A few of weeks ago, Casper's S-1 filing unleashed a new wave of discussions on the business model viability of heavily venture funded tech companies, especially following the weak performance of some hyped tech companies recently.
In this context, I thought I'd share my framework for evaluating online commerce platforms in the last decade (this framework does not apply to marketplaces and is updated regularly):
While Casper checks most of the boxes (a big market with outdated competitors, a broad customer base, high (first) AOV, a great value prop and a relatively high product margin, even if not 70%, and a positive contribution margin on the first order), the company seems to have challenges with repeat purchases. The company does not disclose cohort data, but a quick back of the envelope calculation suggests a sub 15% customer and dollar retention. It is therefore an open question as to whether Casper is / will be able to build a multi-product platform for the 'sleep economy', and progress beyond the sale of mattresses and perhaps a few low AOV related products. Additionally, as the company is facing an increasingly competitive environment (apparently there are 150+ other online mattress retailers out there), critics doubt whether the company can reduce its acquisition costs sufficiently to become profitable without substantial upselling. Here is a nice overview of the company's unit economics:
Digitally enabled commerce is dead. Long live digital first commerce.
I'd like to zoom in on the last point of my framework, the 'ability to rise above the noise'. Over the last years, it became increasingly expensive for companies to use the traditional online acquisition channels, even when operating at scale. As a result, many companies turned to (paid) referral marketing products, but this is unlikely to be a complete substitute.
The result is linear growth at best - the end of tech valuation multiples...
This reality is especially tough for D2C commerce companies selling physical products as retention and upselling are hard to sustain and organic growth more difficult to generate consistently than it is for digital first plays. The latter tend to hook users with a great online experience and then upsell physical AND digital products AND community access (think f.ex. Zola for wedding registries and peer feed-back, Safe365 for family caretaking and third age communities, Co-star for personalised horoscopes and nurturing friendships, the Glossier blog...) while optimising working capital requirements. These products are so powerful because, beyond offering a digital product that you want to access regularly (retention), they provide a sense of belonging to a community and many triggers to consume adjacent products (upselling). As we are witnessing the debundling of the 'big blue', I think that many more such products will appear.
Unlike digitally enabled commerce, digital first commerce allows products and its communities to 'rise above the noise' by driving virality and user to user marketing while retaining customers much more efficiently. Existing acquisition channels are slowly stepping up their game and new acquisition channels may appear in the future but, until then, a B2C SaaS approach with a marketplace or D2C commerce play attached seems like a great bet :)
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