The Mattress Titan: How Resident Conquers the Sales Game

Drew Sanocki:

Hey, everybody. Today's a special podcast. I recorded it with a co-host Mike Maher, who is a buddy and CEO and founder of Taylor Stitch. And we interviewed another friend of ours, Eric Hutchinson, who's a serial entrepreneur. He's a co-founder of Madison Reed, the hair color company. He then went on to start Resident Home, which is a successful mattress brand. And he also founded DreamCloud. And just an all-around baller and a good guy to learn from. So I hope you'll enjoy this episode of the Nerd Marketing Podcast.

Drew Sanocki:

There are some CEOs who are like very public. It seems like from observing them, they spend half their time blogging or posting to medium and putting out point pieces and stuff. And then there are those who just crank. And I would put the two of you guys in that latter category. Is that an intentional decision? Like I'm not going to be a public CEO. I'm just going to focus on being a CEO.

Mike Maher:

The two of you being Hutch and Ron, right?

Drew Sanocki:

No, I would put you two. I knew you were on a podcast recently, but for the most part, you're under the radar.

Mike Maher:

Yeah. I also don't run an $800 million mattress company either. I'm not like the king of Ecom here.

Eric Hutchinson:

It's an interesting observation and one I have reflected more on in that I'm not someone who seeks out the spotlight. And my path to entrepreneurship was never one in the pursuit of fame. It's been in the pursuit of building real businesses. That said, I recognize the value that a personal brand can bring to not only the business you're running, but to the opportunities that come across your desk. And so I think it's something I probably should have done more to curate over the last 12 years that I've been an entrepreneur. I have a nice ecosystem within the DTC space. I've been able to foster more through personal relationships. I'm hard to find on social media. And that piece is by design. I don't get a whole lot of personal benefit of being out there interacting on Twitter, a very passive consumer of the social ecosystem. But I do think that there's real value for both individuals as well as for the companies they run. Formatting that as something that's on my radar or something, even though I probably not drawn to it, would be helpful.

Drew Sanocki:

Yeah, you got to be strategic about it. I feel like the three of us were working on a couple of deals a while back. And then I compare us to like Andrew Wilkinson. He's up in Canada. He did a roll up e-commerce, which he IPO, you know, basically bought a bunch of Shopify software apps. And he's like super public about it. And I think where it helps him is probably deal flow, finding more apps to buy and also recruiting.

Recruiting is huge. Whenever I wish I had a bigger social media footprint, it's like when I need to hire that Head of Sales. And yet I'm speaking to like five people through my Instagram account.

Mike Maher:

Hutch, you just said you've been an entrepreneur for 12 years. Take us through that journey. There's been a few bus stops on that ride and just so everybody kind of knows your background.

Eric Hutchinson:

I had a first career in finance. I joke that the best thing that ever happened in my career was the financial crisis. It got me off my ass to start a business. First company I started was called Home Value Protection, where we developed a new insurance product to collect the value of people's homes against declines in the real estate market. Anybody's ever thought they had a tough time raising capital, try to raise capital for that business in 2009, at the height of the financial crisis. We were successful, grew that over about three and a half years. Sold it to a large insurance carrier.

I joke I spent the next couple of years trying to convince everybody not to start insurance companies, but made a beeline over to the consumer side and to find a company called Madison Reed in the women's hair color and hair care space. A finance insurance guy I started to raise money for a women's hair color company that was proved not to be a whole lot easier. That business was first generation, was now become known as Disney native brands. At that time, e-commerce was your website, a buy button, and some Google ads. But we had the idea that you can create a brand that had a different relationship with the consumer and that that brand would be born online and then engage consumers to the digital ecosystem. But ultimately, I think we were very early on in the, it was now called Omnichannel, but we bolted on broadcast media, offline execution with partnerships with Alton support in our own branded stores.

I stayed with the company through our Series C and then took a little break and then started Resident, which was kind of a play forward of all that I've learned through my previous experience both as an entrepreneur as well as in finance. And here we are today selling mattresses.

Drew Sanocki:

Who bought Madison Reed?

Eric Hutchinson:

So Madison Reed is still privately held. My co-founder, Amy Errett, she's the CEO and carrying the flag. It's eight years old now, and I think really has solidified itself. And that space is kind of a very trusted brand for women in a product category that is one that requires very high level of trust and has very small margins of error. You turn a woman's hair orange once and you've not only lost her trust, but her entire ecosystem. So it was a great education on it is important to have not just a good product, but an excellent product. And that's the foundation for creating brands.

Drew Sanocki:

One thing we wanted to ask about, you pivoted into mattresses, but when you did, Casper was already around, right? So can you go back to when you started this business in 2016?

Eric Hutchinson:

We started this business this business in 2016. We saw what was happening with Casper, Purple, Tuft & Needle, and we had a hypothesis and those proof points were proving it out that the consumer was ready to make considerable purchases online. Up until that point, e-commerce was a $50 to $100 price point in terms of what people were buying. The companies that were approaching this space had very distinct business models, but that there's still a big kind of open opportunity for one based on attribution data and what we call performance marketing, but just to kind of structure the landscape.

You had Casper that had raised a lot of money, worked with Red Antler to create a beautiful millennial brand, but was very much playing the Silicon Valley playbook. Purple who had their proprietary technology. Goldilocks Video, and I think did and has done a great job of using video to tell that story in an effective way with consumers. Then Tuck the Needle had really gone after Amazon as a channel. Our business is very much focused on creating value propositions that resonate with consumers and then our own proprietary e-commerce platform, but it's really one part data, one part attribution, one part technology that just gives us a different level of performance.

Then as I mentioned on the value prop side, an approach that is creating brands that really resonate with the average consumer. One of the charts I love to show people and investors is population distribution by state and our sales and they're one to one core. Our sales follow the distribution of population. We have this fundamental belief that big businesses are made with middle America adopters, so create those value propositions and sell at a price point that people can get excited about the product and the offer you have.

Drew Sanocki:

When you're talking about attribution and relying on paid for the most part?

Eric Hutchinson:

We have the most robust channel mixer in e-commerce. There's this misnomer that organic traffic drives businesses. There's not much that's free out there. Even with SEO, you're paying for the content. It's another form of paid. What you're really trying to do is measure those dollars that you're spending. Attribution is the quantification of a user journey. I refer to it as a journey without a destination. You're trying to better understand the user journey across device, across platform, across household. In the case of a mattress purchase, this is a family making the decision. You want to be able to effectively engage with everybody in that household. Then it's not only about understanding the journey, but understanding how the different channels interact with one another. With that, you can better determine not only where to deploy dollars, but where not to spend the dollars. The latter part is in some ways the most important. When you launch a business, you have 100 assumptions. All you know is that half of them are wrong and you don't know which half. Understanding which half are wrong is really helpful in terms of driving that efficiency. Part of the reason why you've been able to scale so efficiently and quickly

Mike Maher:

Has building that proprietary platform? Have you built that while the plane's been flying?

Eric Hutchinson:

It's a little bit of both. We build a culture and a team around data and using data to drive the business. Attribution marketing is just one element of how we use that. The first generation of our what we call attribution platform was an affiliate platform that we hacked together. Your affiliate ecosystem people get paid based on the traffic and on conversion rates, so they have to understand attribution better than anybody else. We took that platform and hacked it for our own good, own use. Over time, we rebuilt that and made it more sophisticated and more proprietary over time. We are definitely a hacker culture. One interesting thing about a hacker culture is you do have to mature that to be more institutional as you grow. It was in our DNA from day zero to use data to make better decisions and basically to call bullshit on what the individual platform is trying to tell you. Every platform will try to take more credit than it deserves for a transaction or for the value that it's providing.

Mike Maher:

That multi-touch is always such a challenging thing to build out. You mentioned culture and this culture of hacking. I always have found it really interesting being close to you here in San Francisco and you guys leading from the Bay Area with the rest of your team distributed across the myriad of time zones from San Francisco to New York to London to Israel. How did you build that culture, that hacker data-centric culture? Correct me if I'm wrong, but a lot of them are in Israel, right?

Eric Hutchinson:

Technology and data science teams are based in Israel and they work from day zero. The point that covers all the way back when we started this business. I was looking to have to take a break for a year or so and just kind of refill the gas tank after having been through two startups. And so to do that, we found people on Upwork. Worked with people fro different geographies that was hopefully going to allow me to hang out on the beach for a few years. Things took off a little bit faster than we expected. But the fact that we started this way, I think, is a really important element. I think it's really difficult for a company that has a collate located office culture to go fully remote.

Mostly because of the communication and how you build culture. So from day zero, we were using Slack, Google Docs, all of our models were built on top of Google Sheets. And we had a way of communicating that really empowered the individuals and helped to eliminate the silos of communication. So much of the issue you have with an office culture, there are these silos. And so you've got to get everybody together to have effective communication. And we were just set up that way from day zero. It also allowed us to be very effective across not only geographies, but really across time zones.

Israel is way ahead of us. There's some benefits that came out of that that were not planned. So the engineers get to work most of the day without being disrupted by those of us on the business side. We were well ahead of the accelerant that COVID was as it related to remote culture. And I think one of the reasons why we were able to scale so effectively last year was that we were already working this way. So when people had to go remote, most other companies had to spend a couple of months kind of readjusting. And we were just executing day in and day out, already kind of dialed into this way of working.

Drew Sanocki:

You guys have any headquarters in the Bay Area?

Eric Hutchinson:

We had a WeWork office for a short period of time and nobody went in. So we closed it. We're technically headquartered in New York. Not sure how I let that happen. But we have an office in Tel Aviv, in London, in New York. We have a team in Mumbai as well that focuses some data science. A lot of our SEO work is out of there.

Drew Sanocki:

Did you say you raised money for this? Haha. It's like just coming out of the gates, I think your average entrepreneur isn't going to be able to just scale up a data team in Israel.

Eric Hutchinson:

Raising money is always difficult. There are those people that are really great at it. I have always found it to be a challenge. This business, we were also, we did not have first mover advantage. The last thing the world needs is another DTC mattress brand. We were challenged from day zero and I have always had a relentless focus on unit economics in the business. And that's what we did here is performance marketing, unit economics. Even if we weren't even up positive, we had to be cashflow positive from day zero so that we could fund a business. And then we did raise money over time to fund inventory and things like that. But compared to our competitors, that was pennies on the dollar that we raised.

Mike Maher:

You guys have built an incredibly efficient business, something that's much larger than most of it, if not all of your competitors. The thing that I've always been super impressed by is the capital efficiency and the profitability where a lot of most of, if not all the competitors are not either of those. What are the top two or three KPIs that you manage the business towards?

Eric Hutchinson:

I really try to make things simple and drill down to a handful of KPIs that are the real driver of the business. The North Star KPI for us is cumulative contribution margin. So a contribution margin being the basic profit metric after all your cost of goods and market expense. So the first line item we focus on is gross margin. Were constantly looking to expand gross margin. And we have both on the unit basis and a cumulative basis. And then the delta is our CPA. So our CPA, the way we measure that is a percentage of gross sales, which means we're really trying to manage the contribution margin number.

That's a percentage versus just a dollar. And then what we want to do is we'll contribution margin positive. And so you do get the benefit of being able to kind of make it up by volume. When we think about what is the right number for our price, what's the right CPA target as a percent, it's really around trying to dial in something that's extremely scalable. I tell most people that when you get the pricing right, it should feel like the clouds opened up and you can just run forward with growth. CPA and contribution margin are really the two North Star metrics that we have though.

Drew Sanocki:

So you want to be profitable on that first purchase too?

Eric Hutchinson:

This industry is one of the most interesting from a unit economics perspective I've ever seen. So our average order value is over $1,000 on a DTC basis where 50% gross margin and we targeted 20% contribution margin. And we do that with negative working capital. So I get money from my consumers on day zero and I pay my suppliers on day 30 or day 45. And so we were able to scale this business really on other people's balance sheets by having that unique cycle. You look at my previous business, you were never going to get to $1,000 LTV and surely not going to get to a 20% contribution margin business and obviously not profitable on first purchase. It's really, really unique unit economics to drive a growth business efficiently from a capital perspective.

Mike Maher:

Do we talk about profitable on first purchase? This is like one of the classic econ KPIs and it is, there's such a wide range of meaning for like what profitability is. What's profitable? Are you including just the cost of the product, the marketing? I think it's really interesting the way that you guys have thought about it and you're focusing on that 20% contribution margin. That's going to cover a lot of your G&A, if not all of your G&A, which truly is what comes down to like you're making an entire company profitable on first purchase the product in that one time. When you really come back for their second, third, fourth purchases, there's a lot of gravy to be had.

Eric Hutchinson:

So we have right now what I refer to as an AOV driven business. We have a healthier repeat purchase rate than I wouldn't have expected us to at this point in our cycle. But we want to be have a profitable business and really run the business off of that, off a single purchase economics right now.

Mike Maher:

Mattress industry has historically had a horrible repeat. Everybody talks about it being a one and done thing. You guys have also done an incredible job building other brands, launching other things. I mean, I don't think nobody's heard of Resident because it's not a brand. It's an aggregation of I'm a close friend of yours and can't even keep count. Like we have four or five mattress companies and then there's sheets and other home goods. Layout for the listeners, how you kind of thought about like cross selling, building other brands and creating different tiers and brands within that.

Eric Hutchinson:

We built a platform that allows us to launch multiple brands. Nectar and DreamCloud are the one too that people have heard of. We have multiple brands within this category because we want clarity of value top of the top. So Nectar is about memory foam, DreamCloud is about hybrid and allows us to be surgically effective with our acquisition. One of the things I think is e-commerce entrepreneurs, we can become short-sighted in that we're solving today's problem versus thinking about what's happening over the long arc. What we're really talking about is the future of consumer brands and those brands that are being born today are going to be the brands that our kids interact with. They're the Nikes of tomorrow.

And so that long arc actually creates some really, really interesting dynamics. We engage with a little over 10% of the US population through one of our websites every year. You engage with the entire US population after 10 years. That database becomes extremely important. What also becomes extremely important is that consumers are having a great experience not only through the purchase journey, but once they receive your product.

That being a leading indicator of word of mouth and then repeat purchase rate. So you look at even our Maxis brands, we look at the 2018 and 2019 cohorts, we're already getting up close to a 10% repurchase rate, which almost fell out of my chair when I heard that because you only buy this product once every eight years. And the benefit in this category of creating a great customer experience is the only thing you want to do less than buy a new mattress is go buy a used car. So if you have a great experience with us, why would you ever go shop anywhere else when you need another mattress? You just need to go back to the same place.

The other thing that is interesting about this category and what we're building is that Maxis is the gateway into the home. When you move, the first thing you buy is a Maxis so you don't have to sleep on the floor. And if we can create trust through that relationship, our ability to sell you the sheets, the bedding and ultimately help you furnish your home is almost greenfield opportunity for us onto the horizon. The other thing that I think you always need to be doing as an entrepreneur with your business is thinking about TAM, not so much quantifying it, but how do you constantly expand that TAM and the opportunity you're running after.

I'd love to say that at the beginning of this business, we said, hey, we're going to ultimately want to sell people everything in the home. What we've constantly done and it's more of a growth mindset that we have at the company is think expansively what that next opportunity is and lay the groundwork to ultimately unlock that opportunity. And you do that through this great execution.

Mike Maher:

Here's the thing that I find really interesting is like a lot of people talk about this. Most people execute piss poor on that. You have to build a really strong relationship with your customer where they trust you enough to go sell them something else. Going from point A of selling the mattresses to point B of even selling them linens for their bed can be a tough jump for a lot of brands. And for me, it goes back to a lot of like, you have to build a great product and a great experience. Those are the two things that I think matter the most. Love to understand how you guys have thought of that internally as you guys think about product development and experience development.

Eric Hutchinson:

On the product side, if you think about it through the lens of concentric circles with our brands. So it started off with the mattress and then for selling to the mattress, let's sell the bed frame, the foundation and the sheets and the bedding because it's an easy communication and it can be done through that initial transaction. And then from there, looking kind of at one concentric circle out from that, which is okay if I'm selling you that what about bedroom furniture? And so within the core brands, we take this concentric circle approach and then we ask our consumers. So we send out about a thousand surveys every day asking our consumers not only what they're buying from us, what else are they shopping for at this point in time? And then what would they like to buy from us and use that as an input of where we should go next.

We've had the good fortune of a lot of opportunity right in front of us in this category. And so from a risk reward perspective, we just said, look, let's continue to focus our energy here on the near end concentric circles from mattress for the time being, but try to understand what are the other categories that we would like to go into and learn. Supply chain for physical product good is so important. And while mattresses are technically a small parcel, there's nothing small about them. But as soon as you move into furniture, you're dealing with LTL and an entirely different logistics supply chain that if you don't get it right, you're going to have a bad customer experience.

And so we've been cautious as we've looked at the other categories and making sure that we understand what I referred to as Donald Rumsfeld that we get educated on the questions we need to be asking. Right now, mattress salespeople may not be smart enough to ask so that when we get to them, we are educated and feel really good about our ability to execute. Y

Mike Maher:

You hit upon something that last you talked about supply chain logistics. I mean, you guys have experienced some pretty serious explosive growth over COVID. Being on the inside and having been a close friend, like I've heard the horror stories of we had one hundred and fifteen FedEx truck shortage. It wasn't a lack of Ecom. It was how did you know to get that just get that shit back on track?

Eric Hutchinson:

Supply chain is going to be the limiting factor of your scale. Full stop. I do not know anybody who has achieved product market fit in their business. And when they tried to hit the gas, did not run into supply chain issues. And so understanding that is important. So one of the things that I advise people to do and we try we do even with the new product is making sure we're working with a supplier that can scale. It's rare that you're going to find someone that's going to want to work with you on day zero, that's going to be with you when you're doing a billion dollars. But they need to be able to scale through a couple kind of iterative cycles of the business. The worst thing would be to be scaling towards profitability and have to switch a supplier. So that's kind of first and foremost is understand that as you scale, that supply chain is going to be a hindrance. Create redundancy.

So when I look at our business, we've rebuilt our supply chain for years and four times in five years. I think we had some foresight to do that when there were some different headwinds. But a year ago, pre-COVID, we were profitable and we had a very distributed supply chain. So we had three mature suppliers going into COVID and we had five points of distribution. We expanded that to 10. And we had, as you mentioned, issues with getting enough those FedEx trucks. We weren't perfect, but in the land of the blind, the one-eyed man is king. We were doing better than others. And that has been an ebb and flow over the course of the last year. And we are far from out of the woods. As you mentioned, there's a foam shortage due to some chemical outages that resulted from the Gulf freeze back in February. Here we are at the end of June and those plants are not back to full production. So it's going to be whack-a-mole. It's going to be very difficult to look around the corner to see what's going to come next.

But by creating redundancy and as soon as you start to scale higher really great people that understand the supply chain of your industry. And don't try to do it all yourself because there are people who have built entire careers of doing this and can help you get ahead. Even if they aren't going to help you stay ahead.

Mike Maher:

I just have this vision in my head of 115 FedEx trucks just not being where they need to be. Miles and miles of FedEx trucks just need to be lined up and get filled with mattresses.

Eric Hutchinson:

I remember going to one of our warehouses. This was probably two years ago. We'd scaled nightly. The supplier as a warehouse just stacked two and a half stories high, 10 rows and about a football field deep, just nectar mattresses. There were literally pallets of mattresses on the floor all the way down for a football field. And we move an entire one of those bays every single day out of this one warehouse to keep up with your volume. Wow.

And in some ways, it's good not to see that every day because if you did, your brain would start to hurt in terms of the logistic complications. And the benefit is that there are people that created an entire career out of solving these problems and are there to help you. And there's nothing more fun than to do this stuff at scale. Typically, the really impactful growth levers you have on the business are going to be difficult and they're going to require expertise. And if you think about doing them yourself, you're going to put them at the end of the list because you don't know what to do next. Be great at recruiting and go find the person who has done this before, who loves it and is looking for the challenge and opportunity that you're going to present them and then empower them to go solve that problem.

And it's one of the unique ways that we found of unlocking growth. Great example in our business is retail. So we're in about 2,700 retail stores today. My brain would have melted had I had to do this by myself. We went and found a guy named Bob McCarthy who was world class. He'd been doing this for most of his career. And he was chomping at the bit to have the opportunity to work with a brand like this that was going to put the marketing dollars behind his effort. And we were off to the races. We're talking about Ecom as a whole in this.

Mike Maher:

And you really talk about channel growth and the fact that you guys were actually able to use digital channels to create marketing engines really efficiently. And I think that you guys are probably able to be in a data-centric culture, able to really think through that in an intelligent way where this guy goes into most places and gets laughed out of the room because he's the wholesale guy where you can see it as like these are still massive distribution channels. And there's still a huge amount of people that want to shop for these things in person. And being able to have somebody like that supported by the digital aspect of the business, I think is a really interesting proposition to grow.

Eric Hutchinson:

And in our industry, 70% of the revenue still runs through retail. We're spending more and engaging more consumers than anybody else. So he had a bazooka when he went into retail and said, hey, look, I have over 50% of the people who visit our site want to touch a product before they're going to buy it. You want them to come buy it from your store. And there are some great examples of we would ink a deal and before we could even get product to the retailer, we'd put them up on our store locator and they'd have tens of people coming in over the course of a weekend asking for the Nectar mattress. And there's no better reinforcement of the value that we're providing them when you're sending customers into a retailer. But I think what you're touching on to some degree is a broader point, which if you're scaling your business, because there are consumers that love your product.

And if you're looking to go into retail or looking to ink another partnership, find out what that thing is that your brain to the table that they can't live without and lean into it. And part of that is trying to think through how you're solving your partner's problems. In the early days, the way we got into retail was they needed traffic. And so once we understood that, we built dashboards and we quantify the traffic that we were providing. And it made the conversation very credible. Well, it's an awesome business. There's no end in sight.

Drew Sanocki:

You can just keep expanding categories until you take over the whole home. We could kind of end on this last question is like, what's the end game? Have you thought about that?

Eric Hutchinson:

When you guys asked me to join the podcast and one of the first questions was the entrepreneur journey, I refer to it as a marathon of sprints. Some people say, oh, it's a marathon. It's really a marathon of sprints. You have to find a way to catch your breath along the way. And if you don't, you become very short-sighted. We have, through a lot of the hard work that the team has put in, created a platform that I do think really has the potential to create the brands of tomorrow. Not that the brands that we have created aren't that. And so for me, I'm trying to look at this as a playground. We've done some really interesting things.

There are some really kind of meaty opportunities slash problems on the horizon for us. And how do I build a team that's excited about taking on those problems? And then trying to be more looking more long-term around where this business could ultimately go so that we're creating value, doing so in a way that continues to unlock that next opportunity for us so that I can continue to have fun. I think as entrepreneurs, if we can find a way to have fun in the businesses that we're creating, then you can hopefully get out of that really short cycle view of just trying to solve the next problem in front of you.

So as I think about what's next for our businesses, for me, it's about making sure that this is a fun place to work, that we're creating a platform that continues to unlock more opportunities so that people are excited to work here, a place that we can all have a good time.

Drew Sanocki:

How many people do you have?

Eric Hutchinson:

Great question. So today we're about 215 full-time employees and then we have another 200 employees in a call center out of the Philippines. So we're north of 400 employees at this point in time, which is awesome. It's just kind of crazy as I sit here in my loft in Soma. No other employees in sight.

Drew Sanocki:

Well, thanks for having me on.

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