The 5 Most Deadly “Costs” Fast-Growing Companies Face

by Aaron Orendorff

13 min read

    Five and a half million people just saw Mike Brown’s face … all at once. In an instant, the dream was real. After a year of slow but steady growth, Mike and the team at Death Wish Coffee — all six of them — had finally done it: breakthrough.

    The video began with a simple question: “How big a buzz are you getting from your morning coffee?” and then … there was Mike, front and center for the next two and a half minutes on Good Morning America.

    That was back in 2013 and for a month, they rode the wave. Traffic, accolades, new orders and of course new money all rolled in.

    Then, reality.

    As Mike tells it:

    “After thirty days of basking in the glow, everything fell apart. We couldn’t keep up with demand and ended up three to four weeks behind on all new orders.

    “People started complaining … everywhere: emails, phone calls, and especially online. They called us a ‘scam.’

    “We’d been number one on Amazon, then they shut down our account completely. Our second biggest outlet, Ebay, even dropped a lifetime ban on our company. It was a nightmare.”

    Rapid growth brings with it a unique set of problems, especially financial problems. And the truth is while most businesses have a plan to make it big, very few have a plan to handle success once it arrives.

    It took two years for Death Wish Coffee to get the right cogs in place to recover. But by the time they won QuickBooks’ Small Business Big Game Competition last year and appeared in their own 30-second Super Bowl commercial, they were ready. This time, the difference was night and day:

    quickbooks-death-wish-coffee

    Sadly, for many companies, that kind of second chance never comes. Even worse, their businesses never recover.

    To save you from the same fate, I sat down with Death Wish Coffee to put together this list of the five most deadly costs fast-growing companies face … and what you can do right now to get ready.

    1. Order-Fulfillment Costs

    Order-fulfillment costs is a catch-all term meant to cover everything that it takes for your business to deliver what it’s selling. Often order-fulfillment costs describe physical expenditures, like increased production, warehousing, and shipping. However, staffing is also a related cost and so is maintaining quality.

    Anticipating all five is daunting in the face of rapid growth. Thankfully, physical expenditures — the big three of production, warehousing, and shipping — can by and large be dealt with by vetting and enlisting third party providers prior to media exposure or at the first signs of oncoming expansion.

    “Vetting” is easily the most important word in that last sentence.

    Due diligence isn’t the sexiest thing in business, but knowing the intimate details of who you’re outsourcing to is non-negotiable.

    Even though this is an article about “costs,” cost cutting cannot be your first priority with outsourcing.

    For example, when Entrepreneur reviewed “three ways to save money” by outsourcing production, neither of first two ways had anything to do with money itself. Instead, they both stress the vetting process: “1. Understand each other’s businesses. 2. Build internal relationships.”

    Naturally this means committing time to the process of finding the right third parties. It also means committing relational energy by asking questions that go beyond price-sheets and terms.

    • Is the third party willing to share their own financials with you to ensure stability?
    • Do they supply comprehensive, in-house verticals from engineering to custom packaging, special orders, and customer-facing representatives?
    • What is their history with safety and quality?
    • Does their corporate culture, values, and on-site atmosphere match yours?
    • What protections do they offer for your company’s intellectual property?
    • Will you as a client have a primary point of contact other than the salesperson?

    Growth is the worst time to get bogged down as a leader. Given the depth of trust demanded in outsourcing order fulfillment, the point is to get proactive about vetting prior to spikes in demand.

    “The magical moment,” Mike explained when asked about order fulfillment, “was when I finally got my hands off the packing tape.”

    magical-moment

    In light of Death Wish Coffee’s disaster the first time around, when their second chance hit, they were ready. Death Wish Coffee partnered with National Fulfillment Service in Philadelphia, PA, before the big day arrived:

    “We read their reviews, current customer testimonials, and exhaustively analyzed their terms and financials. We contacted their past customers directly, both the references they gave us as well as a few we looked up on our own. We visited the facility in person. We met with their leadership one-on-one. We asked question after question after question.

    “We did all of that because we knew we were entrusting our business to these people and we didn’t even want to experience what we’d gone through before. It’s painful to watch as people who paid for your product can’t get it.”

    2. Outstanding-Debt Costs

    For companies on the brink of making it big, outstanding debt sounds like one of those “good” problems. Why?

    Because in this setting outstanding debt isn’t money you owe other people, it’s money other people owe you. So what’s the danger?

    During periods of rapid growth, outstanding debt mounts quickly, often at an exponential rate. This is true for ecommerce businesses moving into wholesale but it’s especially true for service-based businesses landing larger contracts. The deadliness of this cost is it creates a financial illusion: you feel like you have capital because on paper you do. But, try using that capital when you need it … and reality bites back.

    Outstanding-debt costs are very much the Scylla-and-Charybdis of growth. You need working capital to meet the higher expenses growth brings with it and yet you need growth to generate working capital. When a growing company takes on too much outstanding debt that’s where the old “rock a hard place” come crashing together.

    When Intuit asked business mentoring expert Terri Levine how to navigate these troublesome waters, her advice was to the point:

    “I instruct my clients to collect all outstanding debts quickly, decrease prices by 10-15%, think about refinancing or borrowing money, offer customers discounts for prompt or upfront payments, and reduce costs by eliminating unnecessary overhead.”

    Even more pointed was Vinny Antonio’s, President of Victory Marketing Agency, advice to Forbes:

    “Cash flow management for a rapidly growing, bootstrapped company can be harder than the world’s most difficult Sudoku puzzle. It’s almost a full-time job staying on top of who owes you what and who you owe, and then prioritizing those payments. All the while, you’re pushing for more growth, but with that comes additional expenses — most notably, your executive team. Good talent doesn’t come cheap, and you often have to find creative ways to lure the right personnel to your team.”

    Two antidotes to the cost of outstanding debt stand out.

    First, do not be seduced by large clients or companies wanting to do business with you on their terms. Many rapidly growing companies run into this problem head on due to the excitement of new opportunities.

    Second, do not be afraid to say no.

    This applies to both old and old business relationships alike.  If an old customer no longer fits your new model, drop them; they’re just dead-weight. And the same is true of new customers who want extended terms.

    3. Customer-Service Costs

    New customers are like any new relationship. At first, they’re all sunshine and lollipops. It feels good to be wanted, to be popular, to have droves of excited visitors beating down your door …  wallets out.

    New customers equal new money and with truly explosive growth — as long as you don’t fall victim to outstanding-debt costs — a lot of new money. But it’s a facade. New customers quickly become current customers. The shine wears off and — just like any relationship — the warts come out.

    Increased customer-service costs are the time bombs of rapid growth because they don’t rear their heads right away. But rest assured: they are coming. So what can you do?

    While much of the advice about overcoming order-fulfillment costs revolved around outsourcing, customer service is different. It’s tempting to off-load customer service to a third party, especially if you deal with a difficult industry. As leaders, we even tell ourselves clever excuses like, “Well, they’re professionals. They’ll do a better job than us.”

    Not so. Customer service is one place you don’t want to skimp. I’ll hammer home the long-term implications of bad customer service in the next point, for now, let’s go back to Death Wish Coffee’s nightmare and turn around:

    “So much of what happened after the Good Morning spot surrounded bad customer experiences. The reviews were brutal and, like I said, people started calling us a ‘scam’ in their comments.”

    “The lesson we learned was that you have to really love your customers. And we do. The distribution center we contracted with has it’s own call center and we wrestled a lot with how much to put into their hands.”

    “There’s also so much you can do with automated customer support through email now that a lot of companies think that’s the answer.”

    “In the end, we decided to keep 95% of our customer service in house. We didn’t want them calling up someone who wasn’t as invested in loving them as we were. After the Super Bowl commercial there were plenty of long nights for our team. And as draining as that was, you can’t overlook the power of one-on-one service.”

    Automation makes some customer-service scaling possible. Email and even Facebook Messenger Chatbots are great on these fronts. But don’t over do it. Love your customers when they’re hard to love and the pay-offs are huge.

    4. Customer-Acquisition Costs

    Optimizing your customer acquisition costs (CAC) is essential in any business. In fact, analytics platform Kissmetric goes so far as to call CAC “the one metric that can determine your company’s fate.”

    During explosive growth, CAC decreases dramatically. This is due to the nature of rapid growth itself: customers come to you, you don’t have to go to them. Rarely, however (i.e., never), do customer-acquisition costs stay low once a new plateau is reached. As a result, companies routinely underestimate how truly expensive sustaining growth will be.

    Thankfully, Segment offers a five-step formula for determining customer acquisition costs online, which I’ve adapted a bit to fit non-SaaS businesses:

    1. How much do your paying customers spend throughout their lifecycle (customer lifetime value)?
      LTV = (Revenue per paying customer per month * Gross Margin) / Churn
    2. What percentage of people who enter your funnel (e.g., sign up for your email list) become paying customers?
      Enter Funnel / Paying Customer
    3. What percentage of people who visit your website enter your funnel?
      Visitor / Enter Funnel
    4. How much can you spend to acquire a paying customer?
      CPPC = Cost Per Paying Customer
      LTV = Lifetime ValueCPPC = LTV / 3(A third of LTV is on the “higher end of what you’d want to spend for one paying customer.” However, do not fall into the trap of thinking that if you’re paying a tenth during a growth stage that percentage will hold.)
    5. How much can you spend to get someone in your funnel?
      CPA = Cost Per Acquisition
      CPPC = Cost Per Paying Customer
      CR = Funnel to Paying Conversion Rate (from question 2)

      CPA = CPPC * CR

    The key factor in all that is customer lifetime value (LTV). Notice that everything in the CAC formula turns on that one number. That means, to prepare for massive growth, you must to be ready to capture as much momentum as possible and keep the buzz going.

    Death Wish Coffee excelled at both these musts. To leverage all the online visitors their Super Bowl commercial generated, they initiated a five-step plan:

    Step One:
    Capitalize on the excitement and get current customers involved through blog posts, social media, and personal videos.

     What about all the new visitors coming in?

    Step Two:
    Turn the rush of new visitors into new customers with on-site incentives like reward points and free shipping.

    What if a new visitor wasn’t ready to become a new customer?

    Step Three:
    Turn new visitors into new leads with on-site email collection.

    What if a visitor wasn’t ready to become a lead?

    Step Four:
    Bring visitors back to the site through retargeted ads on display networks and social media.

    death-wish-coffee
    death-wish-coffee-sponsored

    And what if a new visitor did become a new customer?

    Step Five:
    Provide new customers with an amazing and unique unpackaging experience and then follow up with targeted emails to encourage them to become ongoing subscribers.

    5. Regulatory and Tax Costs

    This last cost is a killer … and probably the most overlooked. It sounds obvious, but businesses that don’t make regulatory and tax compliance a priority are taking on huge risks for zero gain.

    How does this happen?

    Companies experiencing massive growth find themselves suddenly thrust into national and international markets, both of which have their own unique tax codes. While you may not have experienced something like a “sales tax audit” before, the larger you get, the most likely it becomes.  

    Every state that charges sales and use tax also has auditors that are tasked with making sure every cent of is paid. Of course, the auditor’s time isn’t free, which is why the bigger the business, the more likely the state is to see deep pockets and start an audit.

    What’s more, it’s a common misconception that the auditor will only catch up to you if you’re located in their state physically.  This couldn’t be further from the truth.  Out-of-state companies with enough sales to generate “nexus” are a prime target for auditors.

    For example, in August, a manufacturer in Minnesota was found to be liable for $1.1 million in unpaid sales tax by the state of New York.  The manufacturer didn’t have any physical locations in the state, but its employees sold products at trade shows there and advertised on New York television stations.

    In the state of New York, there’s an extra twist: any individual who believes a company is delinquent on sales tax can start a “qui tam” lawsuit. This means that the person who whistleblows on the tax delinquency actually gets a percentage of the judgment.  No auditor needed: a New Yorker filed suit and won big, all because this company didn’t have a very good grasp of nexus laws.

    And if you think the first four costs were complicated, the Wakefield Research Report found that:

    There were close to 14,000 changes to rates and jurisdictions to occur this year in the U.S. alone, (up by nearly 40%) from the previous year, yet 40% of the accounting pros surveyed rely on “existing knowledge” to determine their tax liabilities. In fact, nearly half of the respondents couldn’t remember the last time they updated their sales tax compliance processes.

    Fortunately, one of the places where automation helps most is at audit time. After automating sales tax with an end-to-end solution calculating rates is done automatically and so is filing with every state where you owe taxes. With advanced geolocation technology, businesses never get the wrong rate again, and that keeps auditors happy.

    Customers who have experienced audits both before and after automating their sales tax compliance are amazed by how much difference it makes.  Auditors don’t have to comb through records in accounting software to get data about rates for individual transactions: it’s all available at their fingertips in the form of easy-to-use reporting tools.  Audits that once took weeks now take a day or two, eliminating this most-costly costly mistake.

    From Dream, to Nightmare … to Dream

    Explosive growth is the dream of every business owner.

    Just don’t let your dream become a nightmare. Instead, start preparing now for the five most deadly costs fast growing companies face:

        1. Order-Fulfillment Costs
        2. Outstanding-Debt Costs
        3. Customer-Service Costs
        4. Customer-Acquisition Costs
        5. Regulatory and Tax Costs

    And remember the words of Mike Brown:

    “Work closely with your accountant. Know your margins, know where all of your money is going, and know your liabilities. A good accountant can keep you out of the red and into the black. Meet with them regularly and not just when problems arise or at the end of the year.”

    Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

    Related Articles

    Your Financing Options

    Current financing options are broken into three categories: Small Business or High-Growth…

    Read more

    The Hidden Costs of Inventory

    You’ve decided it’s time to invest in new inventory. Your customers demand…

    Read more

    100 Best Business Blogs You Need to be Reading (and Taking Lessons From)

    There are many business blogs on the Internet. Some of the most…

    Read more