How to create a direct to consumer company (the Harry’s Razor template)
The TWIST podcast between Jason Calacanis and Andy Katz-Mayfield was a wonderful hour about company creation. Katz-Mayfield told stories about starting Harry’s, and Calacanis asked thoughtful questions about the experience.
As I listened I wondered, what if Katz-Mayfield’s experience isn’t just his own but a model? Is the journey of Harry’s a secret sauce? Can this be replicated?
In The Success Equation, Michael Mauboussin introduces a framework for figuring out the secret sauce.
“Useful statistics have two features. First, they are persistent, which means what happens in the present is similar to what happened in the past. If the job you do is predominantly a matter of skill, you can expect to be able to repeat your performance reliably.”
Good statistics are also predictive of the goals you seek. Let’s say that we keep track of the percentage of shots that a player makes in a basketball game, and the goal of the team is to score points when playing offense. We see that, all things being equal, the higher percentage of shots a player makes, the more points he produces…This is an obvious case, of course, but not all relationships between cause and effect are as clear.
Mauboussin points out that the Moneyball theory of baseball succeeded because some teams figured out that certain statistics were more predictive of wins.
Our question then is this, can we apply this to stories rather than statistics? If Mauboussin read this I’m afraid he would cringe.
What a show.
A frequent mistake is to confuse A preceding B, with A causing B. I’ve written at length about the narrative fallacy, logical errors, and survivor bias. Here we will not address that.
Here we will note what Harry’s has done and compare it with what other companies have done. Sometimes it is the case that A precedes B, because A caused B.
Table of contents:
- Scratch your own itch.
- Focus on you.
- Use disruption theory as a template.
- Don’t fish in an empty pond.
- Build out your moat.
- To merge or not to merge, that is the question.
1/ Scratch your own itch.
“The company was born out of an experience I had just going to a drug store and having a nervous breakdown in the aisle because blades were so expensive.” AKM
A good place to start is by solving your own problem, by scratching your own itch.
Paul Graham wrote a decade ago:
Many of the applications we get are imitations of some existing company. That’s one source of ideas, but not the best. If you look at the origins of successful startups, few were started in imitation of some other startup. Where did they get their ideas? Usually from some specific, unsolved problem the founders identified.
Find what people complain about and solve that.
This can’t be the only thing you do though (and Graham notes that too). In my book on startups that failed, too many founders stopped at their itch. It was the idea that if I build it they will come. They won’t, you have to do more than just that.
Scratching your own itch is only the start.
2/ Focus on you.
Harry’s and Dollar Shave Club (DSC) both launched around the same time. Calacanis commented that you often see this. It makes sense that if there’s a problem, more than one person sees it.
Treated incorrectly, competition can drift your focus. Katz-Mayfield didn’t let this happen. He focused on manufacturing, packaging, and selling. He didn’t let the actions of DSC or the in-store brands dictate what Harry’s would do.
Compare the YouTube Home videos for each company:
That DSC video was great and it’s exactly what Harry’s shouldn’t have done.
A helpful warning comes from Gowalla founder Josh Williams. Go read his piece on the “check-in wars”: Play by your own rules.
You are your competitive advantage.
3/ Disruption theory as a template.
Disruption theory from Clayton Christensen goes like this (emphasis mine):
“Disruption” describes a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses. Specifically, as incumbents focus on improving their products and services for their most demanding (and usually most profitable) customers, they exceed the needs of some segments and ignore the needs of others. Entrants that prove disruptive begin by successfully targeting those overlooked segments, gaining a foothold by delivering more-suitable functionality — frequently at a lower price.
“The razors out there today almost feel like children’s toys. There’s like bells and whistles and all sorts of colors. We took the opposite approach. Let’s make the product speak for itself. A streamlined and simple design. We wanted the brand to feel elevated but approachable.”
In the terms of disruption theory, customers “hire” a product to complete a job. What job are men “hiring” their razor for? A clean shave, but done procured quickly and cheaply.
According to disruption theory, the job to “hire” for has three parts; shave, price, procurement. When one part is more than satisfied (clean shave) customers will move on to another (price, procurement).
When Harry’s bought a German blade factory they satisfied the first “need of some segment.” The other razor blade companies did this too but they did it well before they changed the colors or added batteries. The shave was already good enough.
The “more-suitable functionality” is the other parts. People don’t want to wait, have the razor cage unlocked, and then buy the razors. In fact, I don’t want to go to a store at all.
Read what Christensen writes about Netflix and Blockbuster:
“However, as new technologies allowed Netflix to shift to streaming video over the internet, the company did eventually become appealing to Blockbuster’s core customers, offering a wider selection of content with an all-you-can-watch, on-demand, low-price, high-quality, highly convenient approach.”
Overlay that onto Harry’s. The new technology of the internet allowed Harry’s to create disruption in much the same way. Christensen is careful to point out that disruption theory is only a diagnosis. It’s a definition. It’s not an if-this-then-that statement. It’s not predictive and it’s not conclusive, but it is helpful.
Christensen’s book, The Innovator’s Solution, describes how Wal-Mart after their Jet.com purchase or Unilever after their DSC purchase can stop disruption from happening.
Disruption theory can be a template for underdogs.
4/ Don’t fish in an empty pond.
When Harry’s got their first lawsuit:
“It’s like 90% scary and 10% affirmative. It’s like, well at least we had enough of an impact to catch somebody’s attention.”
To get different returns you have to be different. To survive you have to be right. Getting sued (is one way that) validates that.
The challenge is to fish (v.) where the fish (n.) are going to be.
If Harry’s had tried to enter stores they would have been squeezed out, almost literally. Each episode of Shark Tank on ABC or The Profit on CNBC that has a consumer goods company speaks to “shelf space.”
That space is great, but getting a foothold is next to impossible. There are a lot of fish there, but it’s hard to fish there.
Instead, try to find where the fish are going to be.
Success investors like Howard Marks, Bill Miller, and Warren Buffett all have theories about fishing on uncrowded shores where fish may be.
- Howard Marks wrote. “I think it’s essential to remember that just about everything is cyclical ” This seems to be the angle Katz-Mayfield and co. are taking too. “We looked at a hundred years of shaving history and facial hair trends are cyclical. If you look back in the 60’s and 70’s it was like it is today. Everybody had beards.”
- Bill Miller says to do different things. Miller’s success in the 1990’s was thanks in part to being one of the few value investors who invested in technology stocks.
- Warren Buffett says to move in the opposite direction of the crowd; “be fearful when others are greedy and greedy when others are fearful.”
The key is to be different and right. Amazon was different and right. One executive said that Bill Gates was “flabbergasted” at the idea. Sam Adams was different and right. Founder Jim Koch’s darker beer established a foothold because it wasn’t like water. Phil Knight was different and right. Knight wrote that only Nike when “weirdos went out for a three-mile run.”
5/ Build your moat.
“As long as we continue to differentiate on product and brand, we believe there is space for that.”
On Shark Tank Kevin O’Leary asks the pitching entrepreneurs what’s keeping him from entering their industry if he had a lot of money. He’s asking what differentiates them. Often the presenter says they’re the differentiator. That’s the wrong answer.
Charlie Munger explains that there are five kinds of differentiation (moats); supply side economies of scale, demand side economies of scale, brand, regulation, intellectual property. Let’s look at each in turn and see where Harry’s might establish a moat.
Supply side economies of scale. This is an ability to keep prices low because the volume of product and fixed costs spread out over a large volume. Amazon, like an 800 pound gorilla, sits in this moat area (as well as others). Wal-Mart, Ford, and other physical goods companies leverage their advantage of scale.
Demand side economies of scale. Also known as network effects. The more people who use something the better it is. Here we have communication systems; iMessage, Snapchat, Facebook. Microsoft Word and Excel are here. Amazon is here too. AirBnB and Uber both straddle supply and demand side economies of scale.
Brand. A valuable but elusive moat. Tesla’s moat is brand. Nasty Gal’s moat started as a brand.
Regulation. A ruling body like the government decides who can provide a service.
Intellectual property. When Harry’s bought their German factory they got some IP that protected them from lawsuits. How much meat is left on this bone though? Gillette has patented everything from blade coating to “shaving razor demonstration apparatus.”
Katz-Mayfield is already thinking about digging a moat. “You have to find a niche and differentiate on some dimension. You can’t hope to out Amazon Amazon,” he told Calacanis.
That means they won’t win on the supply side, Amazon’s volume and margins prevent that. They probably won’t win on the demand side. There’s no regulation and little IP. That leaves brand as the moat.
While Harry’s is limited to a single moat, there are companies that create more than one.
Coca-Cola, the greatest brand ever.
While Amazon is a good brand Coca-Cola is great. They’ve captured more than one moat and it makes their positioning almost unassailable. The biggest problem is that the core cola brands have better moats than the new brands; Minute Maid, Monster, and milk.
Supply side: Coca-Cola owns about 25% of its bottling business. While it may sell this part of the company, they’ve developed systems to create their beverages as cheaply as possible.
Demand side: If you’re a restaurant owner, what do you do when people say, “I’ll have a coke.”
Brand: Coca-Cola gave store owners signs in Coca-Cola red. They created the red Santa. Mohnish Pabrai said, “whenever people are generally happy, Coke wants to be there.”
IP: What’s in the can can be (mostly) replicated, but more importantly, the outside of the can cannot.
Coca-Cola is a great company because they are differentiated. The razor companies were not, and that as Mr. Frost says, made all the difference.
In the same way that disruption is a process not a product, so is moat building. Competitive advantages get worn away from competition or changing environments. The Gillette advantage — The Best a Man can Get — was neutralized when Harry’s bought a German blade factory. Both of these ideas are about quality and one perception cancels the other.
“I love these Tommy Johns, I’m obsessed with them. It’s almost a subscription for me. I look at your brand…why doesn’t somebody roll up five of these…Warby Parker, Casper, someone should just take a whole group of these and say, ‘here’s a collection of them.’ Now we have a database of 10 million credit cards plus emails, that’s super powerful.” — JC
To merge or not to merge. Superficially it sounds good but so does cheesecake.
Successful mergers leave a whole that is greater than the sum of the parts. Disney’s purchase of Pixar is held up as a the gold standard for mergers. Ben Thompson and James Allworth explained why acquisitions make sense:
- Talent acquisition. John Lasseter turned around Disney animation.
- Long-term planning. Disney is able to make choices in regards to the future of Pixar characters with more certainty and commitment than Marvel, which they don’t own fully.
- If revenue or cost savings (ideally both) rise. Heinz buys Kraft foods, enhances supply side economies of scale.
- Apple buys Netflix and can bundle the app as a default on the phone. Removing small barriers or setting defaults leads to big changes.
In the same podcast the pair share what makes mergers fail to work.
- When they are empire building.
- When they become huge distractions.
- Synergies fail to materialize. Like AOL Time Warner.
- Redundancy of moats. Tesla and Apple both make great products, but the chief asset of each is brand.
- Cash for the sake of cash. Shark Tank sharks often say that they could just write a check, but for it to be worth their time they want something they can make a difference in.
- Pay too much. Thompson guesses Apple would have to pay a 20% premium to buy Netflix. “There’s no such thing as a good or bad idea regardless of price,” write Howard Marks.
Now, back to Harry’s Razor. Calacanis suggests they bundle with Tommy Johns, okay, but what else?
A quick Google search for “direct to consumer brands” led to a listicle of listicles. There are a lot of them. There are plenty of opportunities, so what should Harry’s do?
“I never allow myself to have an opinion on anything that I don’t know the other side’s argument better than they do.”
— Charlie Munger
The case for Harry’s to merge:
Katz-Mayfield should merge with other D2C brands because it will allow them to sell more things to more people. A razor with your underwear, cologne samples with your socks, supplements with your coffee. Merge with the right brands and a marriage, you’ll do more together.
A merger would allow automatic enrollment to begin with less friction. On the Tommy Johns page I click a box that says to add a razor for $2. On the Harry’s page I click a box that says to add underwear.
A private market price could be less than a public premium.
The case for Harry’s not to merge:
Most of what Harry’s can get they can get from a partnership. They can offer the underwear, tie, sock, etc., either way. Partnerships also allow more room for expansion, Harry’s has moved on from razors to include balms and gels.
A merger does not help differentiate the company. Each of these D2C companies is small-ish, their chief asset is their brand. Much like a stadium sponsorship, if you get tied to a loser that’s a waste of your resources too.
Whether Harry’s — or any — of these companies survives and thrives will not be dependent on whether or not they merge. They will either sell something people want or they won’t.
Having a default stance to start from is very powerful. “The path to superior results,” wrote Seymour Schulich, “is to accept only the best ideas.” Schulich expanded on that saying that unless something is twice as good, don’t deviate.