The Farmer's Dog: A Consumer Subscription Case Study
Analyzing a Series A Investment against the 10 Factors Framework
Welcome to issue #20 of next big thing.
This is the third and final part in a series of essays about consumer subscription businesses. Part one gave an overview of the category and more context for why subscription has become the dominant business model on the Internet. Part two listed 10 factors to prioritize when evaluating these companies.
In part three, I take you behind-the-scenes on one of my investments, and how it stacks up against the 10 factors I described last week. My hope is that this essay provides more insight into how to use the 10 factors framework as a builder or investor of a consumer subscription company.
The Farmer’s Dog is a fresh, human-grade dog food subscription service. It’s a physical subscription business, with product delivered by the company directly to consumers.
Back in 2017, I led The Farmer’s Dog’s Series A round of financing, and wrote this blog post about the investment. It’s been a fantastic three years getting to work with the company. The business has grown nearly 100X in customers and in revenue since the Series A, raised multiple new rounds of capital, and has made many dogs happier and healthier across the country. Most of all, it’s been a treat to work closely with co-founders Jonathan Regev and Brett Podolsky as they’ve built a special culture, and as they’ve exceeded expectations at every turn.
To further expand upon the 10 factors of consumer subscriptions discussed last week, I’ll discuss each with respect to The Farmer’s Dog business. The grades (in this case ranging from A+ to B-) are based on how I saw the business in 2017 at the Series A, but I include updates to my thinking about certain factors based on what I’ve seen since the investment.
1. Must Have vs. Nice To Have (A)
For pet parents and for pets themselves, food is a must have. Though there are many options on what type of food to feed your dog, what was clear with The Farmer’s Dog, even from the earliest stages, was that its food became a must have for every customer. Details such as the personalized packaging with your dog’s name on the package made the product delightful and even more of a must have. I give an A grade for The Farmer’s Dog being a must have subscription at the Series A, and as the company has improved its product and operations in the years since, it deserves an A+ grade today.
2. Existing Recurring Behavior vs. New Recurring Behavior (A+)
One of the most compelling aspects of The Farmer’s Dog investment was that the service tapped into an existing recurring customer behavior. Pet parents purchase food on a recurring basis, and dogs eat the same food multiple times per day for their whole lives. Unlike humans, who feel the need to switch up their diet, sometimes eating at home and sometimes eating out, dogs are not picky, and that makes them the perfect customers for a subscription such as The Farmer’s Dog. Today, and back in 2017, the company warrants an A+ grade for tapping into an existing recurring behavior.
3. Conversion from Free Tier or Trial to Paid Subscriber (B+)
The Farmer’s Dog offers a starter pack as a trial for consumers to test out the service. You can see a bit more about it in the Instagram post below. While the company had strong conversion from this trial pack to paid subscription, there was room for improvement at the Series A, and still today. I give the company a B+ grade, because there also is not a free tier or trial that the company can offer in the current instantiation of the service, whereas many other consumer subscriptions are able to offer those options.
4. Subscription Gross Profit (A)
The annual subscription gross profit of a customer of The Farmer’s Dog is in the hundreds of dollars. While the company deserves an A grade at the Series A, the gross profit has increased substantially since the initial investment, particularly given improvements in product gross margins that have come through economics of scale, and warrants an A+ grade today. As discussed in the 10 factors framework, a company with hundreds of dollars in annual subscription gross profit can get to billions of dollars in enterprise value without even reaching millions of customers. That’s the power of the economics that The Farmer’s Dog commands.
5. Cohort Retention (A-)
When comparing The Farmer’s Dog’s cohort retention against other physical subscription businesses, the company deserved an A- grade at the Series A. Its customer retention, for example, was a multiple higher than that of meal kit services such as Hello Fresh, and of apparel subscription service Stitch Fix, both multi-billion dollar public companies. An interesting characteristic of The Farmer’s Dog is that revenue retention and customer retention are very similar. This is because the frequency of purchase, as well as price of the product, stays the same over time, and retained customers can’t buy more product the longer they use the service, which is the case with some businesses. For this reason, and because the customer retention is not as strong as many digital subscription businesses, the company does not yet warrant higher than an A- grade on retention.
6. Payback Period on Customer Acquisition Costs (A+)
At the Series A round, The Farmer’s Dog had payback on its customer acquisition costs in the very first order. This is the holy grail for any business, but particularly for a subscription business. As a result, the company was growing quickly despite spending very little on marketing, and, while the payback period has of course lengthened as the company has grown, it has remained low enough for the business to scale quickly and efficiently. Today, the company has a multi-channel marketing strategy, including out-of-home advertising showing off the quality of the food, as well as the company’s rallying cry (Long Live Dogs!) as pictured in the below Instagram post. The combination of data-driven performance marketing and a focus from the early days on building a brand and community has enabled The Farmer’s Dog to be the clear leader in direct-to-consumer fresh human-grade pet food. Payback was the most obvious grade amongst the 10 factors for The Farmer’s Dog at the Series A: an A+.
7. Total Addressable Market for Initial Subscription Offering (B)
The single biggest question my partnership had about The Farmer’s Dog Series A investment was about the size of the addressable market for the initial fresh human-grade food subscription service. While I would have given this a B grade in 2017, the company has shown that its Act I is a much larger market than many may have thought back then, having already scaled to hundreds of millions of dollars in revenue. The market for fresh pet food has expanded in the past three years, and one can argue reasonably that The Farmer’s Dog itself has contributed to expanding that market opportunity. But it was not obvious back then, and one of the big risks we took was that the market of pet parents willing to subscribe to this product would be big enough to build a great Act I business.
8. Attachment and Bundling Potential for Act II, III, and Beyond (A-)
Because food is such a recurring and fundamental purchase for every pet parent, there is a natural opportunity to expand beyond food and into other products for The Farmer’s Dog. I believed strongly in the attachment potential at the Series A, although it was not yet proven, and therefore give it an A- grade. Other businesses in the pet category, such as Chewy and Bark, have shown that there is lots of room to expand beyond food into other areas of pet parent spend, and my hope is that The Farmer’s Dog can prove out this key factor in the years ahead.
9. Win-Back Potential (B)
While customers of The Farmer’s Dog churn for several reasons, and there is potential to win them back, in particular as the company expands its offering, the win-back potential was a B grade at the Series A, and remains so today. Consumers do not go in-and-out of food for their dogs often, and when they find something that works, they stick with it. This dynamic works against The Farmer’s Dog on win-back potential, and the company will likely need to expand to more lines of business to resurrect already churned customers going forward.
10. Network Effects (B-)
One of the hardest questions for any physical subscription business to answer in the early days is for the potential to have network effects. Often these come over time, and with scale. This was the weakest factor in The Farmer’s Dog story at the Series A and I give it a B- grade. You could already see the potential for network effects if you squinted. As each additional customer signs up for The Farmer’s Dog, the company’s ability to improve the consumer experience increases through data network effects. Each new customer gives us data on their dog’s breed and weight, which leads to the company personalizing a meal plan and portion sizes for the dog. But these were not yet driving the core experience or leading to defensibility in 2017. Fortunately, The Farmer’s Dog has executed very well on marketing and operations in the years since, and has the chance to tap into network effects at scale in the years to come.
I didn’t have the above framework at the moment of making the Series A investment decision in The Farmer’s Dog (though I wish I had!). What is compelling when looking at the grades is that there are several dimensions in which The Farmer’s Dog stood out as an A or A+ consumer subscription business: a must have, an existing recurring behavior, high annual subscription gross profit, best-in-class payback period. Furthermore, the majority of the 10 factors were A grades (6 out of 10).
It’s almost impossible for a business to be an A grade on every one of these dimensions at the early stage. There are always unanswered questions. But I do think it’s important for a few of the factors to be A+, and for many of these key factors to be exciting enough to warrant the investment (or the building of the business, depending on which role you sit in!).
I plan to use the 10 factors framework when analyzing every new consumer subscription investment, and encourage founders to use it as they explain the strengths and weaknesses of the business to employees and investors. I won’t be looking for all A grades, but I will be looking for thorough analysis, and for a majority of factors to be a high grade, as well as a few in which the business is best-in-class.
I hope you found this three-part series of essays on consumer subscription businesses to be enlightening. Given my continued investment in this category, I hope to share more learnings as I uncover them in the years ahead, and would appreciate you sharing yours too via the comments.
Part 1 - Consumer Subscriptions
Part 3 - The Farmer’s Dog: A Consumer Subscription Case Study (you’re here!)
Finally, a huge thank you for reading and sharing this series already. Part 1 is the #2 mobile search result on Google for “consumer subscriptions,” as of the publishing of part 3, which is 🤯 for me to see!
Thank you to Jonathan Regev for your feedback on this draft.