Dollar Shave Club — A Case Study On How to Make It Rain (and what entrepreneurs can learn from it)
In case you’ve been too busy with Kanye/Taylor Swift gossip, a start-up called Dollar Shave Club (DSC) just got bought by the international consumer packaged goods (CPG) heavyweight Unilever for $1 BILLION. That’s more than even Austin Powers asked for.
There’s been a lot of skeptical feedback regarding this acquisition as it seems to be putting a tech acquisition multiple on a generic consumer product, razors (according to reports DSC was projecting over $200mm in revenue for 2016 making the revenue multiple of the acquisition ~5x). Concerns of future financial returns may be warranted. However, for the rest of this post, I would rather focus on why DSC was successful in creating a rapidly growing business and what entrepreneurs can learn from this example.
First, to understand what is going on, we have to understand the landscape of many incumbent large corporations. From Oracle/Intel to P&G/Coca-Cola, these large companies have been struggling to find meaningful growth avenues for the following reasons: 1) the larger the scale the smaller the overall revenue contribution of a hit product 2) other nimble, smaller entrants targeting every aspect of the business with better customer service and significant product improvements 3) new mediums for distribution cutting into the tried and true business models that have worked for so long, and finally 4) low interest rates and availability of capital making it tough to earn a good return for investors while funding drives ever more competitors into the space. This DOES NOT mean that any of these companies are going away, rather that future revenue growth and profit margins can be meaningfully decreased because of these factors. So in order to fix these issues, large companies look to scale through acquisitions rather than organically.
The business models of these large corporations are particularly important. Large companies depend on huge S&M organizations that employ direct sales teams and advertise on TV and sports arenas. The goal is to spend on marketing in a way to reach the broadest possible audience. The ROI of that spend is tracked but it’s hard to figure out your return on a TV ad compared to return on Facebook spend for example. There are so many various channels to input in your ROI model that S&M spend becomes more a function of what is needed to beat quarterly earnings per share and boosts profit margins. In finance, some people refer to this as maintenance spend (i.e. what a company believes it needs to spend in order to keep the status quo). CPG companies are even more linked to TV ads as branding is the differentiation for commoditized products and you build a brand by targeting the widest audience possible. If you are interested in reading more about this, I suggest Ben Thompson’s Stratechery post about the link between old world (TV ads/Large corporations) and new world (social media/e-commerce) advertising. Because there is no need for physical shelf space, e-commerce companies can sell products to a targeted group of individuals but still generate high profits from these sales.
So why was DSC successful in building a rapidly growing business and getting a typically conservative large CPG company to buy them for ~5x projected revenues? DSC is a more efficient business model for a niche product with a large market. The premise is that every male needs razors to shave and that razors are a commoditized product. Sure Gilette has a razor with 10 blades, but is that really helping you get a closer shave? Consumers need to pay a huge premium not only on the original device but also on replacement razors simply because the brand says Gilette (some small section of Amazon HQ definitely has a dart board w/ Gilette’s profit margins in the middle).
As Ben Thompson writes in his post about the DSC acquisition, the premium on the Gilette razor blade is a function of branding power, but also needing to maintain a certain profit margin to cover the customer acquisition costs, TV ads mainly. This is where DSC’s business model outperforms. Unlike Gilette, it can sell its razor blades for a cheaper price because 1) it does not have to cover huge ad expenses (more on this later) and 2) it is selling a recurring subscription so value is made through creating a long-term customer and not just the initial sale. An important point is that the “cheaper price” for DSC depends on how often the customer likes to replace their blades (I personally am fine using a dull blade so I’m not a subscriber).
According to people with more in-depth knowledge of DSC, the startup has fairly low churn (<10%) and has held the average customer for 20 months! This all points to a decently high lifetime value for each customer acquired. If revenue churn is <10% then it is fairly easy to imagine the retained customers buying ancillary grooming products. Ancillary sales can then cover the revenue churn and over an average 2 year period can start to earn some attractive profits.
The otherside of the CAC/LTV ratio is the customer acquisition costs. Large corporations rely on bulk spend while DSC is able to do more targeted ads. It’s easy to imagine DSC’s CAC being fairly low as the CEO did all ads himself, the startup employed mediums such as YouTube to increase exposure, and social media advertising metrics can be carefully tracked to make sure the spend is limited to the target audience. For example, DSC’s original ad has nearly 23 million views on YouTube! That’s free exposure not too mention the organic customer growth from people who simply enjoyed the hilarious ads and mentioned it to their friends.
Given the efficient business model and undercutting of Unilever’s profit margins, it makes sense that Unilever would want to acquire this competitor to learn from its tactics, spur revenue growth, and perhaps increase the ancillary products that can be sold through this channel. At a 5x revenue multiple, the acquisition may be expensive but can be paid off if the rapid growth continues and costs are cut further due to using Unilever’s leverage with suppliers.
Most importantly, what can entrepreneurs learn from DSC. In my view, I believe DSC succeeded because it started with a niche product first. It was able to develop its customer base without having to worry about anything but its razor customers. By focusing on the niche product, the startup could experiment with pricing plans and razor types that would be the best fit for their customers before expanding. Once you have a happy customer for one product, ancillary products can be sold to deepen the relationship and increase the profits for each customer.
The niche product did have a large market as well. Every male who shaves could use this product and as such it allows organic customer acquisition to have a fair amount of runway before paid acquisition really needs to kick in. To expand upon this, think about FitBit in the US. It is a niche product targeting customers interested in tracking their fitness/health. Since it was a novel product, customers flocked to buy FitBits generating millions of sales. There was a mix of organic and paid acquisition that led to this success. However, as more competitors have entered the market, FitBit has to either rely on product differentiation or paid acquisition. People who have heard from friends about FitBit have already adopted it. The fact that the niche market is still big enough allowed FitBit to have a decent amount of organic growth before paid growth really needed to kick in (this is also a function of the capital raised and the investors’ need for growth/exit).
DSC also came into the marketplace with a clear plan to lower CAC. Ads were not done by paid actors but rather the CEO himself. DSC utilized free channels like YouTube to spread its brand awareness and then toggled social media spend to acquire additional customers. A longer term sustainable business is predicated on having a low CAC. There are many on-demand services that have failed due to over-spending to acquire growth. Entrepreneurs must first make sure the product is solving their immediate customers’ needs before focusing on growth. If the market size is big enough, satisfying the niche customers will generate that organic runway to grow the business.
Finally, I would just like to congratulate Mike Dubin and the Dollar Shave Club team on building an extraordinary business by coming up with a unique business model. Who would’ve thought that low-end razors could be disrupted, and that people could make such funny ads? Seriously, if you haven’t checked out his ads yet, they’re definitely worth it. Please feel free to comment on any items I missed or should’ve expanded upon.
