The Economics of Direct to Consumer Selling (Hint: Manufacturing Ingenuity Required)
More than a year ago, Jered Goodyear was introduced to the president of a 70-year-old mattress company. The two had a mutual acquaintance, but came from vastly different backgrounds.
See, Jered had spent the better part of a decade in online marketing and ecommerce strategy. He’d founded a couple of his own ventures, consulted with a few scaling businesses and had most recently directed and led the North American online growth strategy for Epson, one of the world’s largest consumer electronics brands which pulls in upward of $3 billion in annual revenue.
The two decided to have an exploratory conversation about the potential future of Diamond Mattress –– a four-generation old company still selling solely B2B. As it turns out, the duo quickly found they shared a common way of thinking.
Their next steps were clear. Mattresses were no longer being sold only through brick-and-mortar locations. Consumers were flocking in droves to online purchases of all kinds –– and even mattresses found loyal fans there.
It was time for Diamond Mattress to go direct –– and Jered knew exactly how to differentiate it from the competition. He put in his two weeks and started full time developing a new brand: Hyphen.
He was back in the startup arena, this time armed and ready with the manufacturing expertise of an industry-veteran retailer to bring American-made mattresses to consumers’ doorsteps.
But first, he needed to create a product crafted specifically for the online buyer. In other words, he needed to figure out how to manufacture a quality mattress at a consumer-friendly price point –– shipping included.
A New Era for American Manufacturing
In the early 00s, in the throes of the Great Recession, American manufacturing experienced a mass exodus of sorts. The raw cost of producing goods in the U.S. rose, while sales flatlined or sunk altogether.
This was no unpatriotic departure. It was business strategy. Find cheaper labor to produce quality at parity to your stateside manufacturer, cut the costs for the end consumer and hope the cheaper price keeps your business afloat.
It was outsource or get out.
It was during this time, too, brands such as Warby Parker began to oust traditional retailers like Luxottica from their stronghold market. Lower cost, better customer experience –– and all of it done by going direct to consumer and avoiding any middlemen.
Some have called this shift in business strategy a “pricing race to the bottom,” and certainly those brands which have found a way to lower costs while maintaining margins have benefitted. Amazon is more profitable now than ever –– and consumers have grown accustomed to price comparisons and free shipping offers.
There is no going back. Price is a war in all retail segments –– and cutting costs while maintaining quality is the ammunition.
But American manufacturing is experiencing a grassroots revival.
Sure, Asian countries can produce goods at a scale simply not legal by worker rights standards back in the U.S. And sure, consumers aren’t much budging on their demand for lower cost goods.
There have certainly been efforts to educate consumers on the long-term effects of low cost goods produced at scale (human rights violations half a world away, increased amounts of garbage contributing to ocean pollution and global warming, so on and so forth). Conscious consumerism is on-going and gaining momentum.
But there’s innovation happening on the homefront, too. New technologies are leading to new ways of thinking. Call it, if you will, the second wave of the Industrial Revolution. You read about it every day. You already own some of the products. You at least recognize the leading brands.
Manufacturing in the U.S. is no longer your grandfather’s assembly line job. Rather, American warehouses are paving the way toward the future of IoT, robotics and drones.
See, there’s one thing native to the U.S. that can outpace all else: homegrown ingenuity. And Jered has plenty of it.
The Nuts and Bolts of Going Direct
Most startups begin with investors, or are bootstrapped by the founders. Then, the company begins a process of product market fit. Usually, the goal is to go live –– and then iterate on the product as feedback comes in.
Jered didn’t see that being the path for his new venture.
By partnering with Diamond Matress, an established manufacturer in the space, he nabbed himself not only credibility –– but a warehouse, a production facility and all necessary industry connections.
He also had cash flow and an audience.
With competitors already launched and gaining momentum, access to surveying and market research was critical.
“We really did a lot of development work. It took a long time,” said Jered. “ We wanted to throw out all preconceived notions and just start from scratch. So we initially started out doing surveys to find out what people care about when they’re buying a mattress. What are their biggest concerns? What product features would be most compelling for them?”
A few things popped up –– much of which was passed on to the parent manufacturing company as the team built out mattress prototypes for testing. Topping the list of consumer concerns or things people look for when buying a mattress were:
- A cooling factor
- Antimicrobial protection
- Ease of movement, or what Jered calls ‘feeling stuck’: “There’s also the adult bedroom activities. You can read about it online. They’ll talk about it in a completely blunt fashion –– memory foam beds aren’t as good for sex as a spring bed.”
Jered wanted Hyphen’s new mattress –– which would likely be foam –– to address each of these concerns. So, more than 1,000 mattress prototypes were created –– many of which required a full night’s sleep in order to provide valuable feedback on the design.
“Some you could tell very quickly, ‘all right this isn’t working.’ Others require actual ‘let me sleep in this’ testing,’” says Jered.
In all, Jered’s new product solved for all four consumer-identified points.
Solving for Firmness
“We held focus groups and looked at not only the ‘How did it feel when you first laid on it?’ factor because there’s all these factors at play. There’s pressure relief, firmness and how quickly the bed recovers its shape.
You go to a traditional retail store and pretty much every mattress in there has a firm, medium or plush option. It’s true that everybody has their own preference, but the vast majority of people congregate in the middle of that spectrum.”
Solving for Temperature
“From a temperature regulation aspect, one of the things we worked really hard on was to try to make sure that the bed did not sleep hot. That is a more common complaint of foam beds.
Our top layer is both ventilated and open cell –– which is fairly standard. Then [the mattress] is also infused with copper, which is hyper-conductive and helps draw heat away from the body.
Our mattress also leverages what’s called dual point phase change technology. Basically what that means is that there are molecules that are in the foam that change structure in response to temperature. They are programmed, if you will, to absorb or relieve heat based upon bookended temperature points to help basically regulate body temperature throughout the night.”
Solving for antimicrobial protection
“The market research helped inform some of the product features as well. One of those is the anti-microbial protection. I was surprised at how important that type of thing was to the consumer.
I’m sure that the notion of anything in your bed kind of creeps people out, so the more we can do to just protect against that the better. Our mattresses have two layers of antimicrobial protection –– one in the foam and one in the mattress cover itself.”
Solving for the –– ahem –– adult bedroom activity complains
“We have three layers of foam in our mattress. Two of them are pre-existing foam formulations that we were able to use, and we chose them for specific properties.
Then, we combined those with our Hyphen foam, which is a custom foam formulation. With that we were able to get both the right amount of bounce and the right amount of responsiveness in the foam. The bounce is important.”
But end product wasn’t the only need Jered was solving for. Sure, by manufacturing the bed himself, he could get costs down and build a product that solved for multiple foam mattress pain points.
But now, he needed to figure out how the heck to get a 47-90 pound mattress to a consumer without breaking the bank.
The Effects of Dimensional Weight Shipping
Mattresses have been sold wholesale for centuries for a couple reasons: 1) the internet is still a relatively new invention and 2) because shipping large, heavy items is insanely expensive and the margins just don’t add up.
But with consumer behavior shifting so predominantly to online buying, it’s essential that brands offer a digital purchasing experience. This is even more true if a brand wants to earn the loyalty and buying dollars of generations Y and Z.
Plus, today’s shopping environment relies heavily on customer experience. Forcing a customer to go to a brick-and-mortar mattress shop, lay on multiple beds others have already laid on, and then transport their mattress to their home (and pay for all of it) is just a terrible CX.
The only thing that was standing between a positive mattress shopping experience was weight and size.
Now, like many brands did in the early 2000s, Hyphen could have chosen to offset costs by outsourcing the bed production. Cheaper worker wages and material would increase margins –– and shipping, while expensive, may have been more affordable.
But Diamond Mattress is dedicated to American manufacturing –– and Jered wanted hands-on quality control.
No, the solution wasn’t to outsource. It was to innovate.
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First, a note on weight.
Gravity is a defining principle of life on earth, and in our universe –– at least as far as physics is concerned. Weight isn’t an element we can well control or change. This is why shipping is so heavily based on weight.
Dimensional weight pricing, introduced by shipping companies in 2015, however, created a fundamental shift in how businesses thought about shipping goods and products.
Now, no longer did only weight matter. Size had always been a factor –– but much less so –– and as such, brands shipping large, but light items (a canvas, for example) weren’t paying much for shipping at all. But, large boxes take up room, so shipping companies understandably implemented dimensional weight pricing, where the price of shipping an item is based on a combination calculation of box size and actual weight.
Now, a note on size.
You can’t alter the weight of a product, but you can change its size. To solve for shipping expenses, a mattress couldn’t game the scale, but it could perform a shrinking function.
In terms of dimensional weight pricing, this is good news. The less space you take up, even if heavy, the less price you pay. Smaller box, smaller price tag.
Meet Hyphen’s Compressor
I had a lot of questions to ask Jered when it came to his “bed-in-a-box” model. See, if you order a Hyphen mattress, it will come to your doorstep in a tall, thin box. When you open that box, your queen mattress will be inside, rolled up like a sardine.
Hyphen is by no means the first to use this technology –– but Jered’s team is definitely one of the few. So, the question begged to be asked: “How?”
“It’s really pretty interesting,” Jered tells me, edge of my seat. “The technology to compress and roll a mattress has actually been around for 20 years. We’re not inventing anything new there and we’re not the first one to the bed-in-the-box market either. But, the machinery –– it takes special equipment to do it –– it’s gotten better and better over time.
There’s a lot of nuance to understanding how much can you compress a bed. Do you need to adjust the sizes that you’re cutting in order to get a specific end product sizing, post-compression? What types of foam –– what densities of foam –– work well with compression? Which don’t?
It takes a minute or two to complete each mattress. I like to describe it as this: I have a food saver at home. We’ll buy stuff from Costco and we’ll vacuum seal it. It reminds me of almost a giant food saver in that the mattress goes in and it sort of gets wrapped. It goes into a sheet of clear plastic. Then the bed is compressed both laterally and vertically and then when it’s in that compressed state, it’s not 100% sealed but it’s 98% sealed together and then it gets rolled. When it gets rolled, it gets wrapped with another piece of plastic on top of it to hold it all together.”
This is American manufacturing ingenuity at play. There’s only one remaining need: a quality product that will actually spring back to its intended use form.
“It’s pretty cool to see the first time, especially with a mattress like ours. These machines come in varied quality and they’ll compress everything. Cheap China-made beds just do not recover the same way as ours.”
In this arena, Jered has done his homework. Hyphen mattresses can be compressed for several months and still completely recover. Ones sent to customers, though, have only been compressed for up to two weeks. He credits this recovery ability to the high-quality foam.
“People are always bringing up this notion of, ‘Can a premium mattress really come in a box,’” Jered explains. “It’s counter-intuitive, but the compression process makes the mattress wear better. All foam has an initial pop to it and then certain things will change. When you buy a mattress that’s uncompressed, that’s going to happen in your home over time and with use.
When you buy something like Hyphen, that change happens during compression. By the time you get it home, it changes very, very little.
That’s what the testing has shown in comparison to industry standard and other averages from other beds. Ours wears much better post-purchase and we’ve designed the beds in terms of how they feel and everything else for after compression.
Any of the final testing we did in product development, we’d always compress the beds before they were tried so that it was a real product feel. It’s a true post-purchase experience.”
The Benefits of Being Second to Market
Like Jered said, Hyphen isn’t the first company to produce a bed-in-a-box. Hyphen isn’t even the first to produce a quality bed-in-the-box. What Hyphen is the first to do, though, is produce an all American made bed and a product that truly removes the middleman. This helps Hyphen to even further lower the price for a quality bed.
“We’re able to cut out layers and not just in comparison to retail. Most of our competitors don’t make their own mattress. We own our own factory and make our own mattress. The majority do not. The majority, despite talking about cutting out middlemen and saving you costs –– which they do to an extent, still outsource their manufacturer. We can bring an even greater level of value to the consumer by doing it ourselves, as well as a greater level of quality assurance.”
The proof is in the pudding here –– or the apple pie, or hotdog or whatever traditional food you first gravitate toward. You don’t have to reinvent the customer experience wheel to be successful when going direct to consumer. You just have to produce a great product and solve for the challenges facing this new era of commerce.
More and more wholesale brands will be going direct. Unilever just bought Dollar Shave Club for $1B –– one of the largest ever acquisitions of a direct to consumer brand by a traditional wholesaler. Turns out Procter and Gamble has been experimenting in the space as well with a laundry pod delivery service, Tide Wash Club. Cetaphil and Chapstick have both branched out beyond your local drug store and into independent websites all their own.
What does all of this mean for brands and retailers alike? Well, for one, that it’s imperative to be innovative and provide convenience as a shopping service in order to win hearts and wallets today. It also means that the pricing race to the bottom is over. This is a pricing fairly game where intelligently cutting costs while providing quality will make you the winner.
Manufacturing ingenuity and technology is the solution. And you don’t have to be first to market, either. You just have to be bold enough to invest.
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