Danny Wong — November 23, 2016 Follow @dannywong1190About a year before Michael Salguero and I were first introduced, Salguero inked a deal to buy the website CustomMade.com. That was in 2009.
And for a business that hadn’t yet launched, Salguero and his co-founder Seth Rosen committed to purchase CustomMade.com for a whopping $ 150,000. Without the full cash on-hand, Salguero and Rosen negotiated terms that allowed them to put a modest deposit towards the purchase while they scrambled to source funding from investors to finance the website acquisition and launch their business. Sure enough, they raised $ 400,000 in seed capital to start CustomMade, a marketplace where shoppers could connect with woodworkers to handcraft one-of-a-kind household items such as tables, desks, cabinets, and shelves.
CustomMade was one of many fledgling ecommerce startups looking to upend traditional retail and capitalize on what the industry believed to be consumers’ inherent need for individualization. In 2009, custom t-shirt company Spreadshirt earned approximately $ 30 million in revenue. NikeID sold $ 100 million worth of shoes that year too. And with the belief that CustomMade had brilliantly pioneered the future of furniture retail, investors from firms such as Google Ventures, Atlas Venture, First Round Capital, and NextView Ventures offered CustomMade $ 27 million over several rounds of funding.
However, the team behind CustomMade always knew that “raising money” was not synonymous with “success.”
The limitations of $ 27 million in funding
One of the major assets of the CustomMade.com acquisition was the website’s long history of dominating Google’s search engine rankings for keywords related to custom furniture, which the team harnessed and nurtured. “CustomMade’s growth strategy was driven almost exclusively through SEO. It was a killer domain that was initially focused only on custom woodworking and we expanded that into other crafts,” recalls Salguero. “By 2014 it ranked as the #1 search term for almost anything custom. There was a high volume of traffic and our efforts were centered around how we could convert those people into CustomMade customers.”
At one point, the domain generated one million visitors each month with three-fourths of that traffic coming purely through organic search. Despite all of those eyeballs, converting their audience into active — and paying — marketplace users was a challenge.
Among traditional ecommerce businesses, the sales conversion funnel is straightforward:
- Visit the online store
- Browse products
- Add desirable items to cart
- Checkout
With CustomMade though, the buying process was more cumbersome and less predictable:
- First, shoppers have to describe the exact item they want made (a step which can include creating your own 3D model)
- Second, you receive quotes from multiple makers (who you’ll have to personally vet)
- Finally, after selecting one craftsman to work with, you have to wait however long it takes for that person to fulfill the order (and that uncertainty alone can be detrimental to conversions)
Of course, with $ 27 million from investors who were expecting dramatic growth, the obvious action for CustomMade was to pour cash into potential solutions to its conversion problem. For the business to work, one of two things had to happen:
- CustomMade had to further streamline the beginning-to-end buying process so that shopping in the marketplace felt as easy as buying sneakers from Zappos OR
- CustomMade had to fundamentally change consumers’ behavior to want to completely design their products from scratch using sketches, 3D models and the help of skilled craftsman
But the business could never quite figure out how to do either.
By 2015, the company made the difficult decision to downsize, shedding nearly 20 of its 30 staffers. Around that same time, Salguero transitioned out of his day-to-day role at CustomMade with ambitions to build a completely different ecommerce business. This time, with his own money, on his own terms, and in a lean and bootstrapped manner to avoid the typical trappings of venture capital.
A calculated bet on the subscription-based business model
One of the toughest, yet most important, metrics to grow among traditional ecommerce companies is customer lifetime value (CLV). In transactional commerce, store owners have to make it their mission to persistently follow-up with customers to encourage repeat purchases. This is even true when shoppers know they need a certain product; however, it is common that buyers can’t find the time to place another order or they simply forget.
In an age where customers demand convenience, subscription-based businesses remove most of the friction that can deter repeat purchases. So, when Salguero decided he’d start a new company, he aimed to offer a product consumers wanted on a regular basis in order to generate consistent and recurring revenue. Traditional ecommerce companies assume a majority of their customers will only purchase their products once unless they are successful in hounding them every 30 days to reorder. By default though, subscription-based businesses get new customers to commit to monthly packages which means their average CLV is 12x higher than other ecommerce stores.
From this mindset, ButcherBox was born. Salguero envisioned a monthly delivery service that would provide customers with grass-fed beef, organic and pastured chicken, and heritage breed pork. This was partly driven by Salguero’s personal desire to gain easy and regular access to quality meat. When ButcherBox first launched in September 2015, Inc.’s Christine Langorio reported:
Last year, Michael Salguero bought a cow. A whole cow. A whole, dead cow.
He’d started with smaller meat purchases — a family friend from upstate New York had introduced him to buying shares of freshly butchered livestock — but one thing led to another, and soon enough the day came when he sat in his office in Cambridge, Massachusetts, staring at a few hundred pounds of beef, trying to figure out what to do with it all.
“I basically split it up like a drug dealer and sold shares to my friends,” he said. “They were ecstatic, and thought it was really good quality, but it was still almost impossible for everyone to store it all.” (Salguero, for his part, had bought a freestanding freezer.)
With that, the light bulb went on: Couldn’t this whole high-quality meat-sharing thing be made much easier?
ButcherBox’s subscription-style business follows the examples of popular brands like Blue Apron, a meal delivery service rumored to IPO at $ 3 billion next year, and Dollar Shave Club, a subscription service for men’s grooming products that was just acquired by Unilever for $ 1 billion. But rather than pursue venture capital the same way he had with CustomMade, Salguero has so far decided to grow independently. After speaking with Salguero about his new company, Xconomy reporter Gregory T. Huang wrote:
And it speaks to a key lesson he learned from his previous company: keep things tight and focused. At CustomMade, he says, “we raised a lot of money. At the time, we thought it was good, and we could turn the corner. But you start making decisions you wouldn’t otherwise.” He adds, “You end up doing so much stuff that’s not mission critical. We grew and got product-market fit, but not mass-market fit.”
So the goal with ButcherBox is to see if the team can get traction with the right product. They’re not looking for a mass market, just a dedicated one. And they’re not raising venture capital — at least, not yet.
And so far, the bet Salguero made on himself has paid off.
Kickstarting ButcherBox with $ 210,000 from customers
Before he would officially introduce ButcherBox to the world, Salguero first wanted to validate demand for his product. Therefore, he created a Kickstarter campaign with the modest goal of raising $ 25,000, a sum he believed would be just enough to finance early operations. To his surprise though, the project received $ 210,000 worth of pledges, exceeding his funding goal more than seven times over.
How did he do it?
Salguero’s promotion strategy for the business was threefold:
- “Prior to launching on Kickstarter we advertised on Facebook which helped drive email signups.” When ButcherBox’s Kickstarter campaign went live, Salguero already had a long list of interested customers who were ready to commit to the project. Additionally, because he had already tested different advertising copy and images, he had winning formulas for creative assets he could use for further paid promotion campaigns.
- “We also used LinkedIn, which allows you to scrub your contacts and we tapped our family and friends network to provide a base of support.” With enough early pledges, ButcherBox was highlighted as a trending project on Kickstarter. Then, ButcherBox’s popularity caught the eye of Kickstarter employees and was featured as a “Staff Pick,” which meant the campaign received favorable promotion across the Kickstarter platform and on the company’s newsletter to backers.
- “There were co-promotions we worked on with other companies in parallel spaces and influencers who drove interest from their networks which both proved successful and have been a valuable tool to this day.” Salguero knew that his team alone didn’t have the marketing manpower to make this crowdfunding campaign a breakout success. So, he leveraged the audience and influence others’ already had to drive targeted awareness to and interest in ButcherBox.
Now, ButcherBox is more than a year old and the business has continued to grow rapidly since its inaugural Kickstarter campaign. Salguero discloses that the company, which offers boxes starting at $ 129/month, has thousands of subscribers.
Best of all? “We’re profitable,” says Salguero.
Finding profitable and scalable marketing channels
Thinking back to his time at CustomMade, Salguero laments that he and his team were unable to solve the conversion funnel conundrum. To some extent, CustomMade users were paralyzed by the paradox of choice — when your purchase options are limitless, it can seem intimidating to decide on any one particular design. At ButcherBox though, the customer journey is a lot clearer, which means marketing the business is a lot simpler and far more scalable.
Also, in contrast to his experience at CustomMade, Salguero now has a far more constricted budget for marketing ButcherBox. “We do not pursue any marketing campaigns unless we know they will be profitable in month one,” explains Salguero. Instead of making a big splash with a major round of funding from investors and aggressive six- or seven-figure advertising campaigns, Salguero claims, “Now we’re trying to just quietly build a smart business.”
And one of ButcherBox’s biggest revenue drivers is its pay-for-performance affiliate program, in which it partners with category influencers — fitness, health and wellness, and cooking bloggers — to promote its product. With this arrangement, affiliates receive a commission based on customers they refer to ButcherBox and ButcherBox avoids any upfront costs, ensuring that every affiliate relationship is profitable.
As the company grows, Salguero anticipates partnerships with likeminded brands to be their next big marketing channel. The hope here is that perhaps one day a major brand like Equinox might order a box for each of its gym members. Or Nike might hand out flyers on ButcherBox’s behalf at its training events. Even a small endorsement from a large fitness- or health-related company would be a huge boost for the ButcherBox brand.
Two key takeaways from growing two very different ecommerce companies
As a product of the Boston tech scene, Salguero had dreamt of turning CustomMade into a startup unicorn (a rarified private company worth an excess of $ 1 billion). But after raising $ 27 million and living every new entrepreneur’s dream, he recognized that startup founders feel a lot of undue pressure to build a business that sets them — and their investors — up to have a massive exit (in other words, an acquisition or an initial public offering). Now, Salguero champions growing a company organically, at a rate that feels natural to both the entrepreneur and the brand. The chances are you’ll have more fun doing it this way and you’ll be better equipped to develop a sustainable and long-lasting business.
Also, after recognizing the relative ease at which he has grown ButcherBox, Salguero knows that success in ecommerce is only possible when built upon the foundation of a streamlined conversion funnel. Avoid, at all costs, convoluted purchasing processes that force customers to abandon any hopes they had of placing an order with you.
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