In previous posts, we’ve discussed when people decide to buy a pen, how retailers compete against each other, the sorts of strategies they can use, and the range of products that they can offer. In today’s post, we’re going to bring that all together and have a look at the business of Goulet Pens, one of the most prominent retailers in the market. This will be the first in a semi-regular series looking at some retailers and their businesses.

Our focus will be on the external factors of the business: their strategy and position, their customers, their marketing; this is not to dismiss the internal factors (they are, of course, critical) but the reality is that we are outside observers, and understanding the internal factors of a business – even if you’re inside – can be challenging. It’s also important to note that I haven’t had any contact with the company and this is purely my perspective: I could have things totally wrong. So take it with a grain of salt.

Some of you will have read my earlier post on the role of reviewers; if you haven’t already, the key point is that online buyers have to estimate how much they think they’ll like the pens and then compare that estimate to the price of the pen. When uncertainty is high, people will shy away even from buying pens that seem to be a really good fit for them. I call this the information problem, and believe reviewers play an important role in improving the precision of those estimates, reducing uncertainty and facilitating transactions.

In my opinion, Goulet understand the information problem better than anyone and have built a business around solving it: the video reviews are engaging, informative, and fairly objective, so they’re perfect for helping buyers to understand if a product is right for them. They work to build a trusting relationship between Goulet and the audience, particularly with newcomers to the FP market, and then channels viewers through to the store.

This approach also naturally leads to their position in the market: specialising in products that fit into the lower two products tiers and providing a high-service approach. Producing a lot of video content and providing a high level of customer service also increases costs significantly: you need to spend time designing and producing videos, employ additional customer care staff, and ensure that packaging is done properly. Generally, those extra costs would mean higher retail prices for their products but the Goulet prices are generally competitive with other specialist FP retailers (albeit not with the zero-service retailers like Amazon and MassDrop). This tells us that the extra costs are being spread over a very large volume of product (or that the business is making a substantial loss, which I doubt very much).

So this gives us a good picture of their business: high-service, high-volume, aimed at new and intermediate users. The business works because it’s built around the idea of trust; it’s something which is pretty clearly communicated to buyers through the videos and interactions and it’s no surprise to see it listed as one of their core values. Given that level of trust, it’s also not surprising that the customer base is so passionate about the business.

The biggest question I have about their business is the decay rate in new customers – that is, how many new customers are still making purchases six months later? Or after a few years? This would tell us whether the business is built around new customers or repeat users, but exploring each scenario tells us something interesting.

If the decay rate is high, it means that a lot of customers are jumping into the hobby but quickly moving to retailers specialising in other tiers or that they are quickly getting bored of the hobby. This obviously presents something of a longevity challenge: if you constantly need to find new customers to keep the business going, eventually your costs will rise as you need to start advertising and working harder to attract new sales.

If the decay rate is low, it means Goulet has built a system where it doesn’t really depend on new customers and can focus on keeping its existing customers happy. This means you can grow the business by learning more about those customers, their likes and dislikes, and targeting them with products that suit their interests. The challenge in this scenario is that the business reaches a point where its customers are satiated and there is limited ability to grow beyond that point.

Personally, I couldn’t say which situation the business is in and I wonder if it’s understood internally. A lot of their videos are oriented towards making it easier for new users to get into pens, and their product line is definitely leaning towards those users, but they don’t appear to engage in any marketing beyond content marketing. On the other hand, there are some Goulet-only specials but there aren’t really loyalty programs or the higher-tier product lines to keep customers involved as they grow beyond the $200 price point. I suspect that Goulet has gone through a period of rapid growth and is focussed on getting the business operations right, and will start to address these questions when growth peaks and starts to slow down.

As for competition, my feeling is that Goulet’s principal competitor is JetPens. Both retailers focus on attracting new users and locking them in as repeat business; Goulet offers a higher level of service while JetPens offers slightly cheaper prices (and noticeably cheaper shipping rates). While there is overlap between Goulet and JetPens and the higher-tier retailers (such as Anderson Pens, Chatterley Luxuries, Fahrney’s Pens, Fountain Pen Hospital, Pen Chalet, and Vanness Pens), the actual amount of competition between the two groups is probably quite limited. Were the two lower-tier retailers to close down, I doubt the others would find themselves selling many more pens.

I am also curious about the mix of domestic to international customers. If Goulet the proportion of foreign customers is quite high, Goulet is probably about to face the most challenging period in their business: the business was founded in late 2008, right as the US Federal Reserve began to introduce its policy of quantitative easing (QE). One of the effects is that the USD decreased in value and made it more affordable for foreigners to buy from US businesses. As this policy has now ended, the USD has been appreciating for the last few months.

The most dramatic effect of this (so far) is how expensive US exports to Canada have become - probably the second-biggest market for Goulet after the US. Adding to this is that the Europeans have now begun their own QE policy, which is going to push down the value of the Euro and make the USD appreciate even further. For Europeans (and Australians), buying from the US is getting more expensive every month. While the UK is not talking about QE, a weakening economy points to lower exchange rates (or, at the very least, no appreciation over the next few months).

For Goulet’s international customers, they will be facing higher prices and be making fewer purchases in the next few years than the previous few. This reduces the volume of sales that Goulet will enjoy, and their ability to spread those extra service costs out. On the other side of the equation, a stronger USD will mean products manufactured overseas become cheaper and prices may fall.

Unfortunately, this is the type of challenge that is very difficult for business managers to face: it is unpredictable, beyond their control, and often the only option is reactionary. If international buyers are a small part of the business, Goulet might absorb the impact; if the impact is too large to absorb, that will mean higher prices, fewer staff (and reduced service quality), or both.

Looking longer-term, the other challenge on the horizon is an exit strategy for the founders. Founding and running a business is an exhausting process and many founders depart successful ventures after 5-10 years. The Goulets are in that period now but will find it difficult to leave, given how much of their identities, values and even name are integrated into the business. It’s difficult to imagine someone else running the business and maintaining the same level of trust enjoyed by the Goulets; the most likely option right now is either an employee buy-out or a long period of co-ownership where the torch is passed.

To sum up, we can see that the Goulets have built a business around a genuine opening in the market and filled it masterfully. They have inspired trust and devotion by many customers and grown to dominate their section of the market. The business is not without challenges ahead and it will be interesting to see what direction it takes over the next few years.

NB: This post was edited after publication to include a discussion about the Canadian market.