#DigitalDumping: the practice of adding a digital veneer to an existing supply chain, pricing below it, losing money and never having a realistic chance of making money, raising more money, raising valuation, and hurting money-making legacy businesses until one of them buys you for an unrealistic valuation, either to get rid of you or to soon realize that they must because the business will never make money.
Shahin Khan, @shahinkhan
There remains an incredible level of chatter about Dollar Shave Club – in no small part because they were bought for a huge amount of money by Unilever.
But is Dollar Shave a success story or #digitaldumping as defined by my good friend Shahin Khan?
A recent article by Mark Ritson discussed how, prior to purchase by Unilever, Dollar Shave and similar mythological companies misled marketers to believe there’s a big opportunity in DTC brands. I thought Mark was far too kind to Dollar Shave in his article. But as Mark noted to me in an online discussion, he has to restrain his analysis. I thoroughly appreciate that.
Yet companies hide a great many important things.
I believe there’s a public service to be done exploring what’s public and trying to understand what it might hide. This sense has been behind my noting that the evidence points to Amazon losing money on every retail-like order it fulfills. That same evidence suggests, too, that Amazon Prime is a massive money loser. (Evidenced, for example, in the out of control shipping and fulfillment losses on the Amazon books.)
Truth is, companies regularly take advantage of the restraint of journalists and they rely on, for example, the tendency of journalists to repeat what the company says to paint pictures of things that aren’t in the least bit true.
This is what I believe Dollar Shave Club did before it was purchased. So let’s bust a few myths here – and maybe I can do my part to puncture the silliness of the ventures copying their mythology.
Myth #1: Dollar Shave Club Was A Successful Business
From public reports, it appears that Dollar Shave Club never created any profit before it was bought. Given that they were founded in 2011 and bought in 2016, that’s a lot of years of losing money.
They created the myth of success by paying a lot of customers to order (more on paying later). This is a classic gambit in the digital arena – to claim “lots of customers” will somehow, some day, turn into profit. Just this year MoviePass showed us how tremendously silly this idea is.
We know this from a conference where, for example, founder Michael Dubin said
“the company was projecting more than $200 million in revenue for 2016. Dollar Shave Club isn’t profitable, but..the company could get into the black by year’s end.”
I love that careful wording – “could get into”. After all, he was pretty free to make the claim since he said that in May and the purchase by Unilever was announced in July of 2016. He probably knew he wouldn’t ever be called to justify the claim publicly.
So we are left with this reality: Dollar Shave never made a dollar and yet had revenue of $200M. How big was their loss? I don’t know.
Myth #2: Because of Viral Marketing, They Did it All Without Marketing Expense
In order to create great hype about how their “digital” and direct to consumer approach worked so well, Dollar Shave claimed to have avoided marketing spending.
Except, paying customers to take your product off your hands (i.e. losing money) IS marketing expense.
I’ve heard this so many times in the modern internet world. The first time was in 1999 in a meeting with a startup. They told me, another company had just obtained a very large number of customers in two weeks without marketing. How? They had given away free computers in return for people agreeing to accept advertising on them.
Of course, that’s a conservative marketing cost of $300 to buy each customer. So, if they generated 10,000 customers, they spent $3M in marketing cost. Is that a good or bad level of cost? Depends.
The point is, it wasn’t free. Dollar Shave Club priced their product below cost (razor, marketing, fulfillment, shipping, internet work, etc.) so they spent a great deal of marketing cost per order.
Myth #3: Razor Makers are Ripping You Off
We hear pretty regularly the idea that traditional manufacturers are vastly over-priced – if we just got rid of all the nasty cost then everything would be gloriously cheap.
Yeah. Well, that’s bullshit. I work with manufacturers of many kinds of products and know the cost realities of most of them. A great product is NOT easy to make. While Gillette may make a nice profit, it’s not exorbitant. And they only keep prices down by advertising – because mass ordering reduces cost.
Dollar Shave played this card as well – claiming they were cheap because they got rid of all that nasty overhead. Looking at reality, they made razors cheap by having their investors subsidize them…they PAID people to be their customers.
How do we know this? Once they were sold to Unilever, Dollar Shave’s numbers flatlined. In other words, Unilever bought a fake. They may have known this and bought them for purely competitive reasons. Or, they may have turned a blind eye to the fakery as a result of wishful thinking (as corporations often do in M&A work).
Myth #4: There’s Big Money to be Made in Direct To Consumer Razors (and other things)
This is the myth Ritson attacked so clearly and I’ll leave Ritson’s article to speak for him.
Suffice it to say…there’s not. In 1993 I moved into a world closely connected with direct to consumer selling. Through the past 25 years I’ve done the business planning for hundreds of clients in that world.
It’s naive to ignore the huge costs that shift into media, fulfillment, order support, customer service, pick and pack, or returns when you don’t have a retail store where customers do most of that for you.
In many ways, direct to consumer is a premium channel – not a discount channel.
Myth # 5: The Dollar Shave “Viral Video” was Made for Less Than $5K
As part of Dollar Shave’s self-aggrandizement and “no marketing” claim they made a big deal about their viral video. Well, at least the first one which was the only one that worked at all. (The others were really bad, featured dumb products, and showed cluelessness.)
They pulled the wool over no less esteemed eyes than those at Inc magazine as shown in this article. This article passes along the silly myth the video cost $4,700.
I dug into the video more than Inc did and find things to be far different. Consider:
Founder Dubin suggests he’s just, gosh golly, a founder and did this cool video. Except, as mentioned in the Inc article, he studied improv at Upright Citizens Brigade in NY for EIGHT years. A founding member of the Upright group was Amy Poehler. Not just your local acting troop.
In other words, Dubin is a skilled and trained comedic actor – the kind that would have cost considerable money to recruit to do the video. He did it for free, committed considerable time to it, and saved the company tens of thousands of dollars (if not more).
Elsewhere I read that he recruited another graduate of that improv group to “advise” (this likely means to direct, produce, help edit, script, etc). Huh. I’m sure he paid her with options that paid off handsomely.
Because all that time was sunk, they could rehearse extensively and he was probably scripting every time he pitched investors. It was in his bones – for anyone else to do the video would have needed rehearsal days. (He also avoided a $20K creative fee this way.)
The $4,700 is probably camera, dolly, and lights rental — purely equipment cost and maybe one operator (maybe not).
Because they did it in their facility, they could convert it and prop it to be what they needed – and probably did that over time. You can be absolutely certain it wasn’t a “gosh golly we picked up the camera and shot it”. This likely saved another $20K to $30K in location, props, and set costs.
What would it cost for anyone else to make that video? Well over $100K given the need to hire A-class comedic actors, a-grade scripting, etc…
But companies desperately want to believe superb video is cheap. So no one challenges this myth.
What SHOULD We Learn?
I was going to say that I don’t have any problem with Dollar Shave being an investor “get rich quick scheme”. But that’s not true. I do have a problem with it. Ventures like these destroy the opportunity for real companies to obtain funding because the returns are outrageous and based on falsehoods. A real company can’t compete (I believe this is part of what drove Enron to it’s outrageous schemes – they were competing for investor excitement just before the dot com crash).
That said, Dollar Shave revealed a powerful market urge — people want to believe that razors could be cheap. The power of this urge should be of concern to Gillette and others.
While it shouldn’t be dismissed easily, though, we have to also note the consumer desire doesn’t match truth. So is there a latent DTC market for products like razors? No. Because they can’t be sold profitably at the levels needed to make for a big DTC market.
For further reading here are a couple of interesting posts:
David Barnes (@DRB) passed along this article about a failed attempt to make DTC coffee a big thing. This should not surprise anyone – the market for exotic home coffees has very serious problems.
And Richard Stacy (@RichardStacy) wrote recently about “Calling in a beer-strike”. It’s a pretty funny idea.
But let me suggest just one thing further: The next time you hear about a magical success without work, take a deep breath and be a skeptic. Maybe there are things to be learned. But too often these are purely attempts to reap big investment returns without doing the hard work of building a good company with a valid business model.
©2018 Doug Garnett – All Rights Reserved
Through my company Protonik, LLC based in Portland Oregon, I work with clients to drive innovation success with better marketing of new and innovative products and services — work which needs to start before market analysis. I also work with clients attempting to bring new life to Shelf Potatoes or take their existing products to new markets. You can read more about these services and my unusual background (math, aerospace, supercomputers, consumer goods & national TV ads) at www.Protonik.net.