Another Friday Feedback has come and gone
On February 2nd, 2018 our own Andrew Maff sat down with Scott Scharf, the CEO of Catching Clouds to talk about e-commerce accounting, the big story of Amazon tax nexus, the proper way to launch a new product and so much more!
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READ ALONG WITH SCOTT SCHARF ON E-COMMERCE ACCOUNTING
Andrew: Hey Scott.
Scott: Hello. Hey.
Andrew: Hey, can you hear me okay?
Scott: I just needed you to invite me in.
Andrew: Took a minute to get going. How's everything going?
Scott: It's going good.
Andrew: Good. I appreciate you joining me. You are lucky first person for Friday Feedback here, so we're just going to give this a shot and you're going to have to accept any issues that we have along the way, but we appreciate you being our lab rat for this.
Scott: I'm good for that. Always happy to be a guinea pig.
Andrew: Alright. Why don't we kick it off? Why don't you tell me a little about yourself? Tell us where you're at, over at Catching Clouds, what you guys are up to, the works.
Scott: I'm a long time 30 plus year IT geek. I don't look old enough, but I'm a little older than I seem. I started this business with my wife. She's actually a CPA and a technical user, and I've worked from consulting projects to global multi-nationals and a tone of other things, but over the last six years, we decided, "Hey, we could work together. We both work from home. What do we want to do?"
How do we combine my technical expertise and her accounting expertise? We've always asked, what do businesses do when they don't have technology or accounting, and every business needs that, especially Amazon businesses that can grow so rapidly.
And so we started Catching Clouds, where we provide outsourced e-commerce accounting service. We've got a team 18 of accountants and tech, that help us provide accurate financials for e-commerce businesses. We do whatever we can to share that expertise for clients that are ours, or anybody else we work with, whether it's partners or other people. We spend a lot of time really educating everybody and sharing our expertise wherever possible.
Andrew: Beautiful. Are most of the e-commerce sellers you're working with based off of just one platform or one marketplace, or are they across multiple marketplaces? What does your average client look like right now?
Scott: We're usually taking on the more advanced clients. We do have Amazon only sellers, but the majority of our clients, probably on more than three channels, and we have clients with over 10 channels. We love high volume, complex, or even simple Amazon only sellers or Amazon, Shopify, and Ebay are the most common, or people that are on AmazonUS.com.ca.couk, and so we're working with people that are doing everything from retail arbitrage to drop-ship, to B2B, to multi-channel, to Amazon Vendor Central, as well as Seller Central.
We have a number of clients that we like and we ... One of our favorite clients, he's an Amazon seller, doing well. He's got one of the top board games on Amazon. He has one skew, and it's just awesome, and so our accountants fight over that client, where the most of it, really our approach is, we want to take on the hard stuff, because people just don't dig in, even accountants, to dig into the technical aspects, so we really like the more challenging customers, but we're also great for those sellers that are over a million dollars and really growing and scaling their business, and they want to trust their financials.
Andrew: So, how are you assisting in these clients scaling? If you had someone who's, let's say, just on Amazon or maybe just on Shopify, and they're ready to diversify and grow across multiple marketplaces, multiple shopping carts if necessary. How are you guys helping them with that and what do you think the best approach is that you've seen, at least so far?
Scott: Well, there's two sides to what we're doing. I spend a fair amount of my time, since I'm not an accountant, doing e-commerce business process optimizations. I'm helping sellers understand and identify the optimal operations cloud inventory tool, the right solution there. Talk to them about re-pricers and technology, what it means to scale from an operational perspective into, either additional channels, whether they're doing listing or other functions. And then, we spend ... I really help looking at the operations, you know, what freight forwarders do they need, what insurance do they need, and really asking all those business questions to put a whole plan together, so that you've got a complete technical plan to succeed at it.
The other side, of course, is providing them accurate financials, so they know what their capital is, they know what they can afford to spend on things, to understand what their current profitability is per channel, and looking at things ... Profitability per skew, and so, covering both sides, because we provide not just book keeping and accountants, but we provide controllers, who are CPAs, who are really going to get into their business and challenge our clients to think about their profitability, to really think about the decisions they're making, and then we monitor. If they're spending more money on a channel, are they profitable in the first month, the second month, or the third month.
It's really having somebody that's inside your business that cares. Both the operational technology side of things to be successful at it and manage the data, and then not only the advice upfront financially, but ongoing, really measuring it to say, "Hey you really should cut bait on this jane.com channel that you've never heard of and you're actually losing money on this channel. Why don't you put more money into Amazon.com and sponsored product ads, or more of a focused versus a broaden shock approach," which works for some people, but you have to monitor it to know where you're profitable on which channels.
Andrew: Okay. I have a question for you. We have this problem all the time. We have different sellers who approach us with different issues, so we help on the marketing side. You mentioned sponsored products. When we do ... When the client has a new product, we always mention, you know, there's three ways for us to approach this. You can take it very slow and try and remain profitable. You can break even and have just your target A-cost as basically exactly what your margin is, or you can just go to town and spray on it, and just do everything you possibly can and spend as much as possible, and try to get the better rankings for that product.
What do you guys usually suggest when someone is trying to launch a new product?
Scott: You need to make sure you're profitable as a business. Let's say this is your third or fourth product. Really, our main is the middle option you had there, which is for the first four to six weeks, you might say a little bit longer, but not much longer, you want to spend 100 percent of your margin on sponsored product ads, so you're breaking even on that new product. You might extend that a few more weeks to get it established and hit the ranking you want. You can decide that you've set aside some additional marketing funds for a product and spend that and cover it across other things, but in this world, it's better to incrementally spend and tune, and then maybe ramp it up a little bit, then throw a bunch of money you have, that you could spend on R and D, or you could spend on yourself, or profit that just sits in the business.
I take the middle road. We tend to say, "Look, you don't want to sacrifice the rest of the business for this new launch, and really impact your overall profitability, because you need to pay attention to cash flow. And if you spend all that money on marketing, then you don't have money if it's a success to buy inventory to keep up with the success to turn it into profit."
Andrew: We take the same approach, but we have clients who tell us different things, so they want to take a different route ... Typically we tend to see people who want to spend more, because there is that correlation between PPC and the organic sales, so they kind of tend to see a slight increase in organics, where they think they're making up the money there. I agree. I think the smarter way is to actually spend 100 percent of your margin, get it going for about a month or so, and then let it go.
Scott: And then set a budget, but you want to stick to a budget, versus chasing something that you're not sure of. You really have to have a lot of discipline about your marketing spent.
Andrew: I agree. Are you seeing better profitability for launching new products on Amazon versus if they were on their own shopping cart, because if you're on your own shopping cart, you have email, you have social media, you have ad words. There's so many other marketing channels. Obviously, your margin is better, because you don't have Amazon fees, but there's so much more on a marketing level and on an overhead level, so if you balance out the two, I've always wondered if there's really that big of a difference in the profit margin?
Scott: It does add up. I mean, every business needs to consciously invest and grow their business off Amazon. Now, I'm not saying you ignore Amazon, but there has to be a real balance between what you're selling on Amazon, which could be 10 times the volume, but you make significantly more profit. I really think there needs to be a balance that you have, that you're not completely dependent upon Amazon at any given point. Not so much worried about competition directly from Amazon, but all the other sellers and other people out there. It's just a very competitive space, where you can control your engagement and interaction with customers and build the loyalty in the long-term recurring customers, because you have more options off of Amazon, and it really needs to be a balanced approach in my opinion.
Even if it's 90 percent of the volume and revenue comes from Amazon, just because of the size of the marketplace, that doesn't minimize the fact that you can't just ignore the other platform. And then you can drive so many other opportunities, marketing campaigns, loyalty campaigns, and on every sale, you make more money.
Andrew: Okay. How often do you guys work with brand new sellers? So an e-commerce seller who just has their one product and is ready to get going, or something, or they just got a line of products.
Scott: We're actually ... Where we sit, is we're working with established sellers, that really have hit a minimum of 50K per month in revenue, or typically over a million dollars in revenue, so we're dealing with the more established sellers that already have a track record, have been doing the accounting themselves, and have some of the basics down, and hit that basic level of support. That's where we deliver the most value.
We really do care about those sellers that are smaller, so we've launched our Catching Clouds Academy, which is online e-commerce accounting courses. We have an Accounting for Amazon course, that's about five hours, and an Accounting for Shopify course, and throughout the year, we're going to release a ton, Walmart, Ebay, a lot more specifics to help people, but our current courses will let someone know, this is how you set up Zero or QuickBooks online.
Our focus for our outsourced managed accounting services are the larger, more complex sellers, but we're ... I speak at conferences. I'm speaking in Brooklyn next week, to really cover and help and just answer questions about the fundamentals and what it means to be in a business, because people think, "Oh, I'm an e-commerce seller, and Amazon seller, and I'm all about product and marketing," but they're all businesses. The common fundamental is that they have to understand that they're a business. They have to have the right business structure. They have to pay taxes, and they have to have financials. And you can't just ignore it, because you have to know if you're profitable or not as a business, not just per skew.
Andrew: Speaking of taxes, we spoke about this before, so I'm going to bring it up. You can ... I know it's not entirely your realm, but if you want to give me just a little bit of insight on what you're thinking with the Amazon tax nexus issue with Massachusets and everything right now, what are your thoughts on it? What do you think people should be doing?
Scott: Well, I talk about it all the time, and it's one of our core services, is that sales tax is a reality for Amazon FBA sellers. It really is. No matter what people read and talk about, the commerce clause and all this other stuff, it doesn't matter. The states are not only interpret the law, to say you have nexus if you store inventory there, they're enforcing it. They're sending out letters, they're suing Amazon, they're getting lists of sellers, they're sending out notices. It started with California, and now Massachusets, which Amazon just shared all their data with.
It really is a reality, and every Amazon seller, from small to large, has to make a risk management decision, to understand that they really do have nexus and the states interpret this way. If you send a thousand widgets into Amazon FBA, they're going to move them to all 25 states, move them across 200 different warehouses. It's your property, and it creates nexus, and that's what the states think. That's what they'll audit you for.
The challenge is, it's very complex, but once you decide, you really need to look at which states you're going to register in. Always register in your own state, then work on the next big five states with most of the population, California, Texas, Florida, then Pennsylvania and Ohio, and Washington, and work your way through it. You just ... It really is a reality. Unfortunately, it costs about $200 per state to register. That's quite a bit of money, at 25 states, or you pick the main ones that you're in.
The next thing is, you're going to pay between 30 and 50 dollars per month, per state, either for a tool like Tax Jar or Taxify, which everybody should use. Don't try to do sales tax on your own. We use tools. Everybody should do it. It's overly complex, and once you're registered, collect and file. The nice thing is, once you're already doing it, it's part of an overhead of your business, you collect the sales tax, it sits in your bank account. You send it to states, you're done, and the only overhead is your monthly fees and either time, or a tool, or outsourcing to someone like me or one of our peers, and you just have to decide, but you shouldn't ignore it.
Andrew: Okay. This past week, have you learned anything about the e-commerce industry? Anything recent that you want to share?
Scott: There's a bunch of little things. One, the breakup between PayPal and Ebay happened. I thought that was interesting. But I had to dig around, and it doesn't ... The divorce doesn't happen until 2020, so we've got a little bit of time.
Andrew: But it's coming.
Scott: That's an interesting one that will have a huge impact on PayPal itself. There's just a lot of buzz about Amazon sharing data with Massachusets. I don't have anything new, other than, look, if you should've been registered, you should make a decision and talk to your attorney, or a sales and local tax expert or email someone like me, to figure out what it means for your specific situation. Those are probably the two hottest items that are happening right now, that at least I see some buzz around.
Andrew: Some of your larger clients, some of ours eight figures plus, well into the eight figures, are on at least ... We find, at least three marketplaces. Are you finding that some of the higher volume sellers that you're working with are on multiple marketplaces? And if they are, besides Amazon and their own shopping cart, where are you typically finding them?
Scott: Well, mostly it's Amazon.com.ca.couk. That's the first batch. People are on Ebay, but for all the major sellers, it's just kind of an outlet for moving product that's not selling or testing or getting feedback or things along those lines. The interesting part is we've got a few on Jet. I've had quite a few drop Jet. It just isn't generating the revenue that they expected. Walmart is growing and growing very slowly, and I think everybody's committed to Walmart as an alternative to Amazon, and that more and more people are putting effort there, and Walmart's doing a ton of investment that's going to help everybody.
All the other smaller channels, like Chewy or others. If you're selling a pet product, you should be selling on Chewy. Then it comes down to your specific situation, but I think if you are at the point where you think you should be on multiple marketplaces, it's going to be on Amazon. Ebay is an option, and use it however you choose to, and then Walmart.
We'll have to see. I've been looking and tracking Alibaba for a while, and people are using it to purchase products, and maybe dabble to try to push products into China, but no one's killing it, or even making any progress here in the US. It's really there, and then ... But a marketplace approach can really work, but understand you're going where the competition is.
Andrew: So after the multiple different countries of Amazon, would you suggest Ebay or would you suggest Walmart from what you've seen with your clients? First one you go to.
Scott: They're pretty equal, but I probably say Walmart. Walmart's got the longer term play. They're really building the tools. They're investing in the infrastructure. I think it's going to be a viable ... No matter what. Even though Amazon has such great capital and doesn't need to make profit, I think that Walmart's going to invest, just continue to invest huge in their channel and continue to grow it and leverage their operations. The distribution centers they have around their stores gives them a good chance to really go toe to toe, as much as possible, against Amazon.
Andrew: Nice. Well, it's been great chatting with you. Why don't we go ahead and close out with you telling us a little bit about where everyone can find you, what you guys do if they want to work with you, and so on.
Scott: Sounds good. Thank you very much. Well, they can definitely check us out at www.catchingclouds.net. Follow us at Catching Clouds on Twitter. We're always posting information about blogs and resources and security documents. And then of course, you know, if you're a million dollar plus seller, and you want to know you have accurate financials that you trust, and an accounting team that you know is both technical as well as has the expertise of not just accounting, but controllers and CPAs, that's what Catching Clouds is here for. If you're a smaller seller or an accountant, we have our Catching Clouds Academy that will take our six years of knowledge, and really boils it down to show you a process that will make your accounting manageable until you're big enough to outsource it.