“Love is scalable”: Poshmark’s CEO explains how to grow users by slashing marketing (and the time he was nearly sent to jail)

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Only in Silicon Valley does an entrepreneur just drop into conversation the time a postal inspector almost sent him to jail.

A few years ago, Poshmark CEO Manish Chandra – who is about as far as you can get from a disruptive brogrammer – was sitting in his office when the postal inspectors barged in.

“Where is Mr. Chandra?” they said.

The head of operations walked over and asked if she could help them.

“No, we only want to talk to Mr. Chandra and we know he’s in the office,” they barked back.

Just like Newman once said: “When you control the mail, you control…. information.”

His crime? Pre-paying for thousands of 2.2 pound shipping labels and sending them to his users to make shipping the goods from their closets, sold on Poshmark, as drop-dead easy as buying or selling, or uploading a photo from their phone. Chandra told the users not to worry about weight, just to slap the label on, assuming it would all balance out.

Turns out, the post office tracks overages but not underages. They told Chandra his startup owed the post office millions of dollars.

Solving the problem required a call from a marketing person in the USPS pointing out Poshmark was one of Northern California’s largest and most active accounts, but Chandra ultimately convinced the post office to come up with a 5 pound label that could be slapped on any item without measuring or thought.

That’s just one example of how Poshmark has spent four years steadily removing friction for people – mostly women – who want to buy and sell fashion online in a more engaging, mobile-first way.

This week they announced another big expansion: A new wholesale channel that will directly connect their sellers with hand-picked fashion labels. As many sellers have begun growing into businesses doing hundreds of thousands of dollars in annual sales, Poshmark is going to help them get more inventory to augment what they’re already selling. And it’ll all go through the traditional frictionless payments and shipping channels. (Good thing he ironed that mess out with the Postal Service.)

What if the new channels create too much sameness amid Poshmark sellers? Chandra doubts it’ll be an issue, because each seller is really a stylist mixing and matching basics and designer pieces, just like a real woman’s closet. But if it does, then they’ll kill it, Chandra says. It’s all about serving his own little army of NastyGals on the platform – women who, like Sophia Amoruso, have a particular aesthetic and fans that flock to them.

As I wrote several months ago, Poshmark is a confusing company in a confusing space, given the tech landscape. Its investors always tell me how well it’s doing – and indeed Chandra shared a genrous portion of vanity metrics. And yet, the selling-things-out-of-your-house space is over-crowded with initial casualties already, and, despite a lot of funding, there’s nary a unicorn.

What gives?

Part of it is investors’ general distaste for ecommerce, but part of it –in Poshmark’s case – had to do with a gutsy call Chandra made two years ago: To slash his marketing budget by 80% and live with the consequences, good or bad.

It was a decision against going out and raising a big mega-round: To stop inflating growth (and churn) and try to go back to Poshmark’s roots of growing by community and referrals.

Given widespread concern about burn rates and negative gross margins, it’s a story every CEO paying for users should read. Excerpts of our conversation are below.

* * *                                             

Manish Chandra: One interesting indicator for us is our growth rate for the last year is significantly higher than our growth rate from 2013-2014. So for instance in Q3 of last year, we grew at 50%-60% year over year, and this year our growth will be 150%-200% year over yera. That’s a big jump. I always said the problem is most retail models grow fast up front because you can market and then you reach a plateau and flatten out. Retail on a social community architecture takes a long gestation time but then when it’s there, there’s really no upper limit to the scalability because it just expands.  

We made an adjustment to our user acquisition model from a heavy paid one in the first half of 2013 to a much more community driven one by Q4. Last quarter we acquired five times as many buyers on a monthly basis and our costs are actually lower because it is coming through word of mouth and community.

You can’t build anything sustaining in mobile without engagement. Our average active user day one spent 20-25 minutes in the app and opened it 7-9 times a day. Three and a half years later, our average user count is 100x, but those engagement metrics are the same.

If you look at our flat consumer acquisition costs, intense engagement and repeat buying for high volume sellers– the common thread is our focus from day one on community. Community is a very kumbaya and “let’s hug together” word, but what we are here to say is love does indeed make money. You have to focus on love. If you focus on love, money comes. If you focus on money, nothing comes. It’s how our whole system works.

Love is scalable.

We took a weird journey to create a very large scalable fashion platform, because we focused on community not merch. The only time we’ve suffered setbacks is when we haven’t embraced our weirdness. So my motto is “embrace your weirdness.’ Our weirdness is the community. The more we embrace it the faster we grow.

It’s kind of like Yahoo. If they’d embraced their weirdness, they wouldn’t be in the predicament they are. They should be the best mobile app in the world. They should be Buzzfeed. You guys are embracing your weirdness. It’s powerful.

In the early days we used to greet everyone who joined the platform, but that stopped scaling, obviously. So we created a “meet the posher” program and invited our veterans to greet new people that joined the program. Up to one-fifth of new people are greeted by someone. That group has just been given a warm hug –nothing else. The group that gets greeted has 3x the buyer activation of the other 80%. That’s the value. Love does create money.

SL: What’s an example of when you strayed?

MC: When we started to focus on monetization we were trying to aggressively drive revenue, which we did more in 2013 than anything else because we were young. And then we stopped and took a pretty big step back in the third quarter of 2014. Our buyer costs had tripled, and our revenue was flat.

Channels were opening up in mobile and Facebook was opening up so I spent a ton of money and basically I had two choices. I could have raised a big round and continued on with our merry way. We just got drawn into this aggressiveness, so I took a step back. I went to the board and I said, “Let’s not raise a big round,” and I took my marketing spend and overnight we took it down 80% and said ‘let’s see what that does.’”

It was one of the boldest decisions I made, and I don’t think we would be here today if I didn’t. We would be dead or we would be in a churn cycle. Eight quarters later what happened was cutting 80% of our marketing spend only lead to a 20% downturn. Our buyer count dropped, but it didn’t go away. Then we were able to build it on top of that. Now we are 5x that size in terms of new buyer count. It’s all been done by community.

We still do some paid advertising, but it’s a seed engine that drives the whole thing. It’s all about community and social principles. That’s where we started, but for a couple of quarters we strayed because we got caught up in the hype. Oh my God we could be….! Then we went back to the principles and grew. My doctor said I had post traumatic stress syndrome going through that whole period because if I was wrong, we could have just disappeared. But I didn’t want to grow the company that way.

Eight quarters later we are bigger and our growth rate is accelerating, because it’s a network effect.

As I’ve gotten older I feel comfortable in my skin. You embrace your weirdness. I’m not trendy.

SL: You are an incredibly good salesman and you always convince me how well things are going. So why, in such a popular space, are you not a unicorn. Sounds like what you just described may be part of the answer.

MC: Yes that is exactly the answer. The unicorn is coming. All of this will come over time. I think there are two things that happen in Silicon Valley. The primary experience someone can have ends up driving a lot of investment in consumers. So a valet company is more likely to get funded than a community fashion company. That’s just a fact. So that’s there. But after some point in time the business metrics are hard to ignore.  

At some time next year we will get to the point where we are an IPO candidate. We are not profitable now but we will be opex break even soon, which means the only money you are using is growth money.

To get here, I had to double up on my believe, and it’s hard and sometimes you do feel lonely. You feel lonely because you are betting on something. But to me, I’d much rather bet on your  journey and not sell out than go in a direction that is just about making money.

 …

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