What is Dollar Shave Club’s business model and how does it differ from its com- petitors?

In the past decade, the disruptive influence of the Internet and the mobile platform has reshaped the music industry, newspapers and book publishing, software distribution, and data storage, just to name a few high-profile examples. Companies with business models that would have been inconceivable years ago are ruling the tech landscape today. And traditional retailers find themselves under threat from a host of unexpected startups. One of the more unexpected success stories is the rise of Dollar Shave Club from a small startup with a viral video touting low-cost razor blades to a $1 billion company in less than five years.

Modern entrepreneurs are on the hunt for markets where customers perceive unfair- ness or inefficiency, but can’t do much about it. The U.S. market for razor blades in 2012 was exactly that type of market. Gillette held a 72% market share for razor blades and used its near-monopoly power to great advantage, charging as much as 167% markups for razor blades. Originally, Gillette, Schick, and other razor manufacturers disrupted the business model in their industry by offering razors at low cost or even a loss, and then selling replacement blades at a significant markup, allowing them to make money indefinitely. Today, Dollar Shave Club is disrupting them.

Dollar Shave Club’s founder, Michael Dubin, shown below, saw an opportunity where others saw an impenetrable market controlled by an unstoppable juggernaut. Dubin’s road

 

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map for Dollar Shave Club was as follows: first, his company would use a subscription- based model that would allow customers to order razors and blades sent directly to their homes for as little as $1 a month before shipping, saving time and money while also undercutting Gillette to gain market share. The company’s razors are made inexpensively in South Korea, and distribution was originally done entirely in-house, but is now done by a third party from Kentucky. Cutting out retail outlets creates savings that the company can pass on to its customers. Next, his company needed to feel more like a lifestyle brand than a simple delivery service, building customer loyalty, helping the company grow by word-of-mouth, and illustrating its contrast with the bigger brands. Fast forward to 2017, and Gillette’s share of the U.S. razor market is down to 54%, a huge drop almost entirely at the hands of Dollar Shave Club and similar subscription- based companies like Harry’s. Dollar Shave Club has over three million subscribers, 190 employees, and is now the second largest shaving brand in the U.S., surpassing Schick, and holds over 50% of the online market for razor blades. In 2016, retailing giant Unilever purchased Dollar Shave Club for a whopping $1 billion. Dollar Shave Club has yet to turn a profit and is on track to earn $250 million in 2017, so that price tag seems steep at first, but traditional retailers like Unilever desperately need Dollar Shave Club’s expertise in online marketing and branding, and Dollar Shave Club’s sales have grown explosively in just a few years. It’s not a stretch to say that without “the video,” Dollar Shave Club might not be where it is today. In 2012, Dubin himself starred in an online advertisement introducing his company to the world. In it, Dubin strolls through one of his warehouses, cracking jokes while highlighting the selling points of his service, including the surprisingly high costs of razors at supermarkets and their many needless features. The video identifies celebrity endorsements as a primary culprit for the high costs of razors. In 2017, the video is nearing 25 million views and is frequently cited as an example of marketing done right. The video cost just $4,500 to produce, but generated 12,000 subscriptions in the hours immediately after it went live; and while its impact on the growth of the company is impossible to fully measure, it’s certainly paid for itself many times over. The video is emblematic of Dubin’s commitment right from the start to turn Dollar Shave Club into a brand that inspires loyalty and engagement in its customers. The company maintains an assortment of perks for its members, including an online men’s lifestyle magazine called MEL, a flyer with each delivery called “Bathroom Minutes” that resembles the comics section in the newspaper, and a company podcast that tackles quirky and amusing topics. Dollar Shave Club also employs approximately 100 “Club Pros,” who offer grooming advice via e-mail, text, social media, or over the phone. Dubin was the company’s first Club Pro, and he traveled the country with other Dollar Shave Club employees to talk to people about what types of features men were looking for in razors and other grooming options. The cross-country trips confirmed Dubin’s suspicion that Gillette and other bigger brands had lost sight of what customers actually wanted with its increasingly complicated razors, laden with features nobody actually cared about. Dollar Shave Club prioritizes unscripted customer service: real live people as opposed to automated systems and interfaces. The Club Pros are just one example. Even rank and file customer service representatives are trained to respond to customer queries in a playful way consistent with the company’s brand. For example, one potential customer

 

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jokingly asked a customer service agent to solve a Rubik’s cube in under two minutes to earn the customer’s business. The very next day, the company posted a video clip of an agent doing just that on Facebook. Amused Dollar Shave Club subscribers frequently post particularly memorable interactions with customer service on online forums. For many companies, customer service is a struggle, but for Dollar Shave Club, it’s a strength. Dollar Shave Club uses member feedback to make decisions regarding its product line as well. For example, an exfoliating cloth intended for use in the shower received lukewarm reviews from customers, so the company fully redesigned it from scratch and refunded all of its members who had purchased the initial version. Today, the company uses a 500-member panel of its longest-tenured customers to test new products and offer feedback. One product that tested especially well was the company’s “One Wipe Charlie” sanitary wipe. The YouTube video introducing it is done in the same style as the company’s first video and boasts 3.5 million views of its own. Dollar Shave Club’s commitment to its brand and to its members has made the com- pany’s customer base extremely loyal and likely to become ambassadors for the brand of their own volition. The typical Dollar Shave Club customer is young, comfortable viewing Internet advertising, and a good fit with the company’s easygoing, humorous branding. This valuable user base and impressive relationship with its customers was of major interest to Unilever, whose acquisition of Dollar Shave Club illustrates the pressure that traditional retailers are feeling to learn to sell directly to the consumer, as opposed to via traditional bricks-and-mortar shopping outlets. Companies like Unilever are also much more comfortable advertising on television, and while Dollar Shave Club did launch its first Super Bowl advertisement in 2016, the company rose to prominence using online- only videos to spread awareness of its brand to highly targeted demographics. Dollar Shave Club only needs to advertise to men, which they can do much more easily online than on television. Although Dollar Shave Club is a relatively lean company, it still has had to signifi- cantly improve its IT infrastructure to keep pace with the company’s rapid growth. Today, the company has 45 engineers that have built the company’s software and platforms from scratch. Because Dollar Shave Club’s subscription model is relatively new, many e-commerce website vendors, such as Magento, which the company initially used for its website, don’t work seamlessly with monthly billing and delivery functions, and Dollar Shave Club’s workarounds for the problem frequently malfunctioned. The company real- ized the need for a customized platform and built one in just three months, including a CRM platform called Brain, a marketing automation platform called Voice that sends out customer e-mails, and other customized applications such as Arm for order fulfillment, Ears for telephone-based customer support, and Hypothalamus for machine learning and data science. Dollar Shave Club is one of many startups that rely fully on Amazon Web Services for its computing resources and bandwidth. AWS’s scalability allowed Dollar Shave Club to handle the sudden influx in site traffic it received after its Super Bowl ad. Dollar Shave Club’s rapid growth has come in large part at the expense of Gillette, which is now aggressively seeking to protect its commanding position in the shaving market. In 2017, Gillette launched its Gillette On Demand service, which will allow cus- tomers to order new razors and blades by text message, as well as receive every fourth order for free after three regular orders. Gillette On Demand orders will arrive within

 

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three business days of ordering, and Gillette claims it will offer price points that are com- petitive with Dollar Shave Club. Gillette also responded to criticisms that its products are overpriced by slashing prices across the board and launched a marketing campaign designed to bring back departed customers. They also sued Dollar Shave Club for patent infringement, but because Dollar Shave Club’s razors are simplistic by design, they are likely to enjoy better protection from patent infringement than if they chose to make razors with distinctive features the way Gillette does. Dollar Shave Club currently only operates in the United States, but its acquisition by Unilever suggests that it’s a certainty that it will use its new parent company’s size and scale to go global in the near future. The company rose to prominence because of its understanding of the American male, and it will need to learn how to generate the right message all over again in different countries, where culture and grooming standards are different. Because Dollar Shave Club is only operational in the United States as of 2017, the company has about 1% of global market share in shaving goods, but that number could rise quickly after global expansion, and the full market is valued at approximately $15 billion. If Dollar Shave Club can maintain its focus on its brand and its members as it grows, it’s likely to meet with similar success in other countries

. Case Study Questions

1. What is Dollar Shave Club’s business model and how does it differ from its com- petitors?
2. What are the key elements of Dollar Shave Club’s value proposition for consum- ers?
3. What revenue model does Dollar Shave Club use and why does it work for them?
4. How would you characterize Dollar Shave Club’s online business strategy? 5. How have Dollar Shave Club’s competitors responded?

 

KEY CONCEPTS Identify the key components of e-commerce business models. Manjoo, New York Times, July 27, 2016; “$1 Billion for Dollar Shave Club: Why Every Company Should Worry,” by Steven Davidoff Solomon, New York Times, July 26, 2016; “Manufacturers Make, Shops Sell, But Dollar Shave Club Breaks That Mould,” The Guardian, July 24, 2016; “Dollar Shave Club Built a Billion Dollar Brand with Bizarre Videos,” by Shan Li, Los Angeles Times, July 21, 2016; “Why Unilever Really Bought Dollar Shave Club,” by Jing Cao and Melissa Mittelman, Bloomberg. com, July 20, 2016; “How Dollar Shave Club Went from Viral Marketer to Engineering Power- house,” by Natalie Gagliordi, Zdnet.com, July 8, 2016; “Why Dollar Shave Club Invests in Unscripted Customer Service,” Los Angeles Times, by David Pierson, September 26, 2015. A successful business model effectively addresses eight key elements: • Value proposition—how a company’s product or service fulfills the needs of customers. Typical e-commerce value propositions include personalization, customization, convenience, and reduction of product search and price delivery costs. • Revenue model—how the company plans to make money from its operations. Major e-commerce revenue models include the advertising model, subscription model, transaction fee model, sales model, and affiliate