Dollar Shave Club
Dollar Shave Club
The meteoric rise and subsequent billion-dollar acquisition of the subscription-based eCommerce company Dollar Shave Club has sent shockwaves through the commerce industry. It raises the question of who will be the next company to go for the same sum that Unilever paid. At the same time, it illustrates how large parts of the commerce industry could be ripe for disruption.
I have a few likely candidates – also in the price ranges below the $1 billion dollar mark – that I will share in a separate article. I would also like to hear your thoughts and ideas about what is happening in the subscription eCommerce space and what companies look like they will soon be acquired.
Old and new spell danger
Dollar Shave Club’s success has a lot to do with combining an old business model, savvy advertising and taking advantage of the opportunities presented by the modern, global economy.
The company was founded in 2011 and uses something as archaic as a subscription model. Users sign up and pay a monthly fee, and in return get razors and razor blades shipping directly to their home address. They also have the option of buying additional, related hygiene products, like shaving foam and shampoo.
The razors and blades are imported by the boatload from the Korean manufacturer Dorco and sold for between $1 and $9 a month, depending on which option you choose. The price is way below what you will pay for name-brand razors. Even at Walmart. The low prices are possible thanks to Dollar Shave Club knowing that they have a lot of recurring revenue thanks to the subscriptions. That, in turn, lets the company commit to large-scale, long-term deals – which leads to rebates - with a supplier like Dorco.
Finally, we get to the successful viral video marketing that propelled the company, and cofounder – and now very rich man indeed – Michael Dubin to fame. His answer to the question ‘are your blades any good?’ with a resounding ‘no, our blades are f#¤5ing great!’ sets tone within the first 20 seconds. It is hard to describe exactly what it does right, but I think part of it is how it speaks directly and irreverently to its target audience. You can check it out here.
Put succinctly, I would say that what Dollar Shave Club did right was find good answers to the right questions in the following categories:
Homing in on an existing niche market – what is it we want to sell better than / differently from anyone else?
Finding one/more competitive advantages – how can we better the established companies in the space?
Deciding on an innovative marketing approach – how can we reach and engage efficiently with our target audience?
Finding ways of building strong customer loyalty (low churn and high recurring revenue) – once people are buying our product, how do we make them coming back?
Where is the next hit, big commerce?
The interesting thing lesson here is that it is a model that is applicable to many other niche markets in the commerce space. Not only is it possible – it is already being used to disrupt large swathes of commerce, as well as other industries.
Anything from coffee beans, over makeup to your socks and underwear easily fits with a subscription based eCommerce model. There are even companies using the same subscription model on air travel.
The effects on the incumbent, traditional leaders in the various spaces is profound. For example, Dollar Shave Club have already grabbed more than five percent of the American market from giants like Gillette. This is measured on pure revenue, and since Dollar Shave Club charges a lot less, the actual effect on a company like Gillette will likely be in a two-figure percentage drop in market share.
This has been accomplished by a startup that has spent relatively little on things like marketing and PR, while managing to get 3 million subscribers that provide recurring revenue.
Big players win through M&A
I expect other big commerce companies to join Unilever in acquiring eCommerce companies that use subscription models. It will happen on both national, regional and international levels.
The synergies for successful M&A are tantalising.
Looking at Unilever, the company is getting a two-for-one deal. One is acquiring a strong company that seems set to keep growing. Secondly – and the importance of this cannot be overestimated – they have acquired a company with proven expertise in relation to direct-to-consumer brand building. It is something that many commerce companies, including the likes of Unilever and Proctor & Gamble, seem to be struggling mightily with.
As CB Insights’ data shows, the eCommerce sector as a whole is seeing a lot of M&A activity, and I firmly believe that an increasing number of those deals will involve subscription-based companies – and to make a bold claim, I predict that one of those deals will be worth more than $1 billion dollars before the end of 2017. The deal could involve one of the companies I will profile in a separate post.