Prose CEO Arnaud Plas on growing a company with profitability in mind

0:05Hello, everyone, and welcome to the Modern Retail Podcast.

0:30how he has grown the business while keeping profitability in mind. What follows next is the conversation. Hope you enjoy.

0:43So let's talk just a little bit about your background and sort of how you got to starting Proz, because I feel like maybe people don't know the story. Okay, yeah, sure. So I actually come from like a pretty corporate background. I've worked at Ankle for five years, L 'Oréal for five years. So I started CPG in the laundry space with Ankle. Then I moved to beauty, which from my view was a more interesting market. I learned that at L 'Oréal in France, in New York, and then we founded PROS in 2017. We saw an opportunity to really reinvent a bit of the supply chain and to provide personalization in beauty space.

1:23So what does that mean? How did you approach the supply chain from the beginning? How did that manifest? So we knew, we looked back at the story of beauty and actually beauty started with a very personalized model. So when you were going to the apothecary 200 years ago, you were meeting there and you were doing a consultation, they were making a product for you, and then came the industrial revolution and the standardized approach for like 100 years. And for us, like this mass and standardized approach was due to the limitation in supply chain. So we were like, is there a way today to actually scale the made-to-order process and a fully personalized experience by combining AI and automation on the manufacturing part?

2:07And so the first six months have been really, while we were marketers, it has been a deep dive into the supply chain of beauty and what were the latest technologies that could help us scale. We saw that there were an opportunity to scale a new supply chain, and then we reinvented the shopping experience from there. And we launched in 2018. Got it, got it. And so can you give just a little brief history of the expansion of the product line? Because you started in hair care, but you're no longer just hair care anymore. Yeah, exactly. Just maybe one thing on the user experience. So instead of using the normal shopping experience where you would go and discover the products with the category page and product page and do the checkouts, in our case, it's a pretty long consultation.

2:50It's around 30 questions which allows us to collect around 100 data points. This goes into an algorithm which create a formula that is really tailored and made for you and if you buy it the product will be made the day after. So it's really made to order and fully personalized. We've made close to 20 million products all unique and all made to order in our manufacturing space in Brooklyn. So this is really how it works. Coming back to your question around assortment, yeah, we started with hair. I mean, the funny story is that we started with hair because skincare was a little bit dangerous in our view because it's something that you put on your skin, you don't wash.

3:29So we're like, let's start with something that you wash because it was really the beginning. And so we started with hair. We also saw an opportunity because there is a lot of diversity in hair, a lot of things you can do with your hair transform your hair and and and customers were not 100 % happy with their products so started there only three products first step was to expand then the assortment within hair so we went up to 10 products within the air category then we did air supplements which was a great addition to further build the LTV and then major step with a spirit of like reaching profitability, we launched skincare in 2023.

4:12Got it. You mentioned hitting profitability. So you've hit profitability? Yeah. So just to give you some business metrics, so we've done close to like half a billion dollar in revenue since launch. This year will be around 160 million. Wow. And we've reached profitability last year, single month in May, single quarter in Q3, and full year will be 2024. Wow. Congrats on that. That's great. It has been a journey. That is definitely a journey. I wanted to ask about profitability and supply chain. And just your model is so interesting because it's so one-to-one. And so did you have a roadmap in mind for how this would be able to work?

4:49I'm sure you did because you started this company, but it seems like that is a difficult beast to do when you're making all the products in Brooklyn. They are all very individualized. How did you do that? Yes. So the key was really how we automate production and customization. And so since the very beginning, we knew while we started in a kitchen manually in Times Square, we knew that there would be at some point a machine that would do this in a more automated way and that would drastically reduce the cost. Our goal was really to bring the cost back to like a dollar. We knew that people were ready to spend$5 to$10 more for a personalized product and that the incremental cost on the supply chain side, the target would be to be at$1.

5:29So they're like, if we were able to execute this, there would be a pretty high and significant value creation for the company. So we knew that was the goal. The challenge, of course, is to execute. And so the transition to automation actually happened right before COVID. We received our machine a month before COVID in February 2020. So we did the transition from manual to automation during the first three months of COVID, which was challenging because we had a lot of demand at that time. Cost of acquisition went down to zero. So we wanted to scale, but we were doing that transition. But we did it pretty efficiently.

6:07And yeah, now we've been able to really create a model that is profitable, where the cost of customization is actually under$1 now. We've been able to do some pricing over the last two years without really impacting the demand. So this is how we've been able to achieve profitability. But I would say it has been a journey and a journey that we've started actually in 2021. So I think everyone in the D2C space started to think about profitability more in 2022, I would say, because this is where the fundings went down. And so we had to become profitable as companies. We started a year before, more due to our size.

6:47So at that time, we were at around$80 million in revenue. And so I think the discussion with the board was at this stage, we have to demonstrate our ability to be profitable. And we were, at that time, I would say at probably minus 30 % EBITDA. So there were definitely a path to be profitable. And so the goal was basically to get 10 points per year and to be profitable. Initially, it was in 2025, and we had to accelerate a little bit to 2024. And I think it has been a pretty long list of initiatives. I've started by hiring a C-suite and really moved the company from a build chapter to an optimization chapter.

7:32And so we hired CFO, CMO, COO to really, across the company, bring some productivity programs to gain efficiency in how we were operating as a business. So that was one, I would say. And you need to reach a certain level of scale to make this investment efficient. Because if you're still pretty small, I think it's going to be a marginal impact. But if you pass the, I would say, 50 million mark, then you can really start saving a million here, a million there, and little by little close the gap. Then we thought about the CPA slash LTV equation, which, of course, when you're in D2C is a very important one.

8:17We've been lucky to be on a subscription model since 2019, which has been very efficient. And I would say pricing combined to subscription is a very powerful harm because what we've seen is that you can do pricing pretty easily with your customers that are on your subscription without really impacting the churn. So we have around 300 ,000 members. And when we do pricing, and we did up to 8%, I think, a year ago, we've seen maybe like 100, 200 customers churning. That's it? 100 out of 200 ,000? Yeah. And so when you like subscription, we present for us around 10 to 11 million per month of like recurring revenue.

8:58So if you do an 8 % pricing on that, like you immediately get a million dollar, almost a million dollar more revenue without doing anything except sending an email. So that's very efficient. And the last two years we catch up on the price and that helps a lot. We're going to take a quick break and we'll be right back. And so while you were doing all of this optimization, thinking about saving a million here, a million here, how did you think about product expansion? Because you were also doing this, and that seems like they seem kind of antithetical, if you ask me. Maybe I'm wrong. Yeah, no, I mean, we had to make a decision.

9:35We had three ways to expand the business. One was distribution, one was geo, and one was product and assortments. I would say back in 2029, we would have raised 20 million and done the three at the same time. The reality is that when you want to be profitable, you have to sequence your efforts. Because if you sort of like layer all your initiatives that are non-profitable, then you get very unprofitable. So you need to sequence and you need to start with the right initiatives so you can get some oxygen in your P &L. So you can then fund something that is diluting a little bit. So for us in our mind, if we were to open a country, it would definitely be one or two years of investments.

10:15We would start from zero acquiring new customers. If we were to open a new channel, especially a physical channel, it would have been a cash injection for the inventory and everything. While launching a new skincare line was not a huge investment. And by leveraging our existing customer database, it would be incremental revenue without spending media. And I think it was a strategic bet. And it's actually what happened with around$10 million incremental revenue spending, I would say, probably like$100 ,000 because it was really marginal media investment. We really, 90 % of the revenue was coming from existing customers.

10:55Oh, really? So it was all about LTV building because we had to catch up on the CPA increase. Got it. And can you talk about the CPA increase? Because I think that's another important point that I've talked with a million people here already this week, where it's like, they're going up, I don't know what to do. So how have you approached this, you know, from your position? Yeah, I mean, to give you some numbers, when we started, we were in the 50-ish dollar. I remember in 2019 meeting someone who told me, you have to prep your company for like$100 CPA. And I was sort of like laughing at that time.

11:28It happened, I think, a few months after. so we definitely permanently thought about what if the CPA would double in the next 12 months that was our thinking since I would say 2020 and that's why assortment has been a big part of our strategy to sort of catch up on the LTV because CPA can increase as soon as your LTV is increasing at the same time so definitely assortment was part of the strategy CPA raised to I would say a pretty unhealthy level in 2023 then we got back to some of like the drawing ball and we're like shit we're giving like$200 to Meta to acquire a customer I mean and we're giving$10 discount to the customer yeah so basically that's how do you spread your investment between what you give to Meta and what you give to your customer And so we actually ended up giving more to the customer with a trial offer with like 50 % off, which decreased very significantly the CPA on Meta almost by 50%.

12:36And so the net net was way positive. And we have really piloted the business with a very aggressive trial offer. And I've seen brands like Farmer's Dog doing 100 % free on your first order. Because, of course, if you move your CPA from$200 to like, let's say,$20 because your first order is free, and if you're on a subscription business with high repeats, then of course the CAC on the LTV equation can be much better than doing a full price on your first order with a very high CPA. So I think we've thought about the pricing promotion strategy in regard of the new acquisition context. I wanted, so that's super interesting because I feel like often these days you hear brands saying the opposite where I don't want to, I'm not going to give an introductory offer.

13:26What you see is what you get because, but it sounds like you're not ever going to do that. Yeah, I think for us, two things have been game changing in the last five years. One was launching the subscription. It doubled the repeats business. And B was the introduction of a trial offer, being super aggressive in your first order. But it only works if you have greater retention. We're at like 70 % first repeat within six months. And you need a subscription with a pretty good frequency. Of course, if you're on a single order model where you have to be profitable in your first order, this thinking doesn't work.

14:04But if you're on a subscription business, I would say you need almost to give the first order for free. so you can really bring your CPA down and increase your audience pool. Can you talk about the subscription? Because this is something that I think every company wants to do. Some works, some it doesn't. Yours, it clearly doesn't. It makes a lot of sense for the products you're in. But it's also, have you had to tweak it at all to make it so that you had a higher retention? Or pretty much, was it a switch and then you had recurring revenue? No, yeah, it was really a switch. We doubled the LTV by moving from one-off.

14:39because by default, you're going to repeat. So you actually have to make an action to churn and to avoid the following order. Why, if you're not on a subscription, you actually need to make an active action to make a new order. So you're just switching. And this is how you move from like a 30 % repeat to a 60 % repeat almost immediately with the same product. So it's just like the autopilot or the default behavior is repeating and you need to take action to churn. and this has been extremely efficient. Of course, it doesn't really apply if you sell a mattress. You're not going to do that on subscription.

15:14That being said, I've seen business, like Jolie, I don't know if you're aware of that business, Jolie or Showerhead. They have, of course, the one-off purchase with the hardware and then there is a refill on a filter or something like that. So they're trying to combine a subscription stream on top of a one-off purchase, which I think is smart when you're on more like a one-off vertical. So I think some people have been able to be creative and sort of like plug a subscription engine on top of their current or existing model. Got it. Can you just, you've mentioned a lot of numbers, which has been great as a journalist.

15:56I really appreciate that. But given that you've been so focused over the last few years on hitting these profitability metrics, What were sort of the top data and metrics you were keeping in mind to make sure that you were right on track? Or was it just pretty much CPA, LTV, that type of stuff? Or is there anything else you're always thinking about to make sure that the pathway is correct? So LTV is a tricky one because you only know your 24-month LTV after 24 months. So you cannot really drive your business with those kind of KPIs. I think it's just like every year you need to look at it and check that your predicting model is pretty accurate.

16:35So after three months, you can predict quite accurately your 12 months, 24 months LTV. I tend to prefer payback over LTV as like a business API because I think it's much quicker to get. So if you have like a three months payback, four months payback, six months payback. So in our case, we move from like seven months to three months, by instance. So this is something that you can get a little bit quicker than the LTV. So payback is definitely one. I would say customer satisfaction is a very important KPI. We're here as well. I mean, after three weeks, we know if people are happy or not. We know if they will repeat after two or three months.

17:20But after three weeks, we have a survey that tells us whether they are happy or not. So we've done a lot of work to improve our formulas, to improve our boxing experience, all of that. And so pretty quickly, we were able to measure the impact, the NPS and stuff like that. So any indicators around customer satisfaction is a good segue to your future LTV that you get quicker so you can iterate and make quick adjustments. So that's one that I think is important. Another one more on the CPA side is incremental CPA. So we've been working with House, which has been a great partner to measure incremental CPA.

18:00And I would say before that, we were quite in the dark on how we were investing. And I think House has been very helpful to measure incremental CPA. So 2024 is the year full year profitability? So on the expansion front, on the business front, what should we expect to see? What are you thinking about? How is that manifesting for this year in terms of what you're rolling out? So I think it's like further building skincare will be a priority for the next two to three years for sure. And then as we're profitable then, thinking about sequencing your efforts and being sometimes profitable initiatives and more like investment initiative, then we're going to think about international, which will be an investment, but I would say now we can afford that.

18:49Now we're profitable. So the next initiative will probably be around geography and we also discuss with distributors. But geo is probably next. Can't wait to see it. Arnaud, this has been great. Bye. Great seeing you. Thank you.

19:13And thank you for listening to this episode of the Modern Retail Podcast, a show by Digiday. If you haven't already, please do subscribe and head to Apple Podcasts to leave us a review and a rating. See you next week.