The new retail rules: how Dollar Shave Club proved anyone can take on the big guys and win

(This article was originally published on the Ecommerce Jungle Gym blog)

Subscription ecommerce brand Dollar Shave Club might just have changed the retail industry forever.

At the very least, DSC proved a bootstrapped online retail startup can challenge, and dominate the biggest retailers in the world.

Founder, Michael Dubin started his ecommerce business from scratch in 2012.

With little more than a few pay-per-click advertising campaigns, DSC took on Gillette and Schick — the razor industry’s established oligarchs.

This month, Unilever (the main competitor of Gillette’s parent company, Proctor and Gamble) purchased Dollar Shave Club for the staggering sum of US $1 billion.

The brand’s growth has been almost unprecedented. The rate at which Dollar Shave Club attracted, and retained new customers sent shock waves through an industry that had remained a stable dictatorship for decades. Somehow, by 2016, DSC managed to wrangle 15% of the US razor cartridge share.

That’s some significant value.

The Dollar Shave Club acquisition was big news in the consumer packaged goods industry.

But the circumstances leading up to Unilever’s purchase make this huge news for retail in general.

This moment could be the start of a systematic disruption of the traditional retail business model.

And innovative ecommerce entrepreneurs should be rubbing their hands together with glee. If you play by the new retail rules, you could be the next Dollar Shave Club success story.

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Why retail might be about to change forever

A small, bootstrapped ecommerce startup just took on the biggest of the biggest retail gargantuans. They didn’t just match ’em blow for blow. DSC delivered a breathtaking knockout.

Traditional bricks and mortar retailers beware — dollars, advertising, and distribution channels are not enough to keep your market share.

Dollar Shave Club just snatched the laurels Gillette was resting on, then sliced them into smithereens.

Before the advent of ecommerce, YouTube and social media — Gillette’s business model was impregnable. Proctor & Gamble monstered any potential competitors. Their billion dollar ad budgets, unrivalled logistics and widespread distribution networks acted as intimidating barriers to entry.

Razor buyers simply had to make their purchase at a store, and the choice was normally Gillette, Schick or the ‘no-name’ option. The duopolists were able to ratchet up prices with incremental improvements in products features that customers didn’t really need. As most regular shavers will tell you — a double blade razor does just as good a job as the fancy new five blade ProGlide Flexball option.

The brands were in control. Customers were muscled into paying more for something they didn’t need. And they needed to jump into their car, find a park, and line up at the grocery store to buy their razors.

Ben Thompson, the author and founder of Stratechery explains why the razor blade market was ripe for digital disruption:

“Gillette’s model and P&G’s formula generally cost a lot of money: R&D costs money, TV advertising cost money, and wholesalers and retailers had to earn a margin as well, and that’s before P&G realized the return on their investment.
The result was that cartridges that cost less than a quarter to manufacture and package were sold for $4 or more. That worked as long as P&G’s other advantages in technical superiority, advertising, and distribution held, but were they ever to falter, it was eminently viable to sell cartridges for less and still make a healthy margin.”

Dollar Shave Club’s strategy was the perfect kryptonite.

The brand launched overnight with a cheap video (it cost around $4,500) that went viral, triggering 12,000 orders in the first two days of operation.

Within 6 months, some 4.75 million people had seen the clip. As of August 2016, the view count is over 23 million.

The ecommerce magic is right here in the clip.

Michael himself explains why Dollar Shave Club’s brand promise turned into hundreds of thousands of customers.

“Each razor has stainless steel blades and an aloe vera lubricating strip and a pivot head so gentle a toddler could use it. And do you like spending $20/month on brand name razors? $19 go to Roger Federer! I’m good at tennis. And do you think your razor needs a vibrating handle, a flashlight, a back-scratcher, and ten blades? Your handsome-ass grandfather had one blade and polio.”

Michael and the DSC team gave the market a quality, no-frills option at a fraction of the price. With a couple of clicks, a quality, cheap razor landed on their doorstep. Next month a package of blades arrived without the customer lifting a finger.

Suddenly shaving was about 10 times cheaper and easier than ever before.

How Dollar Shave Club went from nothing to $1 billion

Gillette and Schick had engineered a near duopoly on the industry.

DSC just fixed a simple problem these two traditional brands had themselves engineered:

  • The big two fought a battle to one-up with technology, as three blades became four blades and then five blades, when customers didn’t really want to pay more for the fancy embellishments.
  • The middle-men were taking a huge cut. And logistics expenses were significant. The blade manufacturing was a relatively small cost. Shipping the products to stores around the world is extremely expensive when compared with DSC’s direct-to-customer ecommerce model. Oh, and don’t forget the retailer needs to take its cut, further inflating the price of your Gillette razor.
  • Dollar Shave Club understood its audience. 20–30 year old ‘bro’s’ just want a cheap and effective razor. The simpler the transaction the better. Of course they wanted to take 5 minutes to sign up for a bunch of $1 blades to conveniently appear in their mailbox once a month.

DSC removed the R&D, advertising, and distribution costs the big players were paying. Ecommerce allowed the brand to cut out the supermarket middle-man and sell directly to the customer.

The so-called ‘dude market’ are digital natives. They don’t watch much TV, read many papers, or listen to any radio. Instead of shelling out millions on regular advertising campaigns, DSC created their own content.

(Better yet — the subscription business model turned almost every new customer into regular, repeat sales)

Ben Thompson of Stratechery explains why The Dollar Shave Club disruption is industry-agnostic:

“The price difference is the entire point: in a world with good enough products (Dollar Shave Club imports their blades from Korean manufacturer Dorco) that can be bought on zero marginal cost websites and shipped to your home directly there is no reason to charge more.
The Internet (and e-commerce) has so profoundly changed the economics of business that it is only a matter of time before other product categories are impacted.”

Ten years ago, a three year old startup could not have disrupted a monopolistic behemoth like the P&G-owned Gillette.

The internet, and it’s knock-on effects, have created the perfect environment for disruption of the traditional retail business model. Steven Davidoff Solomon, for the New York Times, elaborates:

“In the past, challenging Gillette would have been impossible. It would have required billions of dollars to invest in a distribution network and advertising to get the product on store shelves.
No more. Now you can get free advertising through YouTube, easy distribution through the mail system and low-cost sales through the internet. Factories and distribution can be bolted on throughout the globe.
The internet, mass transportation and globalization destroy everything. If you do not believe this change is about brand, experience and disruption, know that you can buy razors directly from Dorco, presumably the same brands sold by Dollar Shave Club.”

Simply purchasing DSC doesn’t solve Unilever’s problems.

The old razor blade retail business model has been rendered obsolete for the next generation of consumers.

The tried and formerly true method of dominating distribution and barricading new entrants with monstrous economies of scale is ageing fast.

Ecommerce allows even the smallest of brands to disrupt the traditional retail superpowers, skip the middle-man, and go direct to the customer.

Does size matter anymore in online retail?

The buyers have spoken.

Millennials don’t want to buy uber-fancy $20 razors from a physical grocery store. And there’s a whole lot more than razor blades millennials would prefer to buy online.

Consumers have delivered a fundamental backlash to larger, complacent brands, as the internet has allowed smaller players to compete.

This disruption from small retailers and startups is not isolated to razors, grocery retail, or consumer packaged goods, as this graphic from Fortune Magazine illustrates.

Established consumer packaged goods brands in all industries take heed — you could be next.

The Achilles heel of the traditional retail Goliath has been exposed.

Dollar Shave Club will not be the only ecommerce brand to load a game-changing arrow into their bow.

Bhaskar Chakravorti, writing for Harvard Business Review, suggests the DSC acquisition is a bellwether moment for legitimate, widespread retail disruption:

“The classic consumer-products business model is about to be busted across the board, with both retailers and their suppliers gearing up to encroach on each others’ traditional positions along the value chain using a digital connection with the consumer.”

No amount of mergers and acquisitions will allow companies like Unilever or Proctor & Gamble to innovate at the pace of smaller startups with customer-friendliness built into their internal DNA.

Agile, young brands can afford to take risks and push boundaries.

Public companies simply cannot.

Shareholders don’t buy long term gains over short term pains.

This clip from Bloomberg gives you an insight into the broader ramifications of the DSC deal throughout the retail and ecommerce industries. The analysis from Venrock Venture Capitalist, David Pakman is both fascinating and accurate.

This acquisition isn’t a simple, isolated deal.

The notion of a publicly listed conglomerate buying an ecommerce startup signals the disruption of an industry which remained static for so long.

Unilever is buying DSC’s innovation. They are buying DSC’s digital skill. They are buying the customer friendliness their business is currently incapable of generating.

The product-focused retailer won’t win in 2016 and beyond.

The customer-focused retailers will dominate.

Techcrunch’s Ryan Caldbech explains why traditional retail Goliaths can’t buy their way out of trouble.

“Once the redundancies are removed, what are shareholders left with? The same problem that spurred the deal: shrinking market share due to no innovation. The failure of large consumer and retail players to innovate is clear in theWalmart vs. Amazon battle.
Amazon is racing ahead with innovations that deeply cater to today’s consumer, such as Dash to allow customers to reorder laundry detergent or coffee with literally a touch of a button.
Meanwhile, Walmart struggles to hold its historical position as a low-cost leader by cutting cut costs, be it by cutting corners on quality or consolidating processes. For example, Walmart just reduced buttercream icing waste by its bakers to save on costs.”

The disruption has just begun in earnest.

Dollar Shave Club will not be the only ecommerce startup to unseat the Gillette of their industry.

Slashing costs, acquiring innovative competitors, and increased digital marketing may buy legacy retailers time, but brands with innovation seared into their culture will begin to dominate their retail niche.

Don’t focus on products, focus on customer friendliness

There’s a beauty in the convenience of online shopping that makes ecommerce an enticing option for any regular purchase item.

DSC made the principle of convenience their core value proposition, and they used the cost effectiveness of ecommerce to make it happen. Steven Davidoff Solomon explains:

“The idea was rather simple. Instead of paying $10 or $20 a month at a store for disposable razors, a Dollar Shave Club subscriber could go online and set up a regular order to be shipped to his home monthly at a fraction of the retail cost.
Now it is possible to leverage technology and transportation systems that never existed before. It means that the riches will be split among the select few who have the education and skills to be at the heart of the new decentralized company.”

Dollar Shave Club aren’t the only brand to use digital innovation to disrupt an industry with unprecedented customer friendliness.

You might have heard of a couple of companies out of the United States recently.

The accommodation and taxi industries know who I’m talking about.

Airbnb and Uber used new technology to make their customer’s lives better, and Steven was quick to draw the DSC comparison:

“Manufacturing now is just as much a line item as is a distribution apparatus. This is the business strategy of many other disruptive companies, including the home-sharing site Airbnb, which upends the idea of needing a hotel. The ride-hailing start-up Uber could never have been possible without a number of inventions including the internet, the smartphone and, most important, location tracking technology, enabling anyone to be a driver.”

Complacent retailers should be quivering with this emerging macro trend.

Consumers should be smiling along with every add-to-cart click.

Farhad Manjoo, also writing for The New York Times, spells out why the type disruption triggered by the likes of DSC, Uber and Airbnb is a huge positive for customers everywhere:

“For you and me, this is a boon. By cutting out the inefficiencies of retail space and the marketing expense of TV, the new companies can offer better products at lower prices.
We will get a wider range of products — if companies don’t have to market a single brand to everyone on TV, they can create a variety of items aimed at blocks of consumers who were previously left behind.
And because these companies were born online, where reputations live and die on word of mouth, they are likely to offer friendlier, more responsive customer service than their faceless offline counterparts.”

A superior customer experience is central to success under The New Retail Rules.

David Pakman, Venture Capitalist at Venrock (the guy from the Bloomberg clip) was one of DSC’s early stage investors.

He penned an incredibly valuable Medium post. In it he outlines the depth of CEO Michale Dubin’s understanding of his target audience:

“He (Michael) intuitively understood how to use content and conversation as marketing at a time when legacy brands were still shouting at their customers with TV ads, purchased without actually knowing their customers. He believed in transparency, making great products, and putting convenience and value first. And he knew it was crucial to build a trusted and beloved brand, albeit one that is entirely direct-to-consumer. His plan was grand, but his formula was simple.”

Michael understood the importance of developing a genuine connection to the customer. Branding is at the heart of the DSC disruption model. A superior customer experience is central to new retail success.

Direct to consumer business models are starting to win out

Dollar Shave Club have paved the way for a certain ecommerce disruption prototype.

Lean, agile and innovative brands that cut out the middle man and sell direct through an online store are well poised to steal market share from traditional retailers.

David Pakham’s Medium manifesto also outlines his company’s blueprint for ecommerce success. It’s critical reading for any online retail professional.

When deciding to invest in an online retail brand, Venrock consider this six point criteria:

  • Offer highly-differentiated products with high product margins (In DSC’s case, value and convenience were the differentiators and their product margins are very high. Avoid product categories that can be Amazoned.)
  • Invest only in zero-sum markets (A customer buying your product means they stop buying your competitor’s products. This is clear for DSC, but often lacking in apparel categories, for instance.)
  • Choose categories where incumbents sell only through retailers and have no direct relationship with their actual customers
  • Choose categories where incumbents overly depend on broadcast advertising
  • Choose categories where the CEOs of the incumbents are professional CEOs, not founders (thus are far less-likely to cannibalize existing businesses and adopt new business models)
  • Look for products and services which gather usage data and utilize machine learning to improve over time

Three ecommerce innovators successfully disrupting the traditional retail business model

Warby Parker, Casper and Everlane are three of the most prominent examples that prove Dollar Shave Club’s story is not a mere aberration.

Each of these three ecommerce innovators followed David Pakman’s blueprint closely, and delivered sustainable ecommerce success.

#1. Warby Parker’s ecommerce disruption

THE STORY:

The Warby Parker story is now part of ecommerce marketing folklore.

Warby Parker kinda started this whole direct-to-consumer retail disruption phenomenon.

Traditional eyewear retailers had it so good. You simply had to lay out $200 plus if you wanted a decent pair of designer glasses. The brand’s founders knew glasses don’t cost enough to warrant that price. The industry was ripe for the picking. Warby Parker set about manufacturing their own quality eyewear, and selling through their online store with a ‘try five, pick one and send the rest back’ offer.

THE CEO:

“Simply put, we bypass the middleman. We design our own frames under our own brand, and we work directly with suppliers. We avoid paying licensing fees, and we sell directly to consumers through WarbyParker.com. We started the company because we were sick and tired of radically overpaying for eyeglasses. It didn’t make sense to us that a pair of eyeglasses should cost as much or more as an iPhone.” Co-CEO Neil Blumenthal speaking to Fast Company

THE SUCCESS:

Last year saw 500% growth for the bespectacled ecommerce wunderkinds. Luxottica once had a safe 80% market share. Now some young startup punk is undercutting their prices by a factor of three. According to The Wall St Journal, Warby Parker is valued at over US $1 billion. That’s some serious ecommerce success.

#2. Casper’s ecommerce disruption

THE STORY:

Mr Krim and four friends started Casper two years ago after studying the traditional mattress industry. They discovered it was plagued by inefficiencies and annoying gimmicks. Customers had to trudge to a mattress store and awkwardly prostrate themselves on numerous surfaces before choosing one to use for a decade. There were too many choices and brands, and mattresses were expensive.

With Casper, you simply buy the mattress online and it’s shipped to you in a comically small box (the compressed foam expands into a full-sized mattress, like a magic trick). You have three months to try it out, and if you don’t like it, the company will come pick it up free.

THE CEO:

“We think it’s a unique moment in history where you can create brands that can be scaled quickly thanks to technology, but you can still maintain a one-to-one connection that delivers an elevated level of customer experience,” Casper CEO Philip Krim, speaking to Farhad Manjoo of The New York Times

THE SUCCESS:

Casper had sales of $1 million in its first month. The New York City company has since raised $70 million in venture capital, grown to 120 employees, and hit $100 million in cumulative sales according to Inc. magazine. After two years in business, Casper is on track to book $200 million in sales over the next year.

#3. Everlane’s ecommerce disruption

THE STORY:

Everlane’s founders found a fracture on in the apparel industry. Basic tees, pants and shirts couldn’t possibly cost enough to warrant the prices brands like Abercrombie & Fitch, American Apparel and J Crew were charging.

The brand set out to strip well-designed clothing to the bare essentials, ethically source quality fabrics and partner with selected manufacturers to go direct to the customer for a fraction of the price of their competitors. The company touted “radical transparency” as its mission. By sharing the exact cost breakdown of their clothing (including materials, employees, contractors, and logistics), Everlane were able to expose the exorbitant margins stacked on top of each other in the traditional apparel retail model.

Without physical stores, customer service employees, High St rents and excessive advertising costs, Everlane are able to produce high quality products at most of the competitors just can’t match.

THE CEO:

“Your designer should understand your customer. Your designer doesn’t understand your customer, then that’s the problem. Don’t try to solve it by building a merchandising team that is going to stand for the customer. The right organization should be able to do it for both. I don’t know of any retailer in the apparel world that I think has a great experience.” CEO Michael Preysman talking to Quartz

THE SUCCESS:

Everlane doesn’t disclose revenue today, but the company reported sales of $12 million in 2013, and double that in 2014. Privco, a firm that researches private companies, estimated Everlane’s sales at $35 million for 2015. Onwards and upwards from here.

The New Retail Rules your ecommerce brand needs to live by

You just need to find a way to create a superior customer experience at a competitive price.

The framework for retail-ecommerce disruption is as follows:

  • Find an industry with a small number of entrenched traditional retailers
  • Offer direct distribution from your online store to cut down on logistics expenses
  • Focus on providing a minimal but high quality product at the cheapest possible cost
  • Attract and retain new customers using a content marketing strategy that involves a combination of blogging, organic SEO, video, social and email marketing
  • Don’t discount, instead prove your list price is fair, and expose the extra costs added by competitors

You no longer need a million dollar budget or VC funding to unseat your industry’s retail heavyweights.

Expect a version of this disruption to take down more traditional retail Goliaths very soon.

Your brand could be the next Dollar Shave Club David.

Just load up that customer friendliness arrow into your bow and aim for the huge Achilles heel.

The original version of this article was published on the Ecommerce Jungle Gym blog. If you work in ecommerce, or you just want to learn more about online retail — you need to subscribe for a weekly package of ecommerce marketing learning to receive stories like this one delivered free to your inbox door.