Casper, Poster-Child of DTC Death

19 marketing insights from the Casper S-1 filing

Casper revolutionized the mattress industry in just five short years, and rapidly acquired 1.5 million customers that love their brand.

They’ve built a business on the premise of transparency and sophisticated branding in an industry that is known to trick and cheat its customers.

The premise of the direct-to-consumer business model sounds great in theory:

Make a quality product, cut out the middleman, and sell it from a sleek website at a lower price.

Problem is…

… In theory, theory and practice are the same. In practice, they are not.

While the premise is incredible for consumers (awesome product, great price), it’s absolutely horrible for their investors and business model.

(Also, you’ll learn in a second that Casper is neither direct-to-consumer or e-commerce).

First, for the record: I think we can all agree that it’s damn impressive to build a $400,000,000 revenue (2019 prediction) consumer brand that attracts 1.5 million customers in just a few short years – with a 31% aided awareness, 80% positive brand sentiment and 60 in net promoter score. Very few people can (and have historically) been able to pull that off.

But… the recent Casper S-1 filing (preparing the company to go public), tells us the second half of that story: Casper is losing $157, on average, for each mattress that they sell.

That’s a deeply troubling premise. When Casper first launched their company, they entered the market with a unique positioning:

Make it easy to buy a mattress online (no cost for retail space) No retail partners (no markup) Rely on word of mouth to drive organic growth rather than traditional advertising. Use the money they save from 1+2+3 to offer a high-quality product at a low price. Finally, for the lack of a better term: Be cool. And just slightly different. Don’t talk like the other players in your market. Create better content, association, storytelling, customer service, and generous guarantees.

This ☝is an awesome playbook.

Hundreds of direct to consumer brands have built rapidly growing brands, that consumers love, with the same formula.

Venture Capital loves this too. They love disruption. The problem is– they’re not only disrupting the industry itself… but the fundamentals of running an actual business.

See‚ there’s something else that Venture Capital loves more than anything else: Hockey-stick growth. Growth at all costs, screw short-term profits.

This does, inevitably, force direct-to-consumer brands like Casper into a different kind of flywheel:

Word of mouth is great, but we’ll attract customers even faster if we advertise! Let’s expand to new sales channels, like traditional retail. And… let’s find partners! Target, Amazon, Costco!

Fast-forward… and the DTC brand now operates 60 stores, retail partners and has spent more than $400,000,000 on advertising.

How’s that then different from a traditional mattress company?

There’s a huge difference:

See– Casper has never been profitable.

And they probably never will.

A wakeup call( 😴), and an important lesson, for both direct-to-consumer brands, entrepreneurs and investors that look up to companies like Casper.

A treasure-trove of insights

My favorite part of any company filing to going public is the second they open up their books and show the world what their entire business model looks like.

An absolute treasure-trove of insights.

The Casper S-1 filing is a 300+ page beast, and I spent the better half of the weekend digging into their financials and metrics (How ironic that a mattress company kept me up all night.)

Verdict? They’re screwed.

This is not a technology company (lol, say hi to WeWork for me.)

Or a “sleep company” (wtf does that even mean? Got that one from “camera company” snap didn’t you?)

Casper is neither a “direct-to-consumer” brand or even an e-commerce business.

This is a mattress company. With fancy branding, poor unit economics… and a marketing team with deep pockets.

Granted, I’m a marketer, not a financial analyst. And… I’m getting ahead of myself.

To fully understand the financials of this company, you need to understand consumer marketing. Casper is a company that lives and dies by its ability to succeed with their marketing. This isn’t a secret… in fact, the word marketing is mentioned in their S-1 document a full 170 times (Brand is mentioned 201 times.).

And hey — I’m not writing this to hate on Casper. I’ve bought several of their products, I’m just never buying their stock.

I’ve uncovered a total of 19 insights from the Casper S-1 documents that can be extremely valuable if you’re an entrepreneur, marketer, and business operator – especially if you’re working for, or building, a direct-to-consumer brand.

Enjoy! 👇

19 marketing insights from the Casper S-1 filing.

Financials and math based on reported financials from Jan-Sep 2019.

1. Casper is not a “direct-to-consumer” business.

Their fastest-growing sales channel is third-party retail, up +74% year-over-year, and now accounts for 17% of their overall revenue. Their direct-to-consumer sales revenue grew by only +20% over the same period.

The total reported revenue for the 9 month period was $312 million, or around $35 million per month, i.e. $420,000,000 for the entire year.

2. Casper is not a technology company or even an e-commerce business.

While not directly disclosed in their S-1 filing (they’ve obscured how much of their revenue is from online vs. their stores), the split is likely around 35% retail and 65% online. Rather, Casper is a hybrid e-commerce/retail business (like most retailers in 2020).

They do pretty well in retail ($1,600 in sales per sq ft per year) and plan to open a total of 200 stores in the next few years.

3. The average order for Casper is $754 ($710 for e-commerce, and $820 for retail).

The difference is significant, building on the previous point; that Casper is more of a retail business than e-commerce or a “technology company”.

4. Hundreds of thousands of customers.

Based on the above, we conclude that Casper generated a total of 413,000 orders in the first nine months of 2019, or 343,000 orders through their direct-to-consumer channels ($258,600,000/$754).

5. During the same time, they spent a total of $104,687,000 on direct advertising.

I’d assume that all of this was to drive traffic to their own stores and website (rather than their retail partners) — which translates to a $305 in acquisition costs per sale. We’ll return to this later.

6. Mo’ money, mo’ problems.

Because of the rapid expansion of their retail stores, it’s a bit tricky to make an apples-to-apples comparison of 2018/2019, but they managed to increase average order value (up roughly +8% year over year) while increasing their advertising spend by 23.0% and increasing the revenue in their direct-to-consumer channels by +20%.

Conclusion: Each customer spent more money, but they also spent more money to get those customers through the door.

7. 20% of direct-to-consumer orders in 2019 came from repeat buyers.

Building on the previous conclusion: Casper increased their average customer acquisition cost even though they increased their retention rate.

Refined conclusion: Their customer acquisition costs (to acquire a first-time customer) have increased EVEN more than it first seems. A.K.A: Why increase your advertising spend to acquire customers if they return by themselves?

8. We’ll have to wait 10 years to see if consumers come back.

According to several mattress industry reports, a “residential user” (i.e. a consumer) change their mattresses every 9–10 years (It’s 5–6 years in the hospitality industry). I’ll return to this point, but that would mean that Casper is yet to complete a full cycle (their first customers are from 2015). With this in mind, it’s unlikely (and highly speculative) to assume the average order value of a repeat customer. Okay… moving on…

9. Gross profit per sale is $377, a 50% gross margin.

This is up from 44% in the same previous period, which is a notable improvement for Casper's bottom line.

10. A marketing team with deep pockets.

Based on all previous numbers, the math breaks down as follows: The marketing team at Casper invests $305 to acquire a customer that spends $754.

It costs $377 to manufacture the products they sell, so they’re left with $377. Deduct $305, and Casper have $72 left to run the other aspects of their business.

This would be pretty good if the marketing team was operating in isolation, but they’re not. (side note: One could argue that Casper is not a mattress company, but a marketing agency: perhaps they should pivot and just help VC-funded DTC brands with their marketing?).

11. On an aggregated level (including their retail partners), the math comes down to an average acquisition cost of $253.

But remember, they have to share revenue with their retail partners (exact details not disclosed, but noted in the S-1 that financials are less favorable).

12. So, Casper spends $104 million on advertising to generate $312 million in sales with a 50% margin. They’re now left with $51,313,000 to cover the costs of running their business.

Let’s look at the other costs. There’s an additional $9.3 million in Sales & Marketing costs (i.e. not direct advertising spend) and another $106 million in general & administrative costs.

Congrats! You’re running a venture capital-funded business that generates a loss of -$65,000,000 (over a 9 month). Or, phrased differently: For each mattress you sell, you lose $157.

13. This previous point is what I dislike about venture capital-funded consumer products that “disrupt” traditional industries.

They’re not sustainable. They only thing they’ve disrupted is how to run a company (where it’s perfectly fine to lose $157 to acquire a customer that MIGHT return to buy a second high-ticket product in … 10 years from now!).

OK, *end of rant*…

14. In order for Casper to break even, they could to cut their advertising spend in half (or double its efficiency).

They’ll tell you this in their S-1 (not that they’ll cut it in half, but that they’ll be more efficient with their marketing spend), but this has not proven to be true in the short history of their business. In fact, it’s the opposite.

They’ve increased their advertising spend more than they’ve increased their revenue.

Secondly. Anyone with skin in the game will confirm that digital advertising will get MORE expensive in the next few years. Trust me, or ask anyone who spends money on Google, Facebook or influencer marketing (all channels important to Casper).

My bet — The cost to acquire a customer for Casper will INCREASE over time.

That’s a huge liability: They spend almost as much money on advertising as manufacturing their mattresses. They spend more money on advertising than all their General & Administrative costs. A +20% increase in advertising rates on Facebook/Google and they’re hit HARD.

Casper also relies on referral traffic from websites like sleepopolis.com, SleepAdvisor.org, verywellhealth.com, mattressfirm.com, mattressclarity.com, myslumberyard.com and sleephelp.org.

If any of their direct competitors would acquire just those seven websites, Casper will, as they say, shit the bed and have to increase their advertising spend in other, potentially more expensive, channels.

15. The other thing Casper can do is increase their average order value (assuming they sell products with a 50% gross margin), by another $314, or +40%.

Their average order value was $495 in 2017, $700 in 2018, and $754 in 2019.

It seems like a stretch that they’d be able to go from $754 to $1,068 without any additional investment in marketing or operations. Remember — this all assumes that they maintain their existing operating costs and nothing else happens to their business.

16. Third, they can increase their gross margins.

It seems unlike, impossible even, to lower the cost from $377 to $220. If they could, they would. Again, this would have to happen without any additional costs. But, it’s certainly a possibility (with low probability in the short term). On the other side of that same coin, they could simply increase their prices. But, that would potentially be at the cost of reduced conversion rates.

17. They could fire half of their staff, give or take. Sounds harsh, but that’s the $106M in General & Administrative cost.

A total of 829 full-time and part-time staff. 597 of which are employed full-time. It’s unlikely to happen in the near-time though, given that Casper is currently hiring for around 145 roles across retail and corporate.

It’s also noteworthy that a majority of their full-time employees work with sales, operations, and marketing, followed by a long-tail across HR, accounting, finance, administration, design and product development (gotta love LinkedIn and their insights!).

18. Finally, a few other things that crossed my mind. First; brand. Casper will tell you (and they’d be right!) that they’ve built an incredible brand over the last five years.

The word ‘brand’ is mentioned over 200+ times in their S-1 filing. They have a 31% aided brand awareness, 80% positive brand sentiment and 60 in Net Promoter Score.

They’re selling a story to investors: No, we haven’t figured out how to run a profitable business, but hey, our customers love us! And, because they love us, they’ll come back and spend more money and buy more stuff from us.

This is brand equity at play: Casper is aiming to convince its (future) investors that their brand holds a lot of value. This could be true, but it’s a dangerous assumption. Here’s why:

Betting on brand loyalty is dangerous when the brand in question is just a few years old.

Those that bought a Casper mattress is 2016 will perceive the brand very differently in 2026 when it’s time to buy a new mattress.

Think Uber 2010 versus Uber 2020. The brand, experience, reputation, perception, association, word of mouth have changed radically.

Shit could happen. It always does. Look at Uber and the many things they’ve done to screw up their brand equity.

Customers that bought a Casper mattress in 2016 appreciated the fact that they were the underdog that challenged traditional retail stores.

They’d never seen anything like it, and between 2015–2018, Casper built its brand and storytelling on challenging those big bad mattress stores. It worked incredibly well.

To quote Melia Robinson, a writer for Business Insider, on June 9, 2015. “I just bought a bed from the ‘Warby Parker of mattresses’ and I will never buy one in stores again.”.

Fast-forward 3 years, to Aug 8 (2018), and the narrative has changed to “Casper to open 200 stores across the US”.

It does, indeed, seem like Melia Robinson will be buying her next mattress in a store :-)

Or, to quote Casper COO Neil Parikh in 2015: “Most of our customers still come from people telling one another…”. Fast-forward to 2020: “We have invested significantly in our sophisticated, integrated marketing strategy, with $422.8 million in total marketing expenditure from 2016 to September 30, 2019.”

Bottom line:

There’s no way to know if any of the 1.5 million customers that bought a Casper mattress between 2015–2019 will return (organically at that, without aggressive marketing), to buy a new mattress in 2025–2029 because of their affinity for the loyalty or affinity for the Casper brand.

Crazy talk. Fact is – there are HUNDREDS of brands (like Leesa, Tuft & Needle, Saatva, Nectar, Bear, Winkbed, Layla, helix, Brooklyn bedding and purple to mention a few) are fighting, aggressively, for those customers.

19. Second; sleep economy. Casper will tell you that they’ll expand their product line to increase average order value. “Mattresses are just the beginning.”, etc.

Classic investor play. Like when Uber says that they’ll eventually get rid of their drivers and operate all their vehicles autonomously. Or flying cars. Or expand to other verticals, like food delivery (only then, they can’t even deliver a frickin’ chicken tikka masala in time).

Nah… this is a mattress company.

Here’s their search traffic to casper.com:

Mattress, mattress, bed, pillow, and more mattress.

In order to expand into new categories, they’ll have to invest in R&D, sales, operations, marketing and several areas across their business that will increase their General & Administrative costs further. And if they end up, say, building an app that improves your sleep, they’re suddenly up against Sleep Cycle, Spotify, Calm and Headspace. Right back to square one.