Startup Camels: Hopi Co-Founders On How They're Going About Growth For Their Enterprise The co-founders of Hopi on building a long-term profitable company.
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This article was co-written with Charles Wright, co-founder, Hopi.
Between 2009 and 2020, thousands of direct-to-consumer (DTC) brands marketed products aimed at getting to a consumer faster and cheaper. Fueled by digital advertising arbitrage, the value proposition was simple: DTC removes the "middle man" from the equation. Today, many of the biggest DTC and digitally native vertical brands (DNVBs) battle for the same affluent urban millennials. Silicon Valley and the global investment phenomenon marches to the beat of three words: growth, growth, growth.
Billion-dollar brands like Harry's, Warby Parker, and Bonobos pioneered today's venture-backed brand building trifecta: hyper growth, quality product, and customer data. Thanks to the internet, these brands can have immediate global reach. Flushed with scale-hungry investors and bucket loads of venture money, DNVBs go to war for the same customer on the same platforms- think Facebook and Google. Acquisition costs soar as they fight for limited advertising space. Consequently, as companies grow, so do the costs of acquiring each customer.
The DNVB space wreaks of high customer acquisition costs and smells like a bubble. As Chamath Palihapitiya, the former VP of Growth at Facebook, and now the CEO of Social Capital, observed, about US$0.4 of every VC dollar raised goes straight to user acquisition. Competitive bids for the same inventory, addressing the same audience, drive up demand for the same real estate within a feed or a story, causing ad prices to skyrocket.
But this bubble has got to burst. Take Casper for example, the DNVB "mattress in a box" brand. In 2018, Casper lost $92 million on revenues of $358 million. It has not been able to turn a profit since it has been in business. Speaking about Casper, Jason Stoffer, Partner at venture capital firm, Maveron, said, "For this company to become sustainable and profitable, they either need to become much more efficient on the marketing side, or they need to figure out how to generate more lifetime value out of their customer base." By September 2019, Casper spent $423 million on marketing! Casper is now filing for S-1 to hopefully IPO later this year. This creates a new argument: are IPOs there to save companies, or are they a true statement of success?
The Middle East has also been flush for VC money over the last few years. Buzzwords tend to be a little different in the region though- "tech" startups are the hot property, and there's a dearth of brands. Alas, there are parallel narratives. Growth at all costs and the celebration of raising money seem to be the most talked about facets of business. There is little mention anywhere of profitability in any business media outlets in the region. Even now during the COVID-19 crisis, news headlines of hyper growth numbers abound. "We grew 800% during COVID-19." Few, if any, mention sustainability or paths to profitability.
TIME FOR A REALITY CHECK
The huge layoffs at tech giants Airbnb, Uber, and, specifically in the region, Careem, should be a reality check. Growth at any cost should not be celebrated. We need to move away from the mentality of "We'll raise more money, and maybe then we'll try and become profitable." Or, "When we get market share, we'll try and become profitable." These should no longer be the benchmarks. The post COVID-19 world should see a realignment on how to start, build, and scale businesses.
At our company Hopi, a direct-to-consumer based brand for contact lenses, we've set out to be a leading DNVB. We're not transfixed on growth at all costs, and we've not got our steely eyes on an acquisition in order to make money- our goal is profitability. Should our goal be to profitably result in an acquisition, then so be it, but from day one, we've set out to be sustainable, and the COVID-19 crisis has emphasized that.
When it comes to how we grow, Hopi is a camel; not a unicorn. Camels have been used in numerous wars, because of their ability to travel long distances without water or food, and because they can carry heavy loads. They're resilient, and that's what we want for Hopi- to stand the test of time, and have our customers wear our lenses for the next 20 or 30 years.
Fundamentally, that comes down to trust. Morgan Housel, Partner at Collaborative Fund and former columnist at The Motley Fool and The Wall Street Journal once wrote: "Marketing is increasingly cheap. Trust is increasingly expensive… Attracting eyeballs no longer sets you apart. Building trust among those who have their eyes on you does. Getting people's attention is no longer a skill. Keeping people's attention is."
Fortunately, Hopi's product offering is replenishable. Our customers need a fresh supply of lenses every month. Re-marketing to an existing customer is significantly cheaper than trying to persuade a firsttime customer to buy your product- sometimes nearly 90% cheaper.
Once we have acquired a customer, we know they have a requirement for lenses. It's then up to us to retain the customer in the system and ensure they don't go back to their old supplier. Lifetime value (LTV) is the key metric we track in the business. Effectively, the total amount of money the customer is expected to spend in your business over time. Unlike other consumer packaged goods, contact lenses have huge potential for LTV- unless the customer has laser eye surgery, they would have a requirement for lenses for the rest of their lives. That's why we are laser-focused on how we can make a new customer a customer for life.
By focusing on our post-sales experience, email marketing, and constant customer dialogue, we're able to reduce friction in the payment process, and increase customer loyalty. We have a unique ability to accrue data behind customer cohorts, leading to a customer-centric experience.
BE A CAMEL, NOT A UNICORN
"Brands are irrelevant. The users are the brand. They are the CEO." This statement from Glossier founder Emily Weiss really resonates with us. Roughly 80% of Glossier's growth comes from peer-to- peer recommendations, and its main retail establishment generates more sales revenue per square foot than the average Apple store.
Instead of blowing cash on customer acquisition, Hopi invests in brand experience to increase customer retention, loyalty, and peer-to-peer referral. This is informed by data and dynamic feedback loops between customers and the founders.
Gillette famously coined and championed a sales tactic that is widely used by brands today, and is still invoked in business school case studies. Essentially, by selling a base product at low prices, consumers are hooked into a higher lifetime value. Retailers that use the "razor and blade strategy" then sell a related product at a premium price to offset the cost of investment (and eventually achieve profitability).
Popular venture-backed brands employ this strategy as their primary driver for customer acquisition. For example, offering a free trial on a subscription product, and practically giving away their product for free. Once the customer signs up for the "too good to be true" offer, they automatically sign up to a subscription, and 10 days later, the consumer is billed the full price of the product, and the next batch is sent out. The key metric these brands are focused on is new customer acquisition, and they'll be going back to their board each month reporting on this as "growth," with no mention of churn.
At Hopi, we decided against this selling tactic, mostly because we couldn't afford to give away the product. Instead of giving away products and tricking consumers, we remain focused on customer centricity. The other key metric we track daily is "churn." Churn measures how many customers cancel their subscription in a given time.
The COVID-19 crisis sadly saw a huge spike in customers cancelling their subscriptions to Hopi. For most companies, founding teams would panic, but at Hopi, our customer-centric approach pushed us to innovation. We looked at the reasons why people were cancelling, and the vast majority were people not wearing lenses every day, since they weren't going to work. The general consensus was that a monthly subscription wasn't right for everyone. We thus adapted to suit the needs of our customers. Almost overnight, we developed a new landing page with new, non-commitment options, and saw a growing trend. Not everyone wanted a subscription; people wanted access to our lenses without being tied into a monthly payment. We saw some customers cancel their monthly subscriptions, and buy up to six months' worth of lenses at once. In one fell swoop, we were able to control our increasing churn, and, at the same time, attract a whole new audience to our model.
The COVID-19 crisis has thus pushed us to make changes, but more than anything, it's emphasized the importance of our customer-centric approach. From picking up lenses and delivering them ourselves, to ensuring late deliveries get a full and speedy explanation from the founders, we believe in always putting our customers first. With customer acquisition costs soaring in this region too, we also focus on retention and future selling through our social pages and email marketing.
THE RETURN OF CAPITAL EFFICIENCY
Taking all of this into consideration, the true test for a brand like Hopi is expansion and market penetration. We're not shying away from our goal of becoming a global brand, for which we will need to raise another round of investment at some point. But it will be a growth strategy built on capital efficiency. This model is likely to be more attractive to investors in a post COVID-19 world. We're about creating a long-term profitable company that will survive the test of time to become one of the true success stories in the DTC and DNVB landscape- perhaps even a brand and company that acquires, rather than gets acquired.