What went wrong with Casper

One of the well-known names in DTC was once lauded as the “Nike of sleep” and the unicorn of the sleep economy.

Raised over $350 million before going public before its IPO in 2020 (at $14.50 per share), just to be bought back private after only 2 years when the share price was slashed to just $3.55.

What went wrong?

As simple as Scott Galloway put it “it has no business being public”

For years companies like Casper were able to raise substantial amounts of money by focusing on hypergrowth in hopes to achieve profitability later.

However, the more saturated the market has become the harder it got to be able to convince the markets that growth at any cost is justified.

At the time of filing for an IPO

Casper generated $312.3 million in revenue over the 9 months preceding the filing

Of which DTC sales were accounting for 83% of total

The average DTC order value (AOV) was $710 and $820 for retail

And

Casper was losing $157 for every mattress it sold

Yet, in its S-1 prospectus

Marketing is mentioned 170 times
Brand Awareness 23 times
Customer Acquisition Costs (CAC) 0 times.

What we know is

From 2016 to September 2019 they spent $422.8 million on marketing

That resulted in them acquiring 1.4 million customers

Back-of-the-envelope math and we have a CAC of $302

Now, they say that 16% of the customers repurchased at least once over a period of time. This is quite expected as people change mattresses every 9-10 years.

But that gives us CAC vs. LTV of only 1.4 where the industry expects it to be at least 3.

Now, coming back to unit economics:

AOV $710
Repurchase rate per customer 1.16
The average revenue per user (ARPU) is $824
COGS $367 (50.7% gross margins over last 3 months)
CAC $302

=

Profit Contribution (PC3) $155

This is what was left to run other aspects of the business including general and administrative expenses, expansion costs, sales, and marketing expenses (not directly related to advertising and customer acquisition)

So, in order to break even Casper could have reduced marketing expenses and/or increased marketing efficiency.

But it seems that neither has been done.

It’s been mentioned that Caper primarily grew via ads (e.g., Facebook, Google, Twitter, YouTube), paid influencers, affiliate programs, and channel partners.

A risky tactic - for non-frequent products such as mattresses with good PMF you would expect for every user acquired to receive at least 0.3-1 additional user via referrals and word of mouth.

And this is how product-market fit for infrequent products should look like.

Clearly, Casper had strong PMF but had likely been spending on users who should have been acquired organically or through the referral program.

Moreover,

As confirmed by the numbers in the prospectus brand awareness was of much higher priority for Casper than CAC and profitability.

The below google search strategy shows us they went after all traffic possible regardless of intent and bid against themselves increasing cost per click which clearly contributed to the CAC increase.

This SERP gymnastic could have played out well if the main KPI was users or DAU/MAU type of metrics but when we talk about CAC or profitability we have to justify every click we spend budget on with revenue it brings in.

Not to mention, they lead users to 3rd party retail partners who charged them fees with every sale so the costs would go higher than the advertising spent.

The same goes for extensive brand campaigns on social media leading traffic to news outlets.

Even their famous SEO strategy was built on the assumption that everyone who sleeps is their customer implying unlimited TAM and infinite growth.

Surely attractive but quite an overreach.

Yes, you can drive a lot of traffic by educating people about the importance of sleep and targeting queries such as “what to do when you can’t sleep” but these audiences are more suitable for sleep aid supplements stores rather than a mattress company.

You can argue that these are long-term investments but if you are spending your marketing budget NOW or someone who maybe convert in 7 years investors will not buy it.

Casper seemed to have an exciting referral program and probably their focus on the customer experience translated into a great WOM spread

But it is also likely they were targeting each customer via multiple channels increasing overall spend on each customer without a clear understanding of what actually drove the purchase.