Why we’re closing Walnut

When product-market fit isn’t enough

This is a follow up on the test launch of Walnut, a startup moving company. If this is your first time hearing of Walnut, we suggest you start here:

“Seriously, a moving company?”Nick Kim
An Introduction to WalnutDylan Kindler

Thanks, Nick & Dylan

Walnut was founded to solve the biggest pain points in household moving. We outlined our approach in May, but it boils down to this: moving is a consumer service, so companies should aim to deliver hospitality to their customers.

Support for hospitality-inspired moving exceeded our expectations. Through ten weeks of operations we served forty customers, earned $28,000, and moved clients from Pennsylvania to New Hampshire. Some days we were up to twelve times oversubscribed. All of our customers indicated they would recommend us to friends (Net Promoter Score 100), and our service earned exclusively five-star reviews. In short, we found product-market fit.

Despite our early successes, we’ve decided to close Walnut. Our tests revealed that we could create an experience customers loved, but we doubted our ability to be profitable long-term. Building a sustainable business depended on transforming poor unit economics, and that wasn’t a future we were excited to invest in.

This story explains what worked, what didn’t, and why we’ve shut down operations. We’ve included lessons about strategy, positioning, and consumer behavior. We hope our experiences help you think about your own entrepreneurial journeys, and the hard decisions you'll face along the way.

What worked: customer experience

At launch, we set out to test how consumers would respond to hospitality-inspired moving. Our goal was to make it feel less like transportation and logistics, and more like hospitality. It worked.

Small, thoughtful changes had an outsized impact on customers

It’s not as if we were doing anything remarkably different. Asking customers for coffee orders pre-move, entering their homes with a smile, and proactively communicating weren’t life-changing innovations individually. But together, they amounted to a feeling that Walnut is different. That feeling is hospitality.

We learned through our needfinding process that not knowing who will show up on moving day can be a stressful part of the experience. To address this, we sent photos and bios of our moving teams before every move. Meeting their movers in advance gave Walnut customers peace of mind.

We also learned that tipping can be stressful at the end of a move. Rather than close every relationship with a tip, we declined all tips. (Read more here.) We also booked reservations at local restaurants to welcome customers to their new neighborhoods. These small moments appeared more in our reviews than tactical execution of the moving service. With such a low bar, this created “by far the best moving experience we’ve ever had.”

A better experience fuels organic growth

Our unfair advantage is that we’ve been trained at Warby Parker, one of the best word-of-mouth growth companies in the world. Since people already rely heavily on referrals when choosing movers, all we had to do was create an experience worth talking about—the promotional moment between friends, family, and colleagues is already built into the industry.

The key was to create passionate promoters who would recommend Walnut when the moment arrived. We set out to create an experience so great that people would implore their friends and family to use Walnut. By the end of our test, we had at least a couple dozen referrals from existing customers and we still receive them every few days.

Branding matters

Since we thought we didn’t have to solve for creating a revenue model, we focused on building a truly differentiated brand.

Most moving companies are named after literal characteristics like “FlatRate” or “Two Men and a Truck.” They also have names like “AAA Movers” to sit atop alphabetized lists. Considering their unoriginal names, it’s no surprise these transportation and logistics companies treat their moves like jobs.

To immediately communicate that we were different, we sought a name that showed customers how we thought about their moves. Our vision was to expand our hospitality-inspired services beyond moving and perform other services like carpentry, painting, cleaning, and even interior design.

Walnut reflected our aspirations to become a home services company, and was the foundation on which we built our brand.

“We believe that companies with a focus on making a product customers love and selling it at a profit from the very beginning have a distinct long term advantage over those who don’t.”

What didn’t: people strategy

Establishing product-market fit was a great starting point, but delivering the experience long-term would require a scalable people strategy. We used a research-based model that works well in retail, but found it didn’t apply as well to the moving industry.

Poor treatment of movers presented an opportunity to be better

Drivers navigate the unforgiving streets of New York City and dodge parking tickets daily. Foremen tackle unique geometry challenges on every move, all while holding heavy furniture and graciously comforting anxious customers.

Despite the importance of skilled movers, nearly every person we interviewed had been cheated at some point by the moving industry. Moving companies fight with employees over their hours, deny them legally mandated overtime, and pay low base wages. They offer bad jobs.

Our hypothesis was that if we offered better jobs, we would attract better talent. Our people are our product, and we believed investing in better employees would solve many of the biggest issues with the experience.

Our challenge: how might we hire the best in the industry in a profitable way?

Drawing inspiration from The Good Jobs Strategy

We thought we found an answer in The Good Jobs Strategy by MIT professor Zeynep Ton. Ton illustrates how some exceptional companies—like Southwest Airlines and Trader Joe’s — drive greater profit margins despite offering higher wages to their employees and the lowest prices to their customers.

Ton shows how scheduling steady hours, offering benefits, and investing in training can lead to operational efficiencies that more than cover the added employee costs. She highlights QuikTrip, a convenience store operator:

Zeynep Ton, The Good Jobs Strategy
“QuikTrip employees can calculate your change in their heads. So if your coffee costs 89 cents, the employee at the register can see you and have the 11 cents ready before you can even pull that dollar bill out of your pocket.”

Inspired by Ton’s work, we set out to find great people and offer them good jobs. Replicating this strategy would help us deliver a differentiated moving experience, achieve greater operational efficiency, and earn more profits.

We found the people, but we also ran into new issues as we attempted to translate the Good Jobs Strategy into the moving industry.

Retailers play offense, but movers play defense

QuikTrip stores are controlled areas that look and feel the same every day. The company can make changes to almost every aspect of the store. Their investments in speed pay off because employees can attack problems — they can play offense — within an environment that remains consistent over time.

Moving is out in the wild, in people’s homes. Every piece of furniture is different. Every bedroom, hallway, elevator, and street is different. We did pre-games and post-games for every move, but no matter how much planning we invested in, our movers were constantly adapting to new environments. Movers play defense.

Over time it became harder to believe that the benefits from implementing the Good Jobs Strategy would justify the additional costs. We certainly had room for operational improvements, but high levels of uncertainty are inherently part of moving. Whereas in a fixed environment you can shave seconds, in a constantly changing environment you’re reacting and avoiding mistakes.

Seasonality, skilled labor, and the Good Jobs Strategy are at odds

In 2015, 61.2% of moves were completed in the five months from May to September. Knowing this, we had to balance our Good Jobs Strategy with the reality that demand will fall during the next seven months of the year.

Traditional moving companies have managed seasonality in two ways. To meet immediate spikes in demand, they outsource labor by subcontracting moves entirely to other companies or by hiring unskilled temps. Alternatively, they fire their movers when things slow down. Either way, these tactics leave customers with unengaged, untrained, disheartened movers in their homes.

To offer good jobs—and be the employers we aspire to be—we can’t manage seasonality this way. More importantly, we also don’t want to lose our best employees during slow season. So is it possible to offer good jobs at all?

Competitive landscape challenges

With operational efficiency and seasonality putting upward pressure on costs, we started to question whether we could achieve quick wins with low-cost changes to the existing business model. We found that some of our experience improvements significantly affected the unit economics.

Our no tipping policy made us less competitive, not more

When we implemented a policy to charge for tips upfront and decline all tips on moving day, we believed it was objectively a better experience for both customers and employees. Our research confirmed it time and time again.

We later learned that this policy relied on a false assumption that customers would evaluate the sticker prices of their moves with Walnut against the total costs of moves with our competitors. We found that they didn’t, and that tips on moving day might even be considered a completely different expense.

Creating a better experience for customers and employees wasn’t sustainable. We were paying our employees higher base wages than competitors, and our customers were evaluating our all-in prices as more expensive than the pre-tip quotes that they were receiving elsewhere. More costs without the revenues.

Read more about how tipping changed our unit economics here.

Competitors made higher margins in ways we wouldn’t

We’ve also heard countless stories of moving companies cheating their employees to improve their margins. For example, some companies only pay movers through the drop-off. For long-distance moves, only the driver gets paid for the hours spent on the ride home. (“The job is over, so why should I pay my guys to be on Facebook?”)

In the most incredible cases, we’ve heard that some employers won’t pay their movers for actual time worked. For example, knowing a job would take eight hours, companies budget only six hours in wages and then reprimand movers for taking too long. (“You were intentionally going slow, so we’re only going to pay you for the six hours this was supposed to take.”)

We reject these practices on principle. We don’t want to run a company that treats employees this way. However, that makes us less competitive on price. See how this plays out:

As shown here, instead of pricing our moves 15% higher than competitors with tip, we’re now pricing ourselves 50% higher. No matter how much quality we communicate to consumers, this is an insurmountable gap.

Refusing to follow the traditional movers’ playbook, is it possible to run a profitable business by charging more for a better experience? Can Walnut reflect our core values and make money at the same time?

“It’s not a question of whether people like [the product]. It’s a question of whether you can generate enough cash flow from that type of operation.”

The key learning

When we started diligence, we were motivated by the incredibly low Net Promoter Score for moving companies. We surveyed graduate students who recently moved, and they gave their moving companies NPS –41! We saw an opportunity to deliver a better experience and drive strong word of mouth growth. After all, moving is already a referral business.

What we found was that while many people complain about their moving companies, even the highest income consumers would not pay for a better service. Our mistake was conflating desire for a better product with desire to pay more for a better product. Now that we’ve learned this, we see examples of it everywhere.

Let’s start with airlines: despite their below average NPS, Ryanair is the largest and most profitable airline in Europe, carrying the fifth most passengers of any airline in the world. People hate flying with them, but they do it all the time. They kick and scream, roasting the company in satisfaction surveys and proclaiming “never again!” until they do it again the next time.

We see the same pattern in moving. People say they love the idea, even that they are willing to pay more for it. But when we actually offered it this summer, we saw how low their willingness to pay truly was. It’s hard not to choose the company offering the lowest price.

Frequency matters

But wait, people pay more for better flying experiences! Assuming they can afford it, the difference between spending more for JetBlue versus saving with Spirit Airlines is repetition. Frequent flyers will not endure having their legs jammed against the seat in front of them every time they fly. Moving happens once a year at most, and humans are hardwired to forget distant pain.

Discretionary purchases vs. compulsory expenses

It turns out people think differently about spending more for a better experience depending on the purchase they’re making. For discretionary purchases — hotels, clothing, cars, restaurants — people splurge to get a tangible upgrade. For compulsory expenses — a flight, a move, or parking — they skimp as much as possible.

Think about the last time you parked at a venue for a game or concert. Driving around, you notice that the lots charge slightly more the closer they are to the entrance. Without questioning it, we’ll park a fifteen minute walk away to save $5 on parking (a compulsory expense), then spend $60 dollars on beers and bad nachos inside!

We now understand these compulsory expenses as grudge purchases. Unlike Hamilton tickets (a discretionary purchase), where people pay 10x more to move from the middle of the house to the front row of the same show, grudge purchases do not drive value with a better experience. Instead, cost minimization is the most important factor.

Making a hard choice

After learning all this, there were two options to keep operating Walnut:

  1. manage costs the way other companies do, or
  2. go up market to serve only high-end customers

The first option was a non-starter: it would remove our differentiation in the market and we would be making hollow promises. We would no longer be a hospitality-inspired moving company that offered good jobs to great people. On a more personal note, we didn’t start Walnut to create bad jobs.

We considered our second option more seriously. High-end customers understood our value proposition, and we believe they would be willing to pay for it. But as we dug deeper, we realized turning Walnut into a premium service had too many challenges along the way.

The strategy would shrink the serviceable market, and we would also have to be excellent at finding a smaller customer base at the exact moment they’re looking for movers. Even if we solved the marketing challenges, our moving service would also have to meet new, higher expectations. Our concern was whether we could ever deliver enough value in this compulsory experience to justify the substantially higher price.

Pursuing either strategy meant changing our core approach to Walnut, and launching more tests to find viable unit economics. That would take time and money, and we weren’t excited about investing in that future.

Don’t throw good money after bad

When we explained this to a friend and fellow entrepreneur, he argued, “this is exactly why venture capital exists.” With product-market fit, we could focus on growing an enthusiastic customer base. Venture capital would help us build market share, and eventually we could earn the margins to become profitable. Some of the seed investors we talked to agreed with this approach.

But we preferred looking at this decision the way Bryce Roberts at Indie.vc might look at an investment. “At Indie.vc, we believe that companies with a focus on making a product customers love and selling it at a profit from the very beginning have a distinct long term advantage over those who don’t.”

We started Walnut because we believed we could create an experience customers love and sell it at a profit from the beginning. When our tests revealed that the latter was false, it didn’t matter what kind of capital we could raise. The future depended on transforming bad unit economics.

History doesn’t look favorably on this strategy. When comparing Instacart to failed dot.com era grocery delivery company Webvan, investor Bill Gurley reminds us, “it’s not a question of whether people like [the product]. It’s a question of whether you can generate enough cash flow from that type of operation.” He says, “It’s like the old adage, [when you’re] handing out dollars for 85 cents, you can go [infinitely].”

The hardest part about realizing this was that we were having fun. Employees, customers, and investors were excited about about what we were building at Walnut. But as we discussed what it would take personally and financially to create the company we envisioned, we kept going back to the unit economics. Running the numbers took emotion out of the process, and like most data-driven decisions, the choice was easy.

Thank you

To all of the people who helped us launch this company. To our customers, thank you for trusting us. To our inspiring employees and co-founder Paul, thank you for your commitment to delivering hospitality. Thanks to our teammates at Warby Parker who lent us their expertise and the many people at the Wharton School who advised us. Thanks to the amazing designers who brought our brand to life. Thanks to our families for, well, everything.

Finally, thank you for spreading Walnut around your networks! We had a blast moving your friends and family all summer.

On to the next one…

Always add the egg • @nickbkim