What the next Dollar Shave Club can learn from failure
After leaving MySpace, I found myself thinking about new ways to fix the high failure rate among promising businesses. Envisioning a studio where we can identify and explore trends, invest in passionate entrepreneurs and pair dollars with expertise and operational resources to develop new companies, I was fortunate enough to attract a group of investors that were willing to fund the unique structure I had in mind.
One of our original and primary key themes was a focus on direct-to-consumer commerce. Specifically, we were interested in the idea that the majority of global brands could not tell you the name of one of their customers. Essentially, brands were retailers and even though they might have highly loyal customers, they never knew anything about them.
We looked into sectors where there was a high enough net margin over the lifetime user value that would enable a variety of organic, viral and paid marketing tactics.
Within the first three weeks of taking meetings, we met up with Michael Dubin to hear about his bold concept for Dollar Shave Club. His approach was a brilliant blend of visionary brand positioning, creating a high quality product and a predictable, sustainable revenue model.
We were happily the first investors and one of the initial board members and have sustained our love for the business and involvement through the launch, growth and acquisition process.
For every lesson to learn from Dollar Shave Club’s overall success, there are takeaways from the failures in the sector that we experienced along the way. Over time, we incubated over 12 different direct-to-consumer commerce businesses, none of which hit the same scale as DSC.
Here are few highlights:
Get your margin right on launch
There is a reason the largest brands in the world have high margins. Sub 50% margin businesses over time have a very hard time scaling.
Repeat purchases (subscription or otherwise)
If you are going to be a single transaction business, your product must have an exceptionally high transactional value.
The first 1000 paid customers do not reflect the pricing of the next 1000 customers
In paid marketing, beware of the concentric circles. We have found in numerous cases that customer pricing for paid acquisition happens in levels. Customer number 1–1000 maybe a $10 CPA — but the 1001–4999’th customer may be double that pricing. Often times, if you can find there is a large pool of inexpensive customers up front — it is a signal that the market is large and customers are ready for your solution.
Cash is different from profit
Inventory paid up front should quickly factor into your cash flows. You can grow yourself to profit, yet consume substantial cash.
Be bold and stand out
Don’t compete with legacy businesses without a very clear differentiator. If you can’t tell people why you are different than the incumbents in one statement, you are off to a rough start. In addition to this, make sure people care about the differentiation. Just because you think that your metallic fastener on a sunglass is the differentiation, it’s very questionable that others will care about such a nuanced item.
Focus on a single channel
Nail one scalable marketing platform early by focusing on dominating it before spreading your marketing dollars and time across other platforms.
On a mission
Above all else, the CEO and management need to be personally connected to the opportunity. If there’s one key lesson I’ve learned while heading up Science over the last few years, it’s that the passion and dedication for the business and the product always shines through, and can often predict how successful that company will be.