This is Part II of an excerpt from an article was originally published on Medium. To read it in it’s entirety, please visit medium.com/@nickbkim.
The key learning
When we started diligence, we were motivated by the incredibly low Net Promoter Score for moving companies. We surveyed graduate students who recently moved, and they gave their moving companies NPS –41! We saw an opportunity to deliver a better experience and drive strong word of mouth growth. After all, moving is already a referral business.
What we found was that while many people complain about their moving companies, even the highest income consumers would not pay for a better service. Our mistake was conflating desire for a better product with desire to pay more for a better product. Now that we’ve learned this, we see examples of it everywhere.
Let’s start with airlines: despite their below average NPS, Ryanair is the largest and most profitable airline in Europe, carrying the fifth most passengers of any airline in the world. People hate flying with them, but they do it all the time. They kick and scream, roasting the company in satisfaction surveys and proclaiming “never again!” until they do it again the next time.
We see the same pattern in moving. People say they love the idea, even that they are willing to pay more for it. But when we actually offered it this summer, we saw how low their willingness to pay truly was. It’s hard not to choose the company offering the lowest price.
But wait, people pay more for better flying experiences! Assuming they can afford it, the difference between spending more for JetBlue versus saving with Spirit Airlines is repetition. Frequent flyers will not endure having their legs jammed against the seat in front of them every time they fly. Moving happens once a year at most, and humans are hardwired to forget distant pain.
Discretionary purchases vs. compulsory expenses
It turns out people think differently about spending more for a better experience depending on the purchase they’re making. For discretionary purchases — hotels, clothing, cars, restaurants — people splurge to get a tangible upgrade. For compulsory expenses — a flight, a move, or parking — they skimp as much as possible.
Think about the last time you parked at a venue for a game or concert. Driving around, you notice that the lots charge slightly more the closer they are to the entrance. Without questioning it, we’ll park a fifteen minute walk away to save $5 on parking (a compulsory expense), then spend $60 dollars on beers and bad nachos inside!
We now understand these compulsory expenses as grudge purchases. Unlike Hamilton tickets (a discretionary purchase), where people pay 10x more to move from the middle of the house to the front row of the same show, grudge purchases do not drive value with a better experience. Instead, cost minimization is the most important factor.
After learning all this, there were two options to keep operating Walnut:
- manage costs the way other companies do, or
- go up market to serve only high-end customers
The first option was a non-starter: it would remove our differentiation in the market and we would be making hollow promises. We would no longer be a hospitality-inspired moving company that offered good jobs to great people. On a more personal note, we didn’t start Walnut to create bad jobs.
We considered our second option more seriously. High-end customers understood our value proposition, and we believe they would be willing to pay for it. But as we dug deeper, we realized turning Walnut into a premium service had too many challenges along the way.
The strategy would shrink the serviceable market, and we would also have to be excellent at finding a smaller customer base at the exact moment they’re looking for movers. Even if we solved the marketing challenges, our moving service would also have to meet new, higher expectations. Our concern was whether we could ever deliver enough value in this compulsory experience to justify the substantially higher price.
Pursuing either strategy meant changing our core approach to Walnut, and launching more tests to find viable unit economics. That would take time and money, and we weren’t excited about investing in that future.
Don’t throw good money after bad
When we explained this to a friend and fellow entrepreneur, he argued, “this is exactly why venture capital exists.” With product-market fit, we could focus on growing an enthusiastic customer base. Venture capital would help us build market share, and eventually we could earn the margins to become profitable. Some of the seed investors we talked to agreed with this approach.
But we preferred looking at this decision the way Bryce Roberts at Indie.vc might look at an investment. “At Indie.vc, we believe that companies with a focus on making a product customers love and selling it at a profit from the very beginning have a distinct long term advantage over those who don’t.”
We started Walnut because we believed we could create an experience customers love and sell it at a profit from the beginning. When our tests revealed that the latter was false, it didn’t matter what kind of capital we could raise. The future depended on transforming bad unit economics.
History doesn’t look favorably on this strategy. When comparing Instacart to failed dot.com era grocery delivery company Webvan, investor Bill Gurley reminds us, “it’s not a question of whether people like [the product]. It’s a question of whether you can generate enough cash flow from that type of operation.” He says, “It’s like the old adage, [when you’re] handing out dollars for 85 cents, you can go [infinitely].”
The hardest part about realizing this was that we were having fun. Employees, customers, and investors were excited about about what we were building at Walnut. But as we discussed what it would take personally and financially to create the company we envisioned, we kept going back to the unit economics. Running the numbers took emotion out of the process, and like most data-driven decisions, the choice was easy.