond Amazon and their customer list, Innovation Brands also invests heavily in Facebook advertising. Because the platform allows for targeted selling, it’s the ideal place for Colin’s team to find wellness-focused consumers. Facebook advertising, like an Amazon launch, is a capital investment. Colin says brands looking to build traction in direct-to-consumer sales should expect to spend $30,000 to $40,000 during the initial advertising phase.
No matter what kind of business you run, there are valuable lessons to take from Colin’s approach.
First, launching a new product is a marathon, not a sprint. Invest in research up front and be prepared to spend on advertising to gain momentum in the early days.
Second, there’s no need to reinvent the wheel. If you’ve already created a successful launch strategy for an earlier product, there’s no honor in reinventing the wheel for the sake of it. Take what was successful from your previous experiences and repeat that approach.
Finally, never underestimate the power of first-party data. Having a direct line to your best customers is critical in product development, product launch, and building a resilient business. But don’t take those customers for granted. Offer them something meaningful in return, whether it’s educational content they can’t find elsewhere or bundled deals just for your biggest fans. Celebrate their loyalty and they’ll continue to support you.
Rob Ristagno: Launching a consumer product in today’s crowded marketplace is hard, but our guest on this episode has unlocked a secret formula to selling online. With three successful CPG brands and counting, hear how he and his team use digital marketing, third-party marketplaces, and first-party data to grow profitable brands.
Introduction: This is the CEO Campfire Chat with your host, Rob Ristagno. Taped in front of a live studio audience, join us to hear successful growth stories for middle-market companies just like yours. Sponsored by the Sterling Woods Group.
Rob Ristagno: Welcome to the CEO Campfire Chat, recorded live in front of a studio audience of senior executives. I’m your host, Rob Ristagno. And today I have the privilege of introducing you to Colin Darretta of Innovation Department, a company that builds direct-to-consumer businesses from the ground up. They’ve launched wellness brands such as Grummies, Finn, and WellPath. Welcome, Colin.
Colin Darretta: Thank you for having me, Rob. Excited to be here.
Rob Ristagno: All right. All right. Now I understand you’ve unlocked a formula to increase the odds of success whenever you’re launching a consumer product, which is very difficult to do. So before we dive into your secret sauce, tell us a little bit about exactly what Innovation Department is.
Colin Darretta: Sure. We call Innovation Department a startup studio. It is a studio that is narrowly focused on building wellness CPG brands. We have that narrow focus for several reasons. We think a lot of the core competencies when you build one brand carry over, particularly when you’re doing it in the wellness category. We also, as we’ll talk about more later, think that there’s a lot of value we can get from cross-pollinating the audiences that we develop for each brand and cross-selling amongst the brands. And so our long-term goal is we’re launching about one brand a year. We scale those brands effectively taking them from zero to one. Let’s call it a one as defined by low eight figures of revenue. And then the goal then is that they can go stand on their own two feet, raise independent capital or they’re cashflow positive at that point, and live outside of the Innovation Department structure. And so we’ll keep cycling through and keep building one each year.
Rob Ristagno: Excellent. Alright. Really curious to hear about how that all works in the blueprints that you’ve come up with. When we’ve talked in the past, you’ve mentioned that you’ve found some success following some contrarian opinions, and one thing that’s stood out to me when we first met was you mentioned that you think Amazon and direct to consumer can live in parallel. I know a lot of people think that Amazon is at least a frenemy, maybe as far as saying it’s a foe, or some people think you have to pick one or the other, you’re either going to sell on third-party platforms or you’re going to have a direct audience and sell directly to your customers online on your own website. Tell us a little bit about your approach and how you’ve been able to find this happy medium.
Colin Darretta: Sure. First of all, it’s not easy. I think most DTC brands view Amazon, if not outright as a foe, largely negative by virtue of the fact that if they launch on Amazon they’ll cannibalize their DTC customers and Amazon, you can’t get any of the customers individually personally identifiable information. So you can’t contact them thereafter. Give you that lower AOV products, and let’s define that as something under 60 bucks, are about 70% of them digitally are purchased on Amazon. So if you don’t have an Amazon strategy and you’re playing in CPG and you’re primarily an online business, then you’re effectively sequestering yourself from the vast majority of the purchasing that’s taking place. So we made it a priority to figure out, well, how do we make them coexist? And other than that, how did they kind of feed on one another?
Colin Darretta: And so ultimately Amazon can function as a really good product discovery platform because it is the second largest search engine in the world outside of Google. So people that are searching for–we build wellness products. So for instance, a stress relief supplement. Right? They’ll find our product as the top result. That’s a mechanism for them discovering our brand. And then we have hooks to get people into our DTC site, for instance, bundling subscriptions and any other myriad of things are only available on your own site, alongside unique products that aren’t available on Amazon, et cetera.
Colin Darretta: So we think of Amazon as a discovery place where, in much the same way as brick and mortar can function, where someone might find the product for the first time and purchase it there, they might even buy it the second or third time there. Simply by virtue of the convenience that a channel like Amazon might offer. And when I say Amazon, I extend that to other marketplaces like walmart.com. They’re just a much smaller scale. And then for your evangelists and the people who start to fall in love with your brand, those are the people who ultimately you cycle them into your DTC. And they’re the people who will have really high continuity.
Colin Darretta: We’re spending pretty heavily on Facebook. And those people, we do direct into our DTC side with those people we accept that it’s, call it somewhere between 10 and 20% of them, will end up going and purchasing on another platform. But ultimately that’s okay because it creates velocity on those other platforms and those platforms are entirely velocity. Right? So your search rank and where you fall in terms of those top 10 results will ultimately determined by simply how much you’re selling every day. So we actually don’t mind that some people trickle outside of our DTC site even when we’re trying to direct people there because it is kind of achieving our ultimate goal of creating velocity on the other platforms, which gets us more visibility.
Rob Ristagno: Makes sense. So you’re getting visibility and exposure, initial trial, perhaps on these third party platforms like Amazon. But you mentioned a few important things there that you’re looking for some hooks and you’re looking for your evangelist and then you want to bring those evangelists into your own ecosystem, take them off Amazon and bring them directly onto your own websites. Tell us a little bit… To get there I imagine you have to have a pretty strong product market fit. So you have to really understand who your ideal customer is and exactly what they want. Can you tell us a little bit about how you go through that process to figure out who your evangelists are and specifically what tactics are you using to get them to come to your own website?
Colin Darretta: Sure. So I think the reason we’re comfortable on some of these third-party marketplaces is we do use other mechanisms to build our first party data portfolio. And what I mean by that is each one of our brands has email lists in excess of a hundred thousand people. Each one of our brands has a content platform. Each one of our brands has phone number lists of somewhere between 20 and 80,000 people, depending on the brand. And so when we have those large owned audiences, we’re able to utilize them in a whole variety of ways, but when it comes to getting to product market fit quickly, one of them is that we’re using those audiences to help us with our product development every step of the way. And that’s through things like surveys, there’s some other means as well.
Colin Darretta: So that comes down to what form factor should our products be in, what sort of packaging should we be using down to the colors, for instance. And so we extensively test with sub segments of each of our audiences. So by the time we launch, those same audiences are the people whom we are initially advertising to, and an important thing to note is we actually, once we own someone’s contact information, we prefer to drive them into other platforms like Amazon, like Walmart, whatever else, wherever we need to create velocity because that has greater ROI, particularly when you’re launching a new product than someone who’s simply purchasing on your site. We’d gladly trade the 15% of margin that Amazon wants for the rank accretion that we’ll get as a result.
Rob Ristagno: And do you think your odds of success are also higher maybe it’s easier just to check out on Amazon the first time they don’t have a relationship with you?
Colin Darretta: Orders of magnitude. So our product display page conversion rates are between 80 and 90% on Amazon vis-a-vis our best performing site is converting on prospecting ads at about 6%. So there is–consumers particularly, again, for lower AOV products are just so much more apt to make a spur of the moment purchase on Amazon. And what I mean by lower AOV products is a Casper mattress. Right? That costs $2,000. Someone wants to do their work when they’re buying a mattress and research it, and the incremental friction of signing up and entering their credit card. When you’re about to spend $2,000 is relatively minimal. The incremental friction and the cost of that when you’re about to buy a product for 20 bucks is actually material. Right? So some people will say, ah, it’s only a $20 product. I just don’t want to go through the hassle of entering my information, et cetera, but then one-click shopping on Walmart, Amazon, eBay, Grove, Thrive any of the channels in which we’re selling.
Colin Darretta: If someone already has an account there, that convenience factor makes them much, much more likely to transact. And finally, because these people in our audiences have kind of already been primed since they were involved in the product production process to a degree, they almost have a vested interest. Right? They’re like I had a hand in how that turned out. And so they’re even more willing to transact. So you kind of get it on both sides. You get their help as you develop the product to hopefully you develop a better product. And then on the other side, because they were invested in it, they’re more likely to be ultimate customers.
Rob Ristagno: Brendan, you have a question?
Brendan: Yeah. I’m just wondering if part of the reason is, do you take advantage of Amazon’s FBA and shipping to their warehouses or do you do that all the warehousing and fulfillment on your own?
Colin Darretta: With all of our Amazon orders, we use FBA and that’s the only platform where we take advantage of their proprietary fulfillment side. Everywhere else we just run our own [inaudible 00:10:56]
Rob Ristagno: Regarding your customer surveys, I always like hearing about surprises. Did you and your team have an idea, hey, this is exactly what our market wants. And then when you actually surveyed, you realized, oops, we missed that one.
Colin Darretta: Sure. With Finn, which is our pet wellness business that we launched last September, we actually originally thought that our form factor is going to be dog supplement. We thought the form factor would be a powder that you could actually put on the dog’s food. We thought, boy what a simple way of integrating vitamins, or whatever other products into your dog’s daily habits without having to include anything else. And thank goodness that we did survey because overwhelmingly none of our perspective consumers were interested in that. They all said, we’d rather have it in the form factor of a treat. And it’s both, you got to be giving your pet a treat at the same time something that’s good for them. And that was a hard left turn that had just been predicated on the opinion of myself and the handful of people who were working on it at the time. We would’ve gone with the totally wrong form factor. The audience clearly didn’t want.
Rob Ristagno: And in doing your surveys, are you able to further segment your audience, your customer base? Do you have different types of personas or segments within your customer groups?
Colin Darretta: Sure to degrees. So we know male, female, we know age, for some segment of them we know household income. So we’ll generally not subsegment well beyond whether we want to survey just women at times or survey a specific age group simply because we might be launching a product that we think is really well suited to a very specific audience. But generally, most of our products, while they might skew somewhat female, we’re probably across all of our brands errs somewhere between 60 to 70% female purchasers, it’s not overwhelmingly so.
Colin Darretta: What we do more so is we subsegment the lists. Just so we’re not caucusing the same people every time. So for instance one survey might go out to a sub segment of one group of 50,000 and another goes out to another group of 50,000. Just so we’re not exhausting people and feeling like they’re getting spammed and it’s delicate balance. Right? You want people to feel like they’re involved in the process, but you don’t want them suddenly to feel like they’re doing all the work for you.
Rob Ristagno: Not too involved, a little involved. Alright, excellent. The survey makes me think about data. Tell us a little bit about what first-party data you’re using? Data that you’re collecting yourself about your customers, and where does third-party data, data you source from other people plan the things?
Colin Darretta: One company the Innovation Department built, which we subsequently spun out, was the company called DojoMojo, which is a partnership marketing software. It enables brands to run things like sweepstakes contests with other brands. So four or five brands at a time in a legally privacy-compliant way, and that’s great email and SMS acquisition tool. So that’s one way that we’ve acquired over the past five years, well in excess of four or five million emails. Obviously those people are really high up the funnel. So you have to weed out the people who just aren’t interested and aren’t appropriate. But we rely on email acquisition as a key tool just because of everything I mentioned and all the ways in which we use email to inform product development to drive velocity on new product launches.
Colin Darretta: When we’re using third-party data, we use it pretty extensively to measure both what’s successful as well as the white spaces where we can dive into. And for example, it informs both what future business that we’ll build. So it’s used the Finn example again. We use a variety of third party tools to figure out that the tailwinds that were happening in the pet wellness category, the fact that there weren’t any brands that have established themselves as clear winners. And we had a pretty good sense of what the market opportunity was on platforms like Amazon or Walmart, some of the others which gave us a really indication of, hey we know that we can go build a million dollar business and think we can do it profitably. We see where the pricing is at and understand the margin profiles. And so at this point, there’s just so many tools out there that if you know how to use them, you can start to validate these things really quickly before you spend a ton of money making a really big bet.
Rob Ristagno: Gotcha.
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Rob Ristagno: What about some questions from the audience?
Audience Member: Colin, thanks very much. I was wondering if you could build upon the comment you made earlier on that you use Amazon and Walmart as a way of building your brand awareness and getting people to experiment, test the product, and then you have other offerings, whether they’re subscription offerings or upsells or unique products that you have just on your site. Can you give a few examples of those?
Colin Darretta: Yeah. So Grummies is our newest business which we just launched on March 2nd. So brand new. Launched DTC with the all four SKUs live on DTC at launch. And then this Monday we launched our first SKU on Amazon, our hero SKU which is our ashwagandha gummy. That’s one very straight forward way that we do everything is we only launch one SKU on Amazon at a time. And with a new brand, we always just launch our hero SKU on Amazon. And the goal is our marketing firepower is going into that. So it’s going to attract a lot of eyeballs, get a lot of awareness. People buy that first product. They might fall in love with the brand and then they come to your website and they realize they see all the other SKUs you have.
Colin Darretta: And then on your website, if you go to Finn or you go to Grummies, you’ll see that we have a big focus on figuring out bundles that make intuitive sense. Right? And we attach nomenclature to that. Like for Finn, we have the pretty pup bundle, which is skin and coat and then we attach meaningful discounts to it. Right? Discount that you wouldn’t be able to get any else as we all know the name of the game is how you make the AOV as big as possible. And you can afford to give meaningful discounts because of how much money you end up saving on flip side.
Colin Darretta: So we do everything we can for on our website to get people buying two plus bottles. And then when we’re launching on Amazon, we’ll also rarely include subscribe and save initially. Over time, we’ll add it on our own more mature SKUs. Again, because we want the people who want to get the deal and want to be subscribers to actually be doing the subscriptions on our site. So there’s a certain degree of, for lack of a better term, gating that we create where you can get the appetizers, so to speak, on other channels. But if you want the main course, you have to come to our own channel.
Rob Ristagno: What about for companies that are established businesses? So we’ve learned a lot about how to launch something from the ground up, but what if I’m a company that has hundreds or maybe even thousands of SKUs. I’m used to going to market through wholesalers, maybe some independent reps, how can I get started in this game? Where would you still recommend one skew at a time? Or how do I eat this elephant?
Colin Darretta: Yeah. It’s tough. Right? I would certainly recommend one channel at a time. I think one mistake I’ve seen brand after brand after brand make is people are successful across one channel. And then think that launching another channel is something that you can do as something of an afterthought. And I’ll use an example. There was a really successful hydration business that I’m familiar with that was absolutely crushing DTC and doing a great job on wholesale brick and mortar. And they wanted to go into some of the digital marketplaces and they just casually listed their products under the presumption that, well, we have enough DTC business and we have enough retail business that therefore I’m one of selling through on these other channels.
Colin Darretta: And that just doesn’t happen. Right? You need to have real resources dedicated to it and DTC, Amazon and the other marketplaces are just totally different animals in terms of the skillsets that are necessary to succeed. So no matter how good your SKU is with very, very few exceptions people don’t just show up. Right? It’s the field of dreams fallacy. If you build it, they are not going to come. And Amazon tends to be… It can be trench warfare. You need to really roll up your sleeves and be in it.
Colin Darretta: Now that can also mean you just hire a great agency. And they aren’t cheap. That’ll be starting at four or five thousand bucks a month. And the greater of that fee plot or a percent of sales which can range from, we’ve seen the best ones are 10% of sales on your first a hundred thousand dollars of sales and then 5% thereafter. So pretty meaningful, but they can kind of do everything soup to nuts for you, just about. And certainly be a guide for you throughout the process of it’s not something deep expertise and you’re not hiring someone on an FTE basis who has deep expertise.
Colin Darretta: And then for DTC really very much the same. Right? Each channel requires real budget and real expertise. You can find a great paid marketing agency that focuses on a single channel and arming them with a healthy budget. But also making sure that other things like site optimization has been done and you can get great conversion rate optimization agencies. You should also have a sense of what your continuity is. And I realize if this sounds like a lot, it’s because it is. So I always advocate that a person launch on one channel at a time and make sure that they really sharpen their sword there before they ever contemplate doing another one.
Colin Darretta: We buy simply as a function of how long we’ve been doing this launch, our new brands on effectively three or four channels all at the same time, but that’s because we’ve built the engineering scaffolding for us to be able to do that. And we have the FTEs in place to make that happen. But certainly when we were building WellPath, our first brand, it was kind of certainly walk before you run, do one channel, get really good at that channel. It’s never autopilot. So no one should be deluded into thinking that and then move on to the next channel where you start to kind of build your expertise slowly.
Rob Ristagno: What about minimum investment, if I’m thinking about getting started, what would you recommend if you’re not willing to spend X on it, promoting yourself on Amazon or excavating yourself to get direct hits on your website, it’s not worth getting to the game?
Colin Darretta: Yeah. So the two are different, I would say on Amazon for new SKU, we won’t even consider it unless we’re ready to burn, not best net cash outflow of at least $50,000 to $100,000. And for a really crowded categories can be considerably more than that. Done right however that investment can return you with one to $3 million top line SKU. And it takes it takes several months for you to scale up into that sort of volume. And so if you’re not prepared to spend real marketing dollars, give away a bunch of free product, do all the things that are necessary from a promo perspective and marketing and discounting and all the things that are the tactics that make you successful on Amazon, it’s a little bit of a don’t bother, particularly if it’s crowded category.
Colin Darretta: On the DTC side what we’ve found is that for just about any new site your first few months are the Facebook algorithm started really, really doing some learning. And you need to be spending $30,000 to $40,000 on Facebook, specifically as a channel each month during that period. Now that’s not pure burn because you are making sales, but you’re probably, especially if you’re a lower AOV product that you rely on continuity for, you’re probably having an AOV of 40 bucks, but it’s costing you $60 or $65 to acquire the customer. And if you’ve got 75% gross profit margins, you only making 30 bucks back on that order. So assuming people are subscribing, you’re ultimately going to be in the black, but for at least the initial spin up phase, you’re going to be meaningfully burning cash.
Audience Member: So I’m curious Colin, if you have any thoughts on someone who has had a very successful brick and mortar store, or even a few different stores, in different locations, but probably local and they haven’t been successful yet at really making it online, so to speak, what would you suggest? So it’s not a brand or a product, but it’s their whole line of products in their store.
Colin Darretta: Right? And that’s a little bit a field of what I’ve done, obviously, since I’m brand focused. I think the one through line of what we focus on and what I think applies to anyone who’s seeking attention on the internet is broadly kind of what we’re all competing after whether you’re a brand trying to get eyeballs to your product under the hope that someone will buy it, or you’re a storefront trying to get eyeballs to your storefront. So people will buy a myriad of products on it is figuring out what that hook is. For us, we’ve realized that that’s where our email list and our focus on content has been so critical and content and community I should say. WellPath, which is the first brand that we built, runs a content site called The Path Magazine, where we’ve got a hundred thousand monthly unique visitors. We have an email list of 375,000 people that we’re sending out content newsletters to twice a week.
Colin Darretta: We kind of have this golden ratio of two times content for every one piece of commerce we’re sending out. So we’ve built real infrastructure there to actually keep people interested in receiving our newsletters because people don’t want to just be sold to. Everyone has to sell to them. And certainly we’re for us where we have a limited SKUs assortment we can only try to sell our same 10 products to the same person so many times before they’re like, “All right, I get it already” and unsubscribe.
Colin Darretta: So I do think that the other kind of called startups stores and marketplaces that I’ve seen succeed, it’s all been by virtue of them having some sort of hook whether it’s with content or something that is a draw, that is a reason for people to want to come to their store versus going to Amazon. And it’s often an understanding that they might be paying a little bit more than they would on a channel like Amazon. But they’re getting something, whether it’s a better curation of products, whether it’s some editorial around the products, whether it’s products that can’t get on Amazon. Some combination of those things or how stores exist in succeed in a world where Amazon is just a hundred pound gorilla out there.
Rob Ristagno: Effectively, you’ve become a media company as well. You’re not just e-commerce, you’re creating all this content to build an audience and keep them engaged. How do you think about staffing that and how do you come up with all the topics?
Colin Darretta: Yeah, so we’re super lean. We rely on a lot of independent journalist slash independent dieticians or fitness trainers and any other myriad people who are trying to build their own brand. One thing we realized is we’ve got a platform. Right? We have hundreds of thousands of email addresses. And so we have a real audience, and there’s lots of people out there who are, particularly in the influencer economy, if you will, who are trying to build their own brand in various ways. And so the trade we can make with them is, well, we can’t pay you a lot to write content, but we can give you a lot of visibility and, sure, we’re not going to go get an Ariana Huffington to write for us when that’s the trade, because she has credible platform and brand, but you will get that young recently out of school dietician or doctor who’s trying to build a very specific wellness-focused practice. Those sorts of people are interested in writing because it increases their visibility. So there’s a clear trade that you guys were making and in return, we’re able to spend a very modest sum on that.
Colin Darretta: And so from an FTE perspective, all we’ve had to have is one full-time editor who kind of is really at the helm, who manages all these moving pieces. But then your writing team is all independent when it comes to determining what subjects that is generally something that editors working with in conjunction with the contributors based on the contributors interest, what they’re trying to develop some degree of renowned for as well as the topics that we want to be focused on.
Rob Ristagno: Yeah. Steve.
Steve: And Colin, you–the world of health and wellness has become so huge. And it’s top of mind, it’s a category of products and services and information that’s expanded tremendously over the years. It’s also a world that’s not regulated. And I’m just wondering what your thoughts are about how the future will look in terms of regulation that would apply to you, your competitors, anybody else in this world, five or 10 years from now?
Colin Darretta: Sure. I think even one year from now, it’s going to look different. FDA has had their hands full with more important things, understandably, over the last year. So they inspected and issued the lowest warning letters by a multiple of five X that then have in any year proceeding that. And just in the last year, I’ve seen more bad actors who are making structure function claims that have no basis in reality crop up than ever before. I’m speaking with our regulatory lawyer at 5:30 today specifically because we are seeing so many of them and we want to basically report them to the FDA or figure out some measure of getting some of these guys to rein it in because, for people who are trying to operate strictly within the regulatory framework that’s been provided, it’s frustrating to watch other people just openly disregarding it and then trying to compete on a playing field with them when it’s totally not level.
Colin Darretta: So I think there’s going to be a lot to come. I think that is absolutely necessary because it will increase consumer confidence in the products they’re buying. Consumers, rightly so, sometimes look at wellness products with a healthy dose of skepticism because they make claims that people–they don’t pass the sniff test. And the more the FDA and the FTC come down on that and tighten that up, I think we’ll be a lot better for it. And then the people who have invested in doing the compliance work and the regulatory work and really betting their website to make sure that they substantiate all the claims they’re making those should be the people who ultimately end up winning.
Audience Member: Quick question. So we’ve had really great success on Amazon and other third-party marketplaces and just started our own DTC site this summer. We’re having a harder time generating traffic and our first-party data there. So I know you talked about Facebook and really using that to build that, but what other methods have proven success for you guys?
Colin Darretta: Sure. I think as I mentioned, the initial way we’ve generated first-party data is using tools like DojoMojo and other partnership mechanisms, whether it’s something as as unsophisticated as like a sweepstakes where you do it with five other brands who have a similar target audiences, and then you all share in the emails that are required. That’s a really effective way of building up your initial first 50,000, 100,000 emails. Other than that, I do think it comes down to a lot of, you have to do the various direct response advertising. We think that Facebook’s a great channel simply because it’s the most targeted place you can be, but there’s a lot of other tools that you can be using from some of the affiliate players out there who are great, and they’ll send them through typically some of their own real funnels where you can then acquire their emails.
Colin Darretta: The other thing we do a lot on our site is we’ll have surveys to give people better product recommendations, but to get those recommendations, they have to submit their email. We change where on the site email capture lives. So it happens earlier in the funnel. Obviously more people will drop off as a result. That’s the trade-off that we’re generally fairly comfortable making. I think that ultimately your goal should be first optimizing the site and making sure that you’ve got a high conversion rate and then hitting the gas pedal hard on how much you spend and focusing on the acquisition of lots of emails and customers. Sometimes people try to go too hard before they’ve really thoroughly optimized their site. And so it’s hard to make the economics ever work if you’re converting between one and 2% in this day and age, particularly if your AOVs are on the lower side.
Rob Ristagno: So how has the Innovation Department going to figure out what to launch next?
Colin Darretta: So that process, we generally… So everyone within our organization has access to a Google Sheet where it think of it as like you just were throwing ideas at the wall. And then twice a year, we go through that and we measure every prospective idea on probably it’s now a dashboard of, call it, maybe 60 or 70 different some qualitative, some quantitative metrics. The qualitative ones, we ultimately try to assign some numerical value to. So it is actually like there is a score that is an output, and it goes through three rounds. The first round is very high level. So it’s looking at things like the categories, TAM, whether we simply, whether we actually care about the category we’re going into, what are the macro factors, I mean, are there real tailwinds going on?
Colin Darretta: Then it moves into, call it 75% of the ideas, just get nixed in that stage. And then the ones that make it past that, we start looking more specifically like, all right, how many other strong brands live in this category? Is there ability to build real community? Is there a content play? Can you write content that’s interesting about this category. And so we measure them on a myriad of other characteristics related to those things and then finally, and so that kind of whittles it down to let’s call it a dozen ideas. And then we do a kind of deep dive on supply chain building a financial model, understanding what the working capital situation looks like? How complex is the supply chain? Do things need to be coming from China or is it domestically produced? What are the lead times? Will most of these suppliers in this category give you terms? How many suppliers are there such that? How much leverage will we have over them? What’s the pricing dynamics in the market right now?
Colin Darretta: And once we’ve got those financial models that generally whittles it down to the last three or four ideas. And at that point, it’s myself and the leadership team sit down and we have to kind of make a gut call because they’re all looking pretty good. And that usually orients to which one we have a real passion for and are actually excited about spending our time on.
Rob Ristagno: That’s interesting. I love it. There’s a very quantitative, robust, structured way, but at the end of the day, you have to excited about what you do.
Colin Darretta: Yeah. Yeah. And then there’s there’s probably two–there’s early in the process, we assign a numerical value of how excited we are. That’s kind of our, we call it our, do we care metric. And then the last part of the process is kind of circling back on that and saying, all right, now it’s time for the rubber to meet the road. How are we feeling?
Rob Ristagno: Excellent. We have time for one more question from the audience.
Audience Member: I’m just wondering what the long-term play is, whether you build this company up and hang on to it and join the cash flow from it over a long period of time? Or are you looking to build it up and spin it off to other CPG brands or to companies like, Thrasio, I am sure you know–just wondering what the long-term play is?
Colin Darretta: Yeah. Great question. So our goal with all of our brands is ultimately to be able to sell them to strategics rather than to Thrasio or any of the Amazon aggregators. Our target revenue split is, we think of it from a digital perspective, a third online, or, sorry, a third DTC, a third online wholesale, and then a third Amazon. So for two reasons, that’s kind of not great for Thrasio is it’s well below their threshold of how much business they want the Amazon to come from. And number two that’s make our brands more expensive than Thrasio wants to pay. The Amazon aggregators are buying things for anywhere from three to six times EBITDA let’s call it. But if you can build A tier brand that gets strategics excited, the Unilevers and P&G’s of the world will pay you three times revenue.
Colin Darretta: So the delta, let’s say you have 25% EBITDA margins, 20% EBITDA margins. You’re talking about selling a one times revenue versus three times revenue. And that has been a learning for us and why we view Amazon as a really core channel because it cashflows really, really well. So it helps finance the DTC and some of the other endeavors we make that might take a little bit longer to pay off. But we don’t want it to be the lion’s share of our business because then we relegate ourselves to functionally being an Amazon brand which at least cuts in half the value of your company, if not in, into a third.
Colin Darretta: So when we think about each of the individual businesses once we get them to 10 million plus revenue, the goal is that they can go stand on their own. That oftentimes will mean that they’ll go raise venture money of their own accord. And that’s probably not going to be from the same venture funds for each one because the fund that is super excited about Finn is probably, I mean, maybe it’s the same one, that’s excited about Grummies, but it very well might not be.
Colin Darretta: And so over the long term, those businesses might need to raise another two to three rounds of funding before they ultimately exit to a strategic. So at the end of the day, Innovation Department ends up owning, by the time they exit, somewhere between 30 and 60% of the business. But we continue to kind of sit on the board and have oversight as it moves forward in its life. We certainly think highly of the Amazon aggregators and super impressive what those guys are doing right now.
Colin Darretta: And that’s kind of, it’s nice because that serves as a downside outcome for our brands is, if other things aren’t working and we have too much Amazon concentration they’re always there to scoop you up for one times revenue, at which point if you’re saying, well, my worst-case outcome is I scale something to 10 million bucks and I have to sell it for $10, 12 million. And that’s the brand that just really didn’t work. And then our winners are the ones that we can go raise venture money and go hopefully sell to a Unilever or whomever. That’s kind of the way we view our model happening. But obviously it’s early days, we’re only three brands in.
Rob Ristagno: Not a bad downside scenario, $10 million exit. Colin this has been super helpful we all learned so much here. What can the group do to help you out?
Colin Darretta: I think, generally speaking, I’m always excited to make new relationships and share knowledge. I love meeting other entrepreneurs. I love rapping about new growth strategies and tactics and what people are seeing as effective in the market. I think as a team we’re all really big believers that a rising tide raises all ships. So I’m part of masterminds and other communities where we share knowledge pretty transparently. If anyone ever wants to connect and discuss on a one-on-one basis offline, I’m more than happy to do that. And always excited to hear about what’s working for other people that we might not be doing.
Rob Ristagno: Excellent. Thanks so much. Colin Daretta from the Innovation Department, and that concludes this week’s CEO Campfire Chat. I’m Rob Ristagno, and to listen to more episodes or download bonus content, visit us at ceocampfirechat.com. See you next time around the fire.
Rob Ristagno: At last week’s chat, one of our guests, Dave Lambert, shared an important message about the pressing need for blood donations in the US:
Dave Lambert: I gave blood earlier today and learn that there’s a nationwide blood shortage, the biggest shortage in the last 45 years. And apparently what’s causing them is a couple of things, on the demand side, there’s a lot of people back on the road driving and some of them may have forgotten how to drive. So they’re getting into a lot of accidents and there’s also was a lot of elective surgery put off during the pandemic.
Dave Lambert: And so people are back and they’re getting their knee replaced and their hip replaced and needing a blood transfusion for some of those things. And then on the supply side, unfortunately, while businesses are starting to reopen no one’s having blood drives. Right? So offices, churches, they’re not having blood drives yet. So I recommend if you can sign up and go to your local blood bank, it’s easy to find, Google it and drive over and make a donation.