Company Case Casper: A Pricing Strategy That Flipped the Mattress Industry The mood was whimsical at Casper's New York headquarters-the online mattress startup had flipped its industry upside down. Celebrating Casper's fifth anniversary, the celebration seemed more like a birthday party for a five-year-old, complete with face painting, piatas, and a balloon artist who crafted everything from an intricate jet pack to a knockoff Chanel bag. "But the magician canceled at the last minute," said Casper's chief technology officer, "which kind of sucked. About the only indication that this was gathering of adults was the free- flowing open bar. Although the party was unusual for a successful New York firm, young Casper's five founders had plenty to celebrate. Against all odds, the startup had finished the prior year selling $400 million worth of mattresses and other sleep-related goods. And it accomplished that feat using an innovative direct-to-consumer (DTC) "bed-in-a-box model. Although not exactly reaping market-leading revenue numbers, Casper had taken a notable slice of the $14 billion U.S. mattress market a market dominated by a handful of mattress companies and specialty retailers. Perhaps more amazing, Casper had just raised an additional $100 million in funding, bringing its total to $340 million in venture capital. That huge influx of cash combined with the young company's rapid growth gave Casper a valuation of $1.1 billion, nearly one- third the value of 140-year-old mattress stalwart Tempur Sealy International. Casper has succeeded for numerous reasons. But at the core of its trampoline-like launch is an idea as old as beds themselves break into a mature market with a quality product at a fraction of the price charged by the ruling brands. For good measure, Casper made shopping and buying simple. Consumer response to this approach demonstrates the extent of unmet consumer need lurking beneath the sheets unmet need that has led to a revolution in the mattress industry. An Industry Begging for DTC Casper's five founders had crossed paths through various other business ventures and unsuccessful startups. Each was looking to start something new. As their discussions evolved, one thing became clear. The modern marketing environment was fueling a direct-to-consumer (DTC) model in countless industries that were dominated by veteran companies charging high prices despite little innovation. What Warby Parker did with eyewear was being repeated over and over again in other industries by companies such as Dollar Shave Club (razors), Bonobos (men's clothing), and The Honest Company (cleaning and baby products). The entire sharing economy, which propelled the likes of Airbnb and Uber to upend their industries, was rooted in the same characteristics customers were sick of paying high prices for warmed-over options that gave them little satisfaction. Casper's founders set their sights on the mattress industry-one that was ripe for change. The industry was dominated by two firms-Tempur Sealy and Serta Simmonsthat captured a combined 60 percent of the global mattress market and 75 percent of the U.S. market. The two firms sold mattresses under the Sealy, Tempur-Pedic, Serta, Simmons, Stearns & Foster, Beautyrest, and other brands. Mattress retail sales were also dominated by a small circle of specialty retailer chains like Mattress Firm and Sleepy's. Nearly all mattresses were sold through one of these stores as well as through furniture stores or department stores where salespeople earning high commissions used old-school tactics to persuade customers to part with their money. From the customer viewpoint, there wasn't much difference between shopping for a mattress and shopping for a new car. Conventional wisdom held that customers simply would not buy a mattress without lying down on several to find the perfect fit for their slumbers. But the mattress-shopping process fequired hours of effort filled with sales presentations, mattress testing, and transactions riddled with paperwork. The bed companies further complicated matters by manufacturing different mattress models for each retailer, making price comparisons impossible. Moreover, most customers had no idea that retailers marked up mattress prices by as much as 100 percent over wholesale price. Mattress prices for the big brands ranged from hundreds of dollars for a basic twin to more than $5,000 for a top-of-the- line king. Not surprisingly, many mattress purchases required long-term financing. Casper's idea of "cutting out the middleman" and selling mattresses at low prices directly to consumers wasn't exactly new. Nor was the memory foam bed-in-a-box concept. In fact, BedinABox.com began selling mattresses online in 2006, and a handful of other companies had more recently followed suit. But the concept was largely unknown to most consumers and had yet to take off. Most beds sold at the time were of coil spring construction, requiring a bulky box spring base. But various companies including IKEA with its own mattress brands were selling viscoelastic memory foam mattresses of the type perfected by Tempur- Pedic. These mattresses could be compressed, rolled, and boxed to make shipping a reasonable option. a a An Unexpected Reaction Casper flipped the switch on its e-commerce platform in April 2014 with just one foam mattress model in twin, full, queen, and king sizes. Each mattress was tightly packed in a blue-and- white heavy-duty box. Watching the mattress unroll and expand when unboxed was magical. Each mattress came with a 100-day money-back-guarantee and was delivered for free via UPS. And the price just $850 for a queen-was less than the retail markup on many comparable name-brand mattresses. Targeting millennials, Casper was confident that a nimble, low- overhead online brand with a cool vibe and an irresistibly low price could capture a small but profitable slice of the market while avoiding the attention of the deep-pocket market leaders. It set a modest 18-month revenue goal of just $1.8 million, a goal that seemed reachable based on a low-cost promotion plan using social media and influencers. By the end of the first day, Casper was already rethinking its sales goal. Orders flooded in so fast that Casper's initial inventory was quickly depleted. The fledgling company surpassed its original 18-month sales goal in only eight weeks. During its first full fiscal year, Casper delivered $100 million worth of mattresses to customer's doorsteps. Originally planning only to nibble at the edges of the mattress market, Casper had taken a big bite right out of the center. Early success led Casper's founders down a path that other DTC mattress brands had not yet triedraising venture capital. At the beginning, we met with dozens of investors who all said, No one is ever going to buy a mattress online. This is a dumb idea," said Neil Parikh, one of the original Casper founders. But when Casper mattresses started flying out of the warehouse, there was no shortage of interested funders. Through venture capital firms, early investors included actors Leonardo DiCaprio and Ashton Kutcher and rappers Nas and 50 Cent, lending celebrity clout as well as funds. And then there were the influencers. About a year after Casper launched, Kylie Jenner posted a picture of herself standing next to a Casper box in her new mansion. "So much work to still be done. IM SO EXCITED. The first thing I'm gonna open are my new Casper mattresses. Jenner's post racked up an immediate 870,000 likes. "When Kylie Jenner posted about Casper I think it broke our website," Parikh said. Success Draws Competition Perhaps more amazing than its immediate popularity is that Casper's sales exploded even as numerous companies with the same idea began selling mattresses. In fact, some of today's leading DTC mattress companies launched the same year that Casper did, including Leesa, Yogabed, Purple, and Bear Mattress. With a low cost of entry, the early startups gave way to an explosion of new mattress companies, each with its own spin on boxable mattresses and nearly all priced much lower than traditional brands. With all this activity, established mattress companies took notice. Serta Simmons bought Tuft & Needle, Sealy launched Cocoon, and Tempur-Pedic launched Tempur-Cloud, a familiar option for DTC customers given that Tempur-Pedic was already far and away the number-one memory foam mattress peddler. Today, there are well over 100 DTC mattress brands. Is that too many? Experts don't think so. Not all will survive. But at the rate the DTC mattress market is growing, there's plenty of room for numerous successful DTC bed sellers. And e-commerce mattress purchases still capture only 5 to 10 percent of all mattress sales, which means it will be awhile before the dust settles. Making matters even more promising for DTC mattress sales, the conventional mattress market seems to be going the wrong direction. After retailer Mattress Firm acquired Sleepy's, it promptly rebranded all 1,000 Sleepy's stores, resulting in 3,500 Mattress Firm outlets. The move didn't end well. Mattress Firm filed for bankruptcy, only to be rescued by South African retail giant Steinhoff in a deal valued at $3.8 billion. Although Casper began as a one-product company looking to fill a hole in the market, the company is now embracing the future by shaping a brand platform that looks at sleep as a consumer category not unlike travel or cooking. "If I wake up in the morning and say, 'I want to sleep a little bit better,' I have to go and get a mattress from a furniture store, sheets from Bed Bath & Beyond you end up having to get things from all these different places," says Parikh. But if you wake up in the morning and say... 'I want to eat healthier,' great, go to Whole Foods. There's nothing like that for sleep." Casper aims to change that. With its "cheaper-than-the-leading-brands" image secure, the company now sells three mattress lines, sheets, duvets, pillows, and a high-tech sleep light. It even has a line of dog beds. And with its products now being sold in the real world through Target stores and in its own growing chain of Casper Sleep Shops, Casper looks unstoppable.26 Questions for Discussion 1. Which new product pricing strategy does Casper employ? Why does it work? 2. Could Casper have achieved the same level of success with a different pricing strategy? Explain