Through 2014 to 2018, Casper was everywhere on the Internet, flooding advertisements into every trendy podcast, website, and YouTube video. Need a mattress? Want a mattress? Buy Casper. Not comfortable buying a mattress you’ve never seen or touched before? No problem! Sleep on it for three months and return it anytime for a full refund within those 100 days, no questions asked. With a radically generous return policy and aggressive multi-million advertising budgets, Casper quickly rose to fame as the flashiest and fast-growing online consumer brand. Silicon Valley fueled Casper’s meteoric rise, eager to showcase the company as a shining example of technological innovation and business transformation.
Casper, Warby Parker, Dollar Shave Club were all pioneers of a new revolutionary type of business called Direct-To-Consumer.
The DTC business model is simple:
· Make a quality consumer product
· Cut out the middleman retailer
· Brand the product with sans-serif font, pastel colors, minimalism designs
· Make a cool website and sell it direct to the consumer at a lower price
On paper, the advantages of DTC are strong. Traditional consumer goods businesses operate in a wholesale model. The only way these companies make money is by getting their products into retailers and selling bulk. Since these consumer companies are all fighting to get their products into the shelves of Target, Costco, Kroger’s, Whole Foods, Sam’s Club — they end up designing these products to impress and satisfy retailers’ cost requirements, rather than consumer needs.
By removing the retailer from the equation, DTC companies in theory can design and offer products to consumers that are higher quality and cheaper. These products are then promoted cheaply through social media and exclusively sold on the Internet.
Eager to ride on Silicon Valley’s hottest trend, venture capitalists all over the world have poured over $3 billion dollars into DTC companies in the past decade. Casper was the shining crown jewel and poster child for DTC businesses, attracting $340M in investment over 5 years. The Casper Hype got so big that celebrities like Ashton Kutcher, Leonardo Dicaprio, Adam Levine, and 50 Cents all joined as investors. Even big retailers like Target couldn’t ignore Casper’s meteoric rise and became smitten with the idea that acquiring Casper would inject freshness, quirkiness, and millennial appeal into its antiquated retail stores. Target offered to acquire Casper for $900M, but quickly found that the founders were not willing for any purchase lower than [a billion dollars clip]. Unable to match that price tag, Target settled for just being an investor. Casper had become a true Silicon Valley unicorn with a pre-IPO valuation in 2019 of 1.1 billion dollars.
Fast forward one year to 2020 where Casper’s long-awaited IPO was about to debut on the stock market. Instead of the glamor and champagne, Casper’s entry into public markets was widely criticized as “desperate”, “downright embarrassing” and “a disaster”. The company slashed its lofty billion dollar valuation by 50% to $500M in a last-ditch attempt to make the company palatable to investors.
Since its IPO, Casper struggles have continued, dropping another $100M in valuation, shutting down its European business, losing its COO/CFO and laying off 21% of its workforce. Casper investors, including all the celebrities, who got in at the billion dollar price tag before the IPO, ended up losing their money. It’s been an epic collapse for Casper, the one-time unicorn, darling of Silicon Valley, and DTC business poster child. A startup that no one could get enough of has quickly become taboo in venture circles. What exactly has fueled Casper’s collapse?
The answer lies in the numbers.
As a private company, Casper had been spinning the numbers to its unicorn status. But as soon as Casper went public, its true financial performance was laid out for all to see.
Casper had lost money in every year of its existence. In 2017 -$73M, 2018 -$92M, 2019 -$93M, 2020 -$90M . Losing money is nothing new to Silicon Valley startups these days. To give credit where credit is due, Wall Street has clearly shown an appetite to look past the red and put hope in the future growth (PDD, TSLA, AMD). But in Casper’s case, the reality is that it’s not a technology company. Casper sells mattresses. Not software and not hardware.
The average Casper mattress sells for $710. After paying off the supplier and delivery costs, Casper makes $377 from each mattress sold. This gives Casper a very sexy 50% gross margin. So what’s the rub?
Casper dumps all their money into advertising. Kylie Jenner and Hacksmith ain’t cheap, you know. In 2017, the company spent 91% of its gross profit on advertising. In 2018, Casper spent 80% of its gross profit on advertising. In 2019, they spent 73% of gross profit on advertising. In 2020, they spent 60%. This means that every dollar Casper makes off each mattress sale, 73 cents of that is going back into Facebook, Spotify, Instagram ad. That means every other company expense, like salaries, R&D, warehouse rent, delivery, website, design — all of that has to come out of the company’s pocket. Advertising is meant to grow, not to sustain a business.
The nuance is that online advertising itself has dramatically changed since Casper’s founding. In 2014, 2015 when Casper was getting off the ground, Internet advertising and influencer marketing was extremely affordable. Running Facebook ads had been an easy, inexpensive, and effective way to target consumers, much cheaper than any billboard or television advertising ever was.
But as more companies have flocked to Facebook, Instagram, YouTube, and other popular websites to target consumers, advertising on social media has gotten saturated, competitive and expensive. It’s no longer just Casper and its $340M war-chest. It’s Casper and thousands of other DTC startups and big consumer brands throwing in millions of dollars, targeting the same demographics, and driving up advertising costs. In 2019 alone, it was reported that the cost per click for Facebook rose by nearly 93%. To break this down into simple math, that means for every $1 a company put into their Facebook ad, they would now need to put at least $2 just to get the same result as before.
The saturation and explosion of online advertising costs popped the bubble not only for Casper, but also hundreds of other DTC startups that had unsustainable business models that depended on cheap online advertising and an endless IV drip of venture capital. With the death of Brandless, the struggles of Honest Company, Everlane, and quiet exit of Dollar Shave Club — investors began to see their losses through the smoke and mirrors.
Casper currently spends $275–305 to acquire a new customer. With the increasing competition from other mattress DTC startups targeting the same customers in the same channels, Casper has no choice but to keep throwing more money into the advertising pit to stay competitive and maintain some baseline growth.
With all the numbers in mind, Casper’s business model boils down to:
· Buy a mattress for $400
· Sell a mattress for $700
· Make $300 on average
· Refund 20% of these mattresses you sell every year thanks to an excessive return policy
Then:
· Spend $300 on advertising
· Spend another $300 on administrative expenses (HR/IT)
· Lose $200 for every mattress you sell
Casper’s massive advertising budget would be forgivable if all that spend was leading to equally large multipliers in revenue. Between 2017 and 2018, Casper grew its top-line by 43%, 2018 and 2019, growth fell to 23%, between 2019 and 2020, growth under COVID was a measly 18%.
The mattress industry reports that the average American changes their mattress every 9–10 years. Casper’s first customers came in 2015 when the company had been pricing its products at the cheapest and had been advertising at their most aggressive levels. With a 10 year long deal cycle and product life, it means we need to wait until 2025 just to understand Casper’s true retention rate. But more importantly, it sheds light into the possibility that growth for the mattress industry is just that slow and constrained. No amount of advertising will change the underlying market reality.
The fastest growing sales channel for Casper is currently…wait for it…retail. Retail sales for Casper have grown 74% year over year, now accounting for 20% of the company’s overall revenue. For comparison, the direct-to-consumer sales revenue only grew by 20% in the same period of time. Casper’s retail sales aren’t just beating their online sales in growth. The average order for Casper is 15% higher in retail at $820 than online.
In the company’s early days, the founders were very prideful about not needing to open stores to grow. Their argument was that as long as you have a good website, you can sell to consumers anywhere, anytime. You wouldn’t need to open up a store and wait for that customer to walk into your doors to make a sale. And because you don’t need real estate, you can theoretically use those cost savings to lower prices and make nicer mattresses. Besides, only boomers go into mattress stores and endure all the sleazy salesman there. Who’d want to go to one?
[post clips of all the casper shitting on mattress stores]
The ironic wall Casper has run into is that online growth is limited. There are only so many people you can hit online before your waves of Facebook, Instagram, YouTube, and podcast ads just become exhausting and ineffective. Brick and mortar, the very thing that Casper was invented to disrupt, ([clips] why go into a store for a mattress when you can buy online) has now become the bastion of light that executives are hoping will save the company.
Casper isn’t the only DTC brand doing this amazing 180 to embrace the very thing it was trying to disrupt. Everlane and Away, two other formerly sizzling DTC companies, have also found themselves opening stores and begging to get on the shelves of big retailers to try and save their businesses.
Having shut down its foray into the European market to “focus on the American market” which by all measures is barely growing and only becoming more competitive, Casper’s future as a company looks bleak and painful. If you couldn’t crack Europe, it’s hard to imagine cracking any other major geographic market. Turning down that $900M offer from Target just because it wasn’t a billion dollars looks more regrettable by the day. With investor sentiment at an all-time-low, geographic expansion now out of the equation, and the bursting of the DTC hype bubble, Casper the once untouchable Sililcono Valley unicorn seems destined to become forgotten in a sea of worthless penny stocks on the NYSE.
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