By: Alexa Esposito
November 2016
Introduction
ABC Network’s hit reality show “Shark Tank” gives budding entrepreneurs the opportunity to pitch their business ideas to a panel of business tycoons and investors dubbed “Sharks”. On the Season 8 premiere, the Sharks were fed with a product that they believed tasted good, but not good enough for a second taste.
Founded in 2008 by CEO Marti Wymer, Spoonful of Comfort is a gift basket service website providing customers with a way to send “sick or struggling” loved ones “homemade soup gift baskets.” Wymer was inspired to start the company in 2007 when her now deceased mother was diagnosed with lung cancer. At the time of her mother’s diagnosis, Wymer was living in Florida but her mother was living thousands of miles away in Canada. Wanting to comfort her mother in a way that transcended their geographical distance, Wymer scoured the Internet for an appropriate gift to send her mother. Faced with an array of chocolate and flower options, Wymer could not find anything that seemed appropriate for her particular situation. Wymer wished that she could send her mother what she, and, and so many others take to be the ultimate panacea and source of comfort for any illness: a warm bowl of chicken soup. It was at this moment, when she realized that the gift basket delivery service market was failing to provide appropriate options for occasions like this one, that Wymer says that Spoonful of Comfort was born.
Spoonful of Comfort, operating under a business model similar to that of an online flower ordering service, now provides other individuals in situations similar to Wymer’s with the option of sending 4-6 servings of chicken, or tomato soup along with rolls, cookies, a card and a ladle, wrapped and shipped in customized packaging to their sick loved ones. In a gift delivery service market full of flowers, candy, and assorted fruit whose exemplary customers are traditionally a husband sending his wife a surprise on their anniversary, or a customer wanting to send a token of gratitude to a business for their services, Spoonful of Comfort seems to fill a clear gap in the market. A gift basket full of soup and baked goods provides an option for mothers with a sick child away at college, or individuals like Wymer, with a sick relative miles away to send their loved ones the gift of solace that comes with a home-cooked meal. Although the Sharks acknowledged Wymer’s great idea, they didn’t bite when Wymer and the company’s investor and 60% owner Scott Gustafson served their soup to the tank, demonstrating that simply filling a gap in the market is not enough for a business’ success.
The Flawed Business Model – The Business is Hungrier than the Customer
Each Shark provided different explanations for their decision not to invest in Spoonful of Comfort, but the driving force behind the majority of the Sharks’ decisions was the same: Spoonful of Comfort’s business model was flawed. The business model of an organization refers to the way a business creates, delivers, and captures value. Business models may be flawed or fail for a variety of reasons, the most common being an entrepreneur’s underestimation of how difficult and expensive it will be to acquire customers. Difficulties in acquiring customers may occur due to the cost of acquisition, the cost of the product itself, and limited need for the product. Acquiring customers can become expensive for businesses when the “Cost of Acquiring Customers” (CAC) exceeds the “Lifetime Value” (LTV) of the customer, when the costs of operating under the company’s business model exceeds the revenue actually generated from customers buying the company’s product or service. In his article “5 Reasons Why Start-Ups Fail,” entrepreneur David Shok states business can calculate their CAC by taking the entire cost of sales and marketing functions, such as salaries, marketing programs, lead generation, and travel, and dividing this cost by the number of customers attained during the period of time those costs were accrued. Shok goes on to state that in order to calculate the LTV of a customer, entrepreneurs should consider the gross margin associated with the customer, which is the net of all installation, support, and operational expenses, over the customer’s lifetime. In order for a business model to succeed, their CAC must not exceed the LTV of the customer.
Although the Cost of Acquiring Customers seems like an obvious factor for entrepreneurs to consider when launching a business, many entrepreneurs overlook this cost, an oversight that often leads to the business’ failure. The Sharks determined that Spoonful of Comfort had fallen victim to this common oversight and flawed business model. Wymer and Gustafson noted in their pitch to the Sharks that it costs the business $18 to acquire customers, and $31 to make the packages, which then sell for $69.99 with a shipping cost of $14.99. Shark Kevin O’Leary noted that under their current business model, the company is losing approximately 40% of their company’s profit margin because of their Customer Acquisition Cost, and if this continues, will make the business’ road to acquiring customers a slow and difficult process. Furthermore, O’Leary, Shark Barbra Corcoran, and Shark Daymon John pointed to two factors that aggravate Spoonful of Comfort’s difficulties in customer acquisition: the business does not lend itself well to repeat customers because the service is only needed at time when someone is sick, and the hefty price tag for these packages may act as a sales deterrent. The Sharks also noted that the gift service will only be valuable insofar as it reaches the sick individual when they are sick, and overnighting a package adds an additional $14.99 to the already high price of $69.99 for the basket itself. Simply put, Spoonful of Comfort is spending more on securing customers than it is actually generating revenue through sales, and for these reasons, the Sharks smelled blood in the future of the company.
Food For Thought
Spoonful of Comfort is an example of how wary entrepreneurs should be about starting a business solely on the basis of a good idea, or an apparent gap in the market for a particular type of service or good. Entrepreneurs also must consider the CAC and the likelihood of attaining a returning customer base. The combination of an expensive price tag and the limited need for a good or service may act as deterrents to attaining a returning customer base or in the worst-case scenario, customers at all. This in turn may cause a business to fail if the cost of customer acquisition is higher than the revenue being generated by the company.
The prudent entrepreneur should consider the CAC, and consider a change in business model if it becomes apparent that the CAC exceeds the LTV. To assess the viability of their business model, entrepreneurs should take the time to calculate their CAC and LTV in order to make sure the CAC is lower than the LTV. Furthermore, entrepreneurs should also consider whether their product is likely to fill an ongoing need, or a short-term need, and given the need, whether the price tag attached to the product or service will deter customers. Keeping these factors in mind when deciding to launch a business can help entrepreneurs satisfy customers’ hunger for longer.