Butcherbox: How they reached $600M in annual revenue with no VC funding

The content in this case study was drawn from an interview with Mike Salguero on D2’s podcast ‘Fully Vested’

Butcher Box is a phenomenon in the D2C subscription space. While other companies in the sector like Blue Apron, Hello Fresh and Gousto raised hundreds of millions of dollars in their quest for scale, Butcher Box CEO Mike Salguero charted his own path. Over 8 years of operations the business has grown to >$600M in annual sales, without ever having raised any external equity capital. The company has been profitable since its first sale and is a brilliant case study on how even in a market clogged with VC funding, you can build a capital efficient business that outlasts them all. How did they do it? Lets dig in:

The Initial Kick(starter)

Butcherbox started with much smaller ambitions than the business it is today. Pre-launch, Mike hoped to get to 1,000 subscribers. If each of those subscribers made $20 profit for the company on a monthly box, then the business would hit just shy of a quarter of a million in operating profit before customer service and marketing — enough to pay himself a decent salary and live his life.

To reach those goals, Mike put $10k in the company account and launched a Kickstarter campaign. He chose Kickstarter partially because funders on the platform didn’t expect to receive their orders for a while — meaning he could bundle the orders then source, cut, pack and distribute the subscriptions in a block.

ButcherBox — 100% Grass-Fed and Grass-Finished Beef, Delivered to your Door

The initial target for the campaign was $25k. In a little under 30 days though, Mike and his first employee/intern Bobby had managed to raise $205k, which worked out as about $40k of operating profit for the business right out of the gates. Kickstarter was a totally on-brand way of starting Butcherbox — it effectively meant the company was carrying no inventory risk from its very first sale. As well as the initial seed capital to fund the business, this was also the “aha” moment for Mike that made him realise this business might be able to scale to a little more than 1,000 subscribers..

Marketing / Growth Strategy

After the Kickstarter campaign, Mike looked for scalable ways to acquire customers for Butcherbox that were cost effective. That came in the form of influencer marketing. In 2015/16 influencers were not the saturated channel they are today, nor was it the focus of the main VC backed D2C subscription businesses. The way Butcherbox optimised the influencer marketing channel though was one of the key reasons for its longevity and its capital efficiency.

Rather than pay each influencer a fee per post, Butcherbox compensated influencers using a ‘residual’. Residuals are a share of each sale, and in Butcherbox’s case, they lasted for the customer’s full lifetime. So if a customer converted via an influencer’s personal link and ended up staying a customer for five years? Well that’s five years of revenue for that influencer. This strategy had two results: in the near term it controlled working capital. Butcherbox only paid commission for a customer when that individual made a purchase, versus conventional pay per click digital or brand marketing. In the longer term, it kept influencers loyal to Butcherbox. Influencer partners had a disincentive to work with other subscription businesses due to the risk of cannibalising their own sales and losing their residual.

Initially Butcherbox grew the influencer marketing channel by reaching out to well known influencers in the food and nutrition space (e.g. paleo, ketogenic, and ‘eat well’ advocates). As they tapped out the obvious names, they hacked their way to lesser known prospects. The only similar company using influencers in the same way at the time was a business called Thrive Market. Thrive Market gave its influencers a unique URL referral ‘thrivemarket/referral’ and then a number (01, 02 etc). The marketing team at Butcherbox simply scraped all those URLs and found every influencer predisposed towards marketing ‘clean living’ food options. A bit of a grey area to be sure, but an example of the hustle and scrappiness that helped Butcherbox grow so rapidly.

The company used the influencer strategy to grow to $50M of revenue. At that point the business started to branch out into Facebook and Google paid advertising. For Facebook, the major unlock was short form video. A video of Mike’s daughter crying for “more bacon!” went viral and garnered a quarter of a million views. The paid advertising was focused on shareable content including amusing videos and recipes. Butcherbox also leaned in heavily on eye-catching promotions, both in paid marketing, and email campaigns. “Free steaks for a year” or “free bacon for life!” stood out among the noise and created that all important call to action.

Crucially, all of the channels Butcherbox succeeded in were measurable. The company could see where each customer had come from and could measure the acquisition cost of that customer on a granular level. Mike claims the biggest marketing mistake the business made was departing from that mantra with brand marketing campaigns. Recently the company paid $8.5M to sponsor a cycling team — something which had no demonstrable link back to the business and no clear KPIs. The lesson is clear: efficient marketing needs to be measurable.

Partnerships vs. Owning the stack

Many of the venture backed D2C subscription businesses in the mid 2010’s like Blue Apron sought to ‘in-house’ every part of their operation with a view to driving higher margins over time. Blue Apron owned their warehouses, their distribution, equipment and even created automation software in-house to squeeze extra operational efficiencies out. Beyond making the business capital intensive, the challenge with this approach is that you spread yourself across multiple different domains, none of which you are a specialist in. If one was being hypercritical, you would say the vertical integration strategy of Blue Apron and others was typical of both the hubris of many venture backed startups and their desire to appeal to VC’s by building ‘competitive moats’.

Butcherbox followed a completely different path. Mike set out to partner with the best companies in each part of the value chain — using what he calls a ‘Toyota model’. Packing and distribution were obvious areas to partner with specialist operators; but Butcherbox took it even further, outsourcing seemingly critical functions like customer service. Their approach was to find the best in class specialists, and then ‘hold their feet to the fire’ on KPIs to ensure flawless delivery. The only area beyond sourcing within their operations that they kept entirely within the Butcherbox team was food safety. Ironically, Blue Apron recently announced that they were shifting to the same asset light model as Butcherbox in an effort to hit breakeven and pay down debt. Following an effective partnership strategy was the key operational strategic decision Mike made that enabled Butcherbox to grow without external capital.

Box One Profitable

Butcherbox’s key KPI is dollars per box — all that matters is how much you make on each order.

Butcherbox started with a $20 a box operating profit before central costs and marketing. That figure dictated how much the business could spend on acquiring each customer in the early days. Management then ruthlessly tried to march that number up. The first major win was once they reached a sufficient scale to open a second facility on the west coast. The company had started out with a single facility in Wisconsin. That was fine for shipping to the east coast, but West Coast orders needed to be packed with dry ice for a five day journey, meaning the company lost money on those orders. Once they became large enough to open their second facility, box one profit immediately jumped from $20 to $25. After facilities they focused on meat buying and then driving better partnership deals across the value chain. With scale, Butcherbox has been able to continue driving the profit on each box upwards, and is currently sitting at >$50 a box.

By 2017 the company knew more about how cohorts of subscribers typically behaved, including how many would churn and when. This data gave them the confidence to move beyond box one profitability and target blended box two or box three profitability. Knowing exactly how much they could pay to acquire each customer was how the company was able to move into paid advertising successfully. Today Butcherbox has box five profitability on each new customer. As we’ll explore below, increasingly saturated marketing channels and the law of large numbers means having to spend more to acquire each customer is inevitable. Even with that higher spend though, the company makes money. Butcherbox has a c.1% churn every week, meaning 50% of customers have churned in any given cohort after a year. On a blended basis then, their LTV is c.12 months, with many customers staying with the company for years.

Inventory Financing and Working Capital

Not the most sexy topic, but this one is so important. Like any business with inventory, controlling working capital was crucial to Butcherbox’s efficient growth.

Many founders forget that payment terms can make an enormous difference to a young company. For Butcherbox, their initial meat packing/shipping facility had 30 day payment terms, but would frequently bill the business late, meaning terms often stretched to 60 or even 90 days. This meant the company was able to sell the meat before it had to pay for it — fundamental but hugely important stuff.

Once the company reached some scale, they were able to secure an inventory financing deal with their distributor. Their distributor would pay for the meat then Butcherbox would pay off each unit seven days after it sold. This effectively removed all inventory from Butcherbox’s balance sheet — a huge unlock in scaling and one of the key items Mike highlights for how the company managed to avoid raising equity finance.

Payment terms extend beyond inventory and are evident in all parts of the Butcherbox business. Facebook was a successful marketing channel for the company partially because they thought carefully about working capital. At the time the company was moving beyond its early focus on achieving ‘box one profitability’, stretching to box two and even three. This change in strategy was softened with smart working capital management. Facebook ads were invoiced with 30 day payment terms, which the company then paid on credit card, pushing final payment out another 30 days (60 days total). By that time, customers that hadn’t churned would have made three orders, fully recovering CAC before the company needed to pay for it.

The Future

Butcherbox is one of the strongest names in the D2C subscription business. While loss-making competitors have either withered or seen their valuations slashed, Butcherbox meets 2023 in a position of strength, a testament to the strength of the business Mike has created. The real question now is how they continue that growth.

After a huge pandemic boom, sales have only grown incrementally. With the consumer now feeling the pinch in the face of a recession, churn will likely increase too. The acquisition playbooks Butcherbox has built out are approaching saturation and the ‘law of large numbers’ means they need huge new ones to continue the growth.

Where does the business go from here? Mike is keen for the company to recapture its spirit of entrepreneurship. The business has previously incubated two new businesses within the Butcherbox brand — smoothiebox.com and BB Good Pets, using the offcuts of meat from the core brand to create raw pet food. Expanding the company’s revenue lines to appeal to more customers makes sense at a headline level.

More close to home, the business is increasingly focused on “farming vs hunting.” Butcherbox has shipped boxes to 1.5M households. Reapproaching old customers and understanding if they can be re-engaged is one strategy. Mike has also highlighted referral as an important growth vector they haven’t fully tapped yet. Understanding which cohorts really stick with the company and leveraging them as brand ambassadors is a clear target for the business.

Conclusions

Scaling an efficient business is always impressive, but doing so in a consumer facing subscription company is next level. Mike Salguero was able to achieve this feat with a simple and repeatable formula. Butcherbox partnered with best in class providers at each part of the value chain and was obsessed with their unit economics. From the earliest days to the growth stage they found ways to create a positive working capital cycle and avoid a build up in overheads. Finally, they leant in to emerging customer acquisition channels and were ruthless with how much they spent and how they judged success. Discipline and a commitment to excellence are the hallmarks of Butcherbox’s success.

Hope its been useful!