The Real Reason Why Dollar Shave Club Won
This New York Times' article on how companies should fear the success of Dollar Shave Club is right but for the wrong reasons.
Dollar Shave Club is a recent nothing-to-unicorn success story. It made its brand equity through a novel business strategy and also, quirky viral videos. In fact, if you have ever had an executive ask you to make a viral video for your company, it's likely he or she was inspired by this video.
The premise of the article, as far as I can tell, is P&G (which owns Gillette) and Unilever (Dollar Shave Club's ultimate acquirer) were bested by technology advancements that allow for an upstart to beat them at their own game. That might be true if Dollar Shave Club was playing their game.
The NYT posited that Dollar Shave Club and its ilk represent a grave danger to Established Brands X and Y because it is cheaper to run many facets of an organization today (free advertising through YouTube, cheap hosting through Amazon Web Services, and rented infrastructure and distribution).
This part is nothing new. It's not like supermarkets were making their own sodas. Monolithic companies such as the ones supposed in peril from startups have long subcontracted the actual building of products to developing nations.
What Dollar Shave Club did that does threaten established companies is to turn the business model on its head. Dollar Shave Club would die upon impact if it tried to establish a new, cheaper brand of razors that was sold on the same aisle right next to Gillette and other well known brands.
Instead, it identified a specific pain point. Razors are not cheap and manufacturers unveil new functionality from time to time, so there's a emotional difficulty in buying a lot at once. But razors are something you will always eventually need. So Dollar Shave Club's main premise was that it could stop you from running out of razors by sending you a new one a month. It made blade purchasing a mail order activity.
In essence, it created a new business model, one that the established companies were not able or willing to recreate until it was too late. Gillette Shave Club launched in 2015, three years after the above video went viral.
When Gillette Shave Club launched, Motley Fool wrote this:
Gillette is fighting a battle it has already lost. DSC is no longer a company that lives or dies based on viral videos and guerrilla marketing. It's a growing player which runs actual television commercials that are rapidly increasing its visibility.
Dollar Shave Club always wisely invested in customer retention, hiring Retention Science to help them in that regard. A viral video that brings in customers isn't worth much if they all bleed away.
The reality is companies' biggest threat to themselves is their inability to make as quick and dramatic decisions and pivots as upstarts. That is what happened here. If Gillette or Schick or any other established player quickly launched a competing monthly service, we might be writing a different story here. Does this sound familiar? It should as it's the premise of one of the most popular business books of all time: The Innovator's Dilemma.
Companies have a very vested interest in keeping their operations as uniform and steady as possible. Because change is expensive, more so the bigger you are, and companies are often judged by quarterly performance. Also, any new marketplace or proposition threatens to eat into their core business. This existential threat is more of an issue than startups having cheaper operational costs. If established businesses want to thrive, that's what they need to focus on.