Retail Revolution vs. Evolution: Part II

Why Casper Needs to Open 200 Stores

Claude de Jocas
Aug 13, 2019 · 15 min read

This is Part II of a Spring Semester Independent Project, tackling the role of vertical retail in scaling Digitally Native Vertical Brands (DNVBs). I am in the second year of my MBA at Harvard Business School, working on this project under the advisement of Finance faculty member Bob White. This article builds on Part I, which seeks to understand why some some DNVBs are opening stores faster than others. My thesis, that vertical retail is necessary to drive down LTV:CAC ratios for big-ticket consumer durables, is further explored via the following case study on mattress brand Casper, plus some concluding thoughts. If you’d like to start at the beginning (recommended), follow the link below.

Part I of this series explored the challenges of scaling a DNVB. While these brands enjoy higher margins than traditional competitors, and in some categories have the potential to grow customer lifetime value by increasing purchase velocities and/or basket sizes, this growth ideally must be achieved without equivalently scaling acquisition and performance marketing costs.

As a big-ticket, consumer durable brand, DTC mattress company Casper is even more limited in the levers it has available to reach a sustainable LTV:CAC ratio, due to the nuances of the mattress category. Since its founding in 2014, Casper has raised over $340 million, reaching a $1.1 billion valuation in March 2019 amidst IPO rumors. Nevertheless, my analysis of publicly reported unit economics data suggests that the still-unprofitable business may not be viable as a pureplay e-commerce model — prompting the brand’s aggressive push into vertical retail and third-party distribution.

Casper’s Growth Levers

Part I of this series included a primer on customer economics, specifically the LTV:CAC ratio and its drivers. My analysis of Casper begins by filtering these drivers through the specific lens of the bed-in-a-box category:

Increase t / Increase n: Per Casper’s own FAQ section on its website, quality mattresses are designed to be replaced every 10 years. This highly considered purchase is usually prompted by a major life change, such as marriage or a new home. Casper therefore has limited ability to grow existing customer lifetime value by increasing purchase velocity, not accounting for the brand’s more recent push into bedding linens and other categories.

Increase P / Increase m: Estimates place the number of direct Casper competitors at over 100 brands. The explosion of the bed-in-a-box category has contributed to margin pressure and increased discounting in the category, limiting Casper’s ability to increase prices.

Minimize CAC: Due to limited opportunities to further monetize their existing customer base, Casper’s only real avenue for growth is to continue to acquire new customers. However, Casper’s current LTV:CAC, underscored by their continued lack of profitability, suggests the company must find a way to reduce their historic CAC in order to improve this ratio.

Casper LTV:CAC Analysis

Understanding the relative sustainability of Casper’s core e-commerce business begins with an analysis of LTV:CAC. To model this relationship, I’ve made the simplifying assumptions that every customer acquired by Casper purchases a single mattress (to be explored in greater detail below), for an average selling price of $1,000 (for reference, a Queen-sized mattress from Casper’s most popular, mid-tier range sells for $995). I’ve assumed that Casper’s gross margin on this sale is 60 percent, given that a mattress can be manufactured for as little as $250, and that traditional mattress retailers (which maintain the high overhead costs of extensive store networks) typically achieve product margins between 40 and 50 percent.

In 2017, Casper reported revenues of just over $300 million. At this point in time, the majority of their sales still came from their e-commerce website, with the exception of a relationship with Target (which began piloting in 2H 2017), and a handful of physical retail locations (opened in Q4 2017). Given the nascency of these incremental channels, I’ve assumed that 80 percent of 2017 revenues still originated from Casper’s website, implying sales of $240 million, and therefore 240,000 customers acquired online.

Finally, in 2017 Casper was estimated by a third-party source to maintain an $80 million annual marketing budget. Given the assumptions above, this works out to a $333 customer acquisition cost on a $600 customer lifetime value — equivalent to a 1.8 LTV:CAC ratio.

Source: Author’s analysis

A fundamental assumption underpinning the analysis above is that a Casper customer is only in the market for a single mattress for the foreseeable future. Of course, there is the potential that if Casper delivers on its strong customer proposition of quality, value and convenience, consumers will begin to justify additional mattress purchases — for instance, to use in guest rooms, children’s rooms and second homes. Product margins could also improve beyond my estimate of 60 percent, driven by manufacturing scale and improved fulfillment logistics. Nevertheless, the sensitivity table below suggests that at 2017 CAC levels, Casper will need to maintain, at minimum, a 50 percent product margin while increasing the average number of mattresses purchased by a customer to 1.5+, to hit a LTV:CAC ratio of >3.0.

Source: Author’s analysis

Reducing CAC: Why It’s Easier Said Than Done

Rather than expecting Casper’s management team to expand product margins in a highly competitive category (hard to do), or work to convince its existing customer base to increase their mattress-buying frequency (even harder to do), it makes sense to expect Casper to bring down customer acquisition costs. There are three primary reasons why this is easier said than done:

Part I deeply explored each of these challenges. The remainder of this article will evaluate how Casper’s management team has responded with a retail-led strategy — including the recent proclamation that the brand will open 200 stores over a three-year period.

The Retail Solution?

In February 2018, after several years of experimentation with pop-up shops, Casper opened its first permanent retail location in New York City’s NoHo neighborhood. While details of the lease agreement were not disclosed, a local source reported that the previous tenant departed due to a rent hike that would purportedly double their $700k per year lease, for a 10,000 square-foot space. Casper’s store at the same address is only 3,000 square feet, suggesting the mattress brand pays roughly $420k, or $140 / sq ft, to lease the space.

Casper then made headlines a few months later when it reported that its aggregate store base (including several additional pop-ups that had since been converted to permanent locations) were producing an average of $1,500 in sales / sq ft. Per traditional retail metrics, this suggests an occupancy cost ratio of $140 / $1,500 = 9% for Casper’s NYC flagship. However, it’s more interesting to think about these same metrics in the context of customer acquisition cost. If rent is indeed the new CAC, and Casper is looking to show investors that they are sustainably able to meet and exceed an LTV:CAC ratio of 3.0+, we need to understand what $140 in rent / sq ft “acquires” Casper from a lifetime value perspective.

Rent, of course, is not the only cost of retail. The Wall Street reported data from Onestop Internet Inc. that looks at the cost structure of premium retail, finding that store payroll and other operating costs are generally 1.73x the cost of rent. In the case of Casper’s NYC flagship, these costs would thus amount to an additional $714k, and bring all-in retail costs to $378 / sq ft.

As shown below, holding constant my assumption that each new customer buys just one Casper mattress for a retail price of $1,000, at a profit margin of 60 percent, one square foot of selling space in a Casper store acquires the equivalent of 1.5 customers, for a total lifetime value amount of $900. If we treat retail costs / sq ft as the corresponding “CAC” of these sales, Casper offline retail locations produce an LTV:CAC ratio of 2.4 — a slight improvement on the equivalent online ratio of 1.8.

Source: Author’s analysis

In 2018 Casper’s leadership announced their intention to open 200 stores within three years. Pro-forma projections below explore the potential impact on Casper’s blended LTV:CAC ratio of this aggressive retail buildout. Per the following set of assumptions, including the simplifying assumption that online and offline product margins are equivalent, a 200-store buildout would grow LTV:CAC to a 2.2x by 2021.

Source: Author’s analysis

It is debatable whether the execution risk of a 200-store buildout is worth the slight improvement in LTV:CAC from 1.9x to 2.2x over four years. However, another way to think about this investment is as a hedge against the continually rising costs of online customer acquisition. While rent and other store operations costs can be reasonably expected to remain relatively flat (or even fall, as retail real estate prices continue to depress), Facebook and Google’s duopoly pricing power has resulted in YoY cost increases of 30 to 70 percent, for Google Paid Search CPC and Facebook CPM, respectively. This dynamic might continue to deteriorate online LTV:CAC ratios for brands like Casper, prompting brands to consider a defensive move into retail.

The offline LTV:CAC ratios shown above may not even tell the full story. In addition to being attractive on a stand-alone basis, Casper stores may produce an omnichannel lift effect not fully captured in offline sales. A study by the International Council of Shopping Centers, a group with a vested interest in preserving the value of offline retail, attempted to quantify this “halo effect,” and found that when a retailer opens a new store, that brand’s site traffic increases by 37 percent, and their overall brand image is enhanced. The impact is even more pronounced for Digitally Native Vertical Brands.

What’s Different This Time?

Casper’s ambitious retail announcements are made in the context of leading retailer Mattress Firm emerging from Chapter 11 bankruptcy as recently as November 2018. The legacy chain, which “collapsed under its own weight,” according to a Casper investor I interviewed, operated 3,500 stores at the time of filing (and has subsequently closed 700 locations). Observers blamed its demise on “breakneck growth,” specifically a roll-up strategy that had Mattress Firm acquiring Mattress Pro, Sleep Train, Sleep Country, Mattress Barn, and Sleepy’s all in under ten years, with the goal of using its scale to exact deep discounts from suppliers. When e-commerce took off in the category, and the retailer lost a key supplier relationship, Mattress Firm’s legacy leases became a crippling liability. The retailer found itself over-stored, and overpaying for real estate (amid allegations of a broker “front runner” kickback scheme, that forced the brand into overly expensive locations).

Source: Bloomberg

Even as Mattress Firm rationalizes its store base, new players are contributing to category retail saturation. Casper’s partnership with Target created an additional 1,000 points-of-sale nationwide (explored below). In 2018, Walmart launched its Allswell mattress, the retailer’s first digitally native private label brand. Although the brand is not displayed in Walmart locations yet, a subsequent move into brick-and-mortar could create 4,700+ new retail locations for now-ubiquitous memory foam mattresses.

With a potential store footprint of 200+ locations, Casper will clearly face some serious competitive pressures. What’s different this time, to make the proposition more strategically viable that what Mattress Firm sought to accomplish? I see three primary distinctions:

What Else Are They Trying?

This article has focused on Casper’s core business model, specifically direct-to-consumer mattress sales via and vertical retail. It’s important to acknowledge the brand has also fueled growth in a number of other ways.

Expanded Assortment

My analysis up to this point is predicated on the idea that the Casper customer never extends their relationship with the brand beyond their single mattress purchase. Since it’s founding, and to their credit, Casper has introduced dozens of additional related products to their assortment, creating the possibility of a long-term consumer relationship. These include:

While most of these items are durable, bed linens have a higher purchase velocity and could perhaps lead to future replenishment behaviors. Additionally, if all products are assumed to have a 60 percent product margin for simplicity, and holding constant the assumption of a $333 CAC, achieving a 3.0 LTV:CAC ratio requires a customer to add an additional $666 onto their purchase of a mid-tier Queen mattress. This is equivalent to also purchasing a Queen-sized mattress foundation ($300), two standard pillows ($150) and a set of cotton sheets ($200) — not unreasonable.


In May 2017, Casper and Target announced a new partnership. Target would begin carrying Casper’s The Essential mattress, a lower-priced, more “streamlined” mattress (a Queen retails for $600), as well as a Target-exclusive line of sheets (priced at $75-$110). Initially, product was only available at, where Casper was the only mattress brand represented on the site, as well as in 35 stores located close to college campuses. Target also invested significant capital into the brand, after talks of a $1 billion acquisition deal reportedly fell through.

This partnership exposes Casper to a massive new customer base, places the burden of customer acquisition/retention on the retailer, and makes in-store trial possible at scale (Casper is now available in over 1,000 Target locations). On the other hand, given the lower pricepoints and retail margin hit, this revenue is lower-quality than what Casper recognizes via its direct channels. Critically, Casper also gives up control of customer data and experience.

The trade-offs here are stark enough that it’s hard not to think of this foray as buying growth. If the DTC e-commerce business were more sustainable — or if investor pressure to validate a $1 billion+ valuation loomed less large — it seems unlikely Casper would still pursue third-party retail distribution.


Casper also sells inventory to, including both its mid-tier (“The Casper”) and lower-tier (“The Essential”) mattress lines. As with Target, this relationship eliminates the burden on Casper to acquire online customers.

Again, control over the experience — and competitor positioning — is what Casper sacrifices via this partnership. In October 2018, Amazon launched two private-label memory foam mattress brands — a low-end Amazon Basics line (a Queen retails for $210) and the higher-end Rivet brand (a Queen retails for $499), at prices that directly undercut Casper.

Concluding Thoughts

What do we make of all of this?

I’ve distilled my main takeaways from both Part I and II of this series, in the hopes that it might be actionable for operators and investors looking to understand when and why retail is the right next step to scale a DNVB:

Questions that I still think deserve a deeper look include the following:

  • Is retail an inevitable strategy evolution for all DNVBs?
  • Will any DNVBs in the consumable / softlines space open retail at scale?
  • Can big-ticket durable brands “fix” their LTV:CAC issues by retaining consumers in other higher-velocity categories?
  • Can a brand stay online-only and still be sustainable? Scalable?
  • How will retail formats evolve to minimize risk and preserve upside?

Thanks for reading. I welcome your feedback at

Thanks to Ian Macomber

Claude de Jocas

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All things consumer and digital, where rational and irrational meet.

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