The Silent Profit Killers in DTC

Hey everyone,

Welcome back for another bite to chew on.

You know what's funny about running a DTC brand? Sometimes it's not the big, obvious costs that kill your profits - it's the sneaky little ones that add up when you're not looking.

Think of it like a leaky pipe🚰

One small drip might not seem like much, but let it run for months and suddenly you've got a serious water bill on your hands.

That's exactly what we’ve discovered as we’ve developed our processes around Obvi's financials. And we bet you've got some of these silent profit killers lurking in your business too.

Today we're sharing the hidden costs we’ve found, why they matter, and most importantly - how to fix them.

On the Menu

• First - The Sales Leaks 

• Second - The Operations Drain 

• Third - The Red Tape Tax

Speaking of silent profit killers…

Here are 3 chargeback stats that used to keep us up at night:

• 86% are straight-up fraud ❌

• 40% of those customers will hit you again within 90 days 💸

• -$125 billion annual cost to online businesses 😬

This isn't just customer service gone wrong - it's a learned behavior that's bleeding DTC brands dry.

Why? Because demanding a chargeback is as easy as hitting a button. Once customers realize how simple it is, many stop reaching out to support entirely. They've learned a new "refund hack" – and they're using it over and over.

That’s why we use Chargeflow. They’re a fully automated chargeback solution. 

Their platform assembles bulletproof evidence packages that actually win disputes. They’re also deeply integrated with Shopify so they not only flag chargebacks, they help us understand their source. 

Our results?

• Win rate jumped to 80%

• Recovered over +$27K in lost revenue

• 10’s of hours saved from fighting chargebacks

Now we can rest easy knowing customers can’t easily defraud us for free product. And the best part is Chargeflow doesn’t cost a dime upfront. 

No contracts. No monthly fees. We ONLY pay them when they save us money. 

Right now, they’re offering a limited time deal → $10,000 in FREE chargeback management. Get in before the holiday rush (when chargebacks tend to spike by +30%.)

USE CODE: OBVI10K to claim your offer. And let them know Ash and Ron sent you. 

The Sales Leaks 🚰

Let's start with where the money comes in - because that's also where it starts slipping away.

Chargebacks

The first silent profit killer that's probably costing you double what you think: chargebacks.

First, what makes them so dangerous? It's not just the lost sale - it's the cascade of costs that follow. 

When a customer files a chargeback, you're hit with → 

• The original purchase amount

• A chargeback fee ($15-100 per incident)

• Processing fees (which you don't get back)

• Shipping costs

• Lost inventory

• Employee time fighting the dispute

We discovered that for every $100 in chargebacks, we were probably losing about $200 when all costs were counted. 

As we grew chargebacks started about eating 0.5% of our revenue every month. That doesn’t sound like a lot, but at scale it was a whole bunch of money just deleted from our bottom line for no good reason.  

Fix it:

• Track common chargeback reasons

• Document all shipping/delivery carefully

• Fight the ones you can win

• Look for patterns in high-risk orders

• Consider chargeback protection services

Regular Returns

The true cost of a standard return isn't much better. That $50 product return? It's probably costing you closer to $100 when you add everything up.

We recently mapped out the full cost of a typical return at Obvi:

• Original shipping cost

• Return shipping cost

• Processing fees (both ways)

• Customer service time

• Repackaging/restocking costs

• Additional shipping supplies

But here's what really opened our eyes - these costs compound based on your category. 

If you're in fashion or accessories, you might see return rates of 20-30%. But if you’re in supplements like us, even a 1% return rate can eat up significant margin when you factor in all these hidden costs.

Fix it: 

Instead of just accepting returns as a cost of doing business, we started treating them as data points. Every return now gets tagged with:

• Reason code

• Customer cohort

• Time since purchase

• Product category

This helped us spot patterns we never saw before. 

For example, we found certain product combinations had way higher return rates than others. Simple fix? Stop recommending those combinations.

If you get granular with your return data, you can start to apply net profit analysis to your SKUs → 

Meaning, you shouldn’t just know what your topline revenue per SKU is, you should understand its contribution margin, less things like returns. You need to do this per sales channel if you sell beyond your website as well. 

A high return product could have good looking gross revenue, but come out neutral or even negative over time given the costs associated with returns.  

With this info in hand, you can drill down and determine → 

• Cause of returns (do you need to change this product or the messaging?)

• Channel fit (should this product only be sold online and not in-store?)

• Brand/Catalog mix (should this SKU be retired?)

Partner & Platform Fees

"Why is our Shopify bill so high?"

That innocent question kicked off a three-month deep dive into our tech stack. What we found was eye-opening.

We discovered what we call the silent fee creep → 

• Apps we installed during BFCM... two years ago

• Multiple tools with overlapping features

• Premium tiers we'd outgrown

• Unused user seats across platforms

But it wasn't just Shopify. The fee creep was everywhere:

• Payment processor fees varying wildly by card type

• Amazon fees changing based on category and fulfillment

• Marketing platform overages we never noticed

• Retail deductions that didn't match our agreements

We even found one retail partner consistently taking their 2% early payment discount... while paying us at 60 days. That's tens of thousands in incorrect deductions we almost missed.

The Operations Drain 🔧

This is where things get really interesting (and expensive). 

From inventory challenges to abused company credit cards, your Opex can hide all sorts of waste and inefficiencies. 

Inventory Chaos ⁉️

Want to hear something scary? Most DTC brands don't actually know their true COGS. We didn't.

Because COGS can be variable, you can’t just rely on some average price you have jotted down somewhere.

For example - we'd order 10,000 units at, say. $4.20 each. Then market conditions would change, and we'd order 50,000 at $3.80 each. Our system would use the most recent price for everything - $3.80. 

Sounds minor, right?

But that small discrepancy led to:

• Inventory values off by six figures

• Profit margins that looked better than reality

• Forecasting that missed seasonal impacts

• Cash flow surprises at the worst times

The real wake-up call came when we couldn't reconcile our warehouse counts with our financial statements. The drift between what we thought we had and what we actually had kept growing.

Fix it: 

We finally bit the bullet and implemented proper inventory management software. Now we can track COGS by batch and date. 

This also allows us to set up monthly reconciliation processes and build better forecasting models. 

The SaaS Dance 💃

Here's a radical move that saved us $1.68M annually: We canceled every single company credit card.

Sounds extreme? Well, our monthly overhead was creeping toward $300,000. Tools, subscriptions, services - they all seemed essential. 

Until they weren't.

By forcing every expense to be manually reapproved, we:

• Found dozens of abandoned test accounts

• Identified tool overlap we never noticed

• Renegotiated rates with key vendors

• Killed "essential" tools that nobody used

Result? Monthly overhead got SLASHED IN HALF to $160,000. That's nearly $1.7M in annual savings just from auditing subscriptions and software.

The Red Tape Tax ❌

Finally, let's talk about the annoying but expensive world of compliance and banking. This is the stuff that keeps CFOs up at night - and for good reason.

Sales Tax Nightmares 😱

Here's a scary number: There are over 13,000 sales tax jurisdictions in the US alone. And thanks to economic nexus laws, you might be on the hook for collecting and remitting in more places than you think.

This was another hard lesson for us. 

Just because you're based in one state doesn't mean you only have to worry about that state's sales tax. Most states now require you to collect sales tax if you exceed certain thresholds - usually around $100,000 in sales or 200 transactions in a year. 

Hit those numbers, and suddenly you've got what's called "economic nexus."

The real challenge isn't just collecting the tax - it's keeping track of where you need to collect it. 

Every state has different rules about what's taxable when you need to file, and how to handle marketplace sales versus direct sales. 

Miss a filing deadline or fail to register when you should, and you're looking at penalties that can quickly spiral into six figures.

We've seen brands get blindsided by sales tax audits that revealed years of uncollected taxes they didn't even know they owed. The worst part? 

Those brands were still on the hook for all the tax they should have collected, plus penalties and interest.

The smart play is to get ahead of this before it becomes a problem. 

That means tracking your sales by state, understanding your nexus obligations, and having the right tools or experts in place to handle collection and remittance. 

Yes, it's an investment. 

But it's a lot cheaper than dealing with an audit or back taxes. This is especially important if you are ever looking to exit.

Know what kills interest from an interested buyer? A deep tax liability on your books. 

Government & Policy Land Mines 💣

Sales tax is just the tip of the compliance iceberg. As your brand grows, you'll face an expanding web of regulations that all come with their own costs and complexities.

Take data privacy, for instance. 

If you're selling to customers in Europe, you need to comply with GDPR. Got California customers? Add CCPA to your list. 

These aren't just checkbox exercises - they require real changes to how you handle customer data, and the fines for getting it wrong can be devastating.

Then there's product compliance. For us in the supplement space, that means FDA regulations, specific labeling requirements, and a host of safety standards. But every industry has its own regulatory framework to navigate.

We've found the best approach is to treat compliance as a core business function, not an afterthought. 

That means building it into your budgets and planning cycles, maintaining relationships with regulatory experts, and staying ahead of new requirements instead of scrambling to catch up.

The Finance Stack Trap 🪤

Financing is a must for fast-growing DTC brands. It’s a necessary tool when you face major growth opportunities or cash constraints. 

But financing can also be like quicksand. The more you struggle, the deeper you sink.

It starts innocently → A line of credit for inventory. Some financing for ad spend. Maybe a working capital loan for growth…

But soon you're caught in a vicious cycle of needing new financing just to pay off your old financing. 

The real killer? The compounding costs of:

• Origination fees

• Interest rate variations

• Processing charges

• Banking fees

• Early repayment penalties

Fix It: 

This could be the subject of an entire newsletter, but in short we created a checklist of strict rules to contain risky financing → 

• No financing without clear ROI targets

• Build cash reserves in good months

• Track true all-in borrowing costs

• ALWAYS have an exit plan

Sum it up

These profit killers are sneaky because they either seem small on their own or they hide in the cracks of your business like random forgotten subscriptions or obscure government policy. 

But add them up, and they're probably costing you six or seven figures annually if you don’t get a handle on them. 

The good news? Most are fixable.

Here’s a quick audit checklist:

1. Pull last month's bank statement - how many subscriptions do you actually use?

2. Check your COGS calculations - are they accurate by batch?

3. Map your true cost per return - all costs included

4. Review retail deductions from the last 90 days

5. List every SaaS tool and its last active use

Remember, you don't have to tackle everything at once. 

Pick one area, fix it, then move to the next. Small improvements compound over time.

All the best, 

Ron & Ash