Dissecting Startups- Clutter Pile 1: Financials
A broad-brushstroked, totally wrong and unspecific business model for Clutter
Here are some disclaimers for this post:
- I am not a financial expert, nor do I have any specific knowledge of Clutter’s financials
- To be honest, I’m not even that great at financials: it’s not my milieu, but something I was lucky to learn quickly is that no matter what job you have, the financials affect you, so you better have some vague sense of how they work
- I’m applying a very generic VC-funded, half-SaaS business model here. It likely is wrong in lots of places, but I think for the distance we are from Clutter, it’s appropriate
- I’m not delving into the messy world of cash flow
Basic Costs and Revenues
An exploration of Clutter’s Costs
- Warehouses- At first, I thought that Clutter rented excess storage unit space, cutting a below-market deal with storage unit companies who had free space. But actually, I found out that they operate warehouses, Costco-style. This allows them to run the storage with a more straight-forward inventory management solution.
- Fixed costs- rent, electricity, A/C and humidity control
- I can’t think of much here, unless they need to open a new warehouse, and certainly that will happen at a certain point of growth, but having so many customers storing so much stuff that you need to open a new warehouse is probably a good problem to have
- Delivery / Pickup for existing customers- customers can request to send more items to storage or to pull items out from storage
- Fixed costs- purchases of delivery vans / trucks
- Variable Costs- labor, gas, vehicle maintenance
- Pickup for new customers- first time customers get free pickup. This means up to 8 hours of labor from 2 movers to help disassemble furniture, pack boxes, and load—pretty much a full service move. For free. God bless America
- Variable Costs- labor, gas, vehicle maintenance
- Warehouse / labor pay- I’m breaking this category out separately because these employees are classified as part time hourly and are not offered benefits
- HQ / R&D pay- these are going to be your executives, your Product & Engineering folk, your Marketing and Direct Sales teams, and your CS employees, in decreasing order of pay and respect (more on this later)
- Marketing costs, or CAC (Customer Acquisition Cost)
An exploration of Clutter’s Revenues
- Monthly subscription, which varies by volume of what you want to store
- Inconvenience fees (these are incurred if you, say, schedule a pickup or delivery and miss it)
How San Francisco (technically, Clutter is in LA) startups tend to spend money
Aka a quick primer on CAC and LTV
In Direct to Consumer (D2C) companies (for example, Quip, Casper, or Great Jones), the main metric is CAC— the Customer Acquisition Cost. In the purest of sales company—a traveling salesman selling encyclopedias—your CAC is that salesperson’s salary (and commission). Scale up and throw in Facebook Ads and Google AdWords and your CAC is a little more complicated.
I don’t believe there are any GAAP rules for how you calculate CAC, but lots of companies take that as a reason not to think about it.
The counterbalance to CAC is LTV—Lifetime Value. This is how much revenue you expect to earn from a customer. This can be further broken down into Monthly (or Annual) Revenue x Average Customer Lifetime. You can increase LTV by increasing either the subscription price or retaining your customers for longer.
One very common dilemma is what to do if your retention is low: do you reduce the price to try and retain them for longer?
Weird dynamics of CAC and LTV in VC-backed startups
Something you hear a lot is the “rocketship” analogy. The idea here evokes a company that is growing like gangbusters: the engine is firing, $1 is being multiplied into $5 reliably, and the only thing to do is shovel in more dollar bills. In these industries (in recent memory: meal prep deliveries like Blue Apron; on-demand house cleaning like Homejoy; food delivery like Munchery), the goal is to race to dominant user share.
When you have multiple companies competing for users, you see skyrocketing CACs. This is enabled by easy VC money, which in turn is fueled by… optimism? Blind faith? Perhaps a hope that what the company is building is truly so valuable and world-changing that when the TRUE cost is unveiled without sign up discounts and subsidies, that consumers will still stick around. It’s the modern BMG “12 CDs For One”.
Some examples of inducements that cause CAC to balloon:
- DoorDash and UberEats give you $20—no $30!—no $40!—off your first order
- Blue Apron and Sun Basket give you 2 free months if you can refer a friend and they sign up (they get their own first-time discount too)
- Casper and Leesa take a slight wrinkle on this because customers don’t get explicit discounts, and the battlefield actually takes place on mattress review sites. In this case, affiliate ad costs contribute most to their CAC
Low effort services like food delivery are highly susceptible to this: their inducements are typically in the shape of a first order discount, and users will hop from service to service, cycling through discounts.
However, Clutter is a higher effort service: you’re not shopping around your belongings from service to service, so they’re relatively shielded from those competitive forces. But at the same time, I can’t imagine that $169 / month for a 10x10 space is the “true” price.
In the future, I’d bet that Clutter will grandfather old users and increase the rates for new cohorts. They do a pretty good job of not showing and committing to prices throughout the product.
Clutter looks about 50/50 on business model
Clutter has some stuff going for it:
- CAC is not likely to be outrageous or inflated like in other “Uber for X” industries
- They own their warehouses, and don’t have to pay X% to a landlord
On the other hand, there is a big pitfall:
- There are a LOT more opportunities for big costs than big revenue
In the next post, I want to try to put some numbers to this as best we can.