By Gavin Zhang
Hims’ recent entry into the unicorn club is unexpected. I was intrigued when I read that Forerunner, Redpoint, and Founders Fund all contributed to the company’s recent $100M series C. Who knew that selling prescription generic Viagra direct-to-consumer could garner a $1B valuation within 2 years of existence? In this memo, I argue that following its early successes, Hims will need to double-down on operational efficiency to offer customers speed and convenience, while defending itself from competition. To win, it will need to improve its customer experience, expand into physical stores, and build a team of medical-policy experts to navigate an increasingly complex regulatory landscape.
Here are the basic facts about the company:
The Pitch: Hims and Hers empowers men and women to take control of their wellness and health on stigmatized conditions like ED, balding, and birth control by buying products like generic Viagra, hair loss medication, and birth control pills discreetly.
The Business Model: Customers pay for subscriptions starting at $20/ mo membership fee for access to the platform and physician network. To purchase products, customers fill out questionnaires and consult with a licensed doctor via email or phone to obtain prescriptions. They receive their prescription in about a week’s turnaround time. The company partners with Bailey Health for its network of doctors who prescribe and interface with customers and Truepill to help fulfill its orders.
Price Breakdown: According to the site, Hims sells generic Viagra at $30 for 10 pills or $3/pill. Romans, their main competitor, sells 10 pills for $20 for or $2/pill. According to GoodRx, a person can obtain generic ED meds with a coupon at $12 for 30 pills or $0.40/pill.
Fulfillment Speed: Hims delivers most products to the customer in 5-7 days of standard shipping. Romans delivers its products in 2 days.
Growth Trajectory: Hims launched in 2017. In its first week, it earned one million dollars in revenue which, the founder Andrew Dudum says, was its weakest week of sales. The company has declined to release any other revenue numbers, but it has grown at an impressive pace. In little over a year of existence, it has also launched Hers, a new product line targeting females.
The early growth has been impressive, but I’m a bit skeptical about how Hims can sustain its success. It’s an uphill battle for Hims for the following reasons:
1.Hims is selling a commodity product:
Hims sells generic Viagra for ED and hair loss supplements for men and birth control for women, as well as vitamin supplements and skincare for both genders. The packaging looks really impressive with its sans serif font, but at the end of the day, there is little they can do to make their product fundamentally different than what their competitors or existing incumbents are selling. Because of an inability to differentiate on product, Hims will have to win customers on marketing, customer experience, price, and convenience.
2. The main lever for differentiation is marketing, which doesn’t seem sustainable:
The only way Hims can differentiate its commodity product is through marketing. Its eye-catching, clever subway ads (the infamous cactus), generate conversation over stigmatized medical issues like ED, baldness, or bad skin. Gin Lane, the branding agency that partnered with Hims, created a brand strategy that was at once deeply empathetic and casually conversational. With punchy copy and a tongue-in-cheek approach to sensitive issues, Hims urges its customers to embrace, “Prevention,” as “more effective than denial,” Hims has hit the zeitgeist amongst its target millennial audience with topics that feel even more pertinent as masculinity norms are changing. The problem will be whether marketing is sustainable as a differentiation strategy in the long-term.
Hims’ early successes in marketing a commodity product are reminiscent of Dollar Shave Club’s story. With a simple subscription model of $1/mo and an insanely viral video that kickstarted its brand awareness in customers’ minds, Dollar Shave Club reached 20 million people. The ad, in combination with sharp social media marketing and engagement, converted viewers to customers who, in turn became brand evangelists. P&G, on the other hand, had to pay billions for TV (2018 big pharma ad spend for TV alone was $3.7B) to convince customers to buy Gillette to look like Roger Federer.
Dollar Shave Club was able to win and convert a lot of customers with emotionally resonant marketing. The problem was that it needed to keep spending money in an increasingly competitive online ads market to acquire new customers. One could argue that this led to its $1B eventual exit via Unilever, as it couldn’t find a way to scale ad spend profitably.
Hims has emotionally resonant marketing but it's an uphill battle to find a way to scale while managing its CAC in the long-term. Furthermore, its competitors will face the same battle, meaning that these brands will also have to compete on ad spend.
3. Big name brand pharmaceuticals are losing their patents and there’s more competition for generics:
As Pfizer’s patent on Viagra and Lipitor are expiring, the barriers to entry for these particular product categories are lower for new players. We’ve already seen a spate of new startups pop up to offer these products: Romans (directly competitive with Hims and also founded in 2017), Nurx (birth control), Cove (migraines), Zero (quitting smoking), and Lemonaid (all of the above). On the incumbent side - Pfizer is mobilizing to consolidate off-patent divisions like Upjohn and Mylan to help leverage its scale to control more of the market on its generic drugs. Furthermore, Wal-mart and Amazon have all launched telemedicine apps which ultimately delivers pharmaceuticals -- and these are two of the most operationally efficient companies in history. Between huge incumbents and smaller startups, Hims will have compete on operational efficacy.
4. Looming regulatory risk: Washington is going to start looking into how D2C platforms enable communication between doctors and patients:
Due to a recent rise of bad actors, the core mechanism of how consumers and doctors communicate via D2C platforms is going to come under increasing regulatory scrutiny. For example, there’s been a rise of scams that target the elderly for braces. Currently, Hims is only dealing with low-risk medical conditions, so an easy checkbox questionnaire for customers to gain access to generic ED pills seems sufficient. However, according to some health advocates, Hims’ methods of prescribing drugs do not even meet standard AUA regulations. It’s reasonable to expect Hims and similar competitors will come under more scrutiny as regulators crack down on how doctors and patients communicate to obtain prescriptions.
The casual style of marketing is also under fire for advertising beta-blocker propranolol, an FDA-approved treatment for hypertension, as a cure for performance anxiety. The casual tone of marketing the particular product as a “wellness” product worries many health advocates that customers are only being sold the benefits of drugs without proper warning of the risks.
All of these examples point to an impending regulatory storm for D2C platforms. If stricter regulations are imposed, the casual and provocative marketing that was crucial to Hims’ initial successes, may be at risk.
If Hims is facing an uphill battle due to previously listed reasons, it’s also important to note, so are all of its competitors. As a customer, I would stick with Hims if they’re delivering on the promise of convenience, great customer support, and low prices.
Here’s what I think Hims needs to do to win:
1. Improve its customer experience, starting with transparent communication around pricing:
In a hyper-competitive environment, Hims only has one chance to win customers on a good experience. It needs to be proactive in explaining their billing process so the customers know exactly why they’re getting charged. Any confusion will lead to a bad experience. I took a look at customer reviews on Trustpilot, a third-party site for customers to post verified reviews. Hims has a “Great” rating or avg 4/ 5 stars based on 317 reviews with customers.
Here’s a screengrab of their customer reviews on Trustpilot, which offers a ratings break down:
The most interesting fact that stands out is 12% of their reviews are “Bad,” which is the 2nd highest proportion of their reviews. That’s a sizable portion of their customers that really disliked something about their experience and I sense there’s a repeat issue that is causing such a sizable negative response.
After digging in, the consistent call out from these 1-star review customers is that they failed to receive product but still got charged.
The website explains that customers’ orders are fulfilled with 3 refills at once, and are charged per refill per month. I suggest that they either charge customers upfront for the 3 refills in one lump sum and explain the breakdown or keep the existing billing process but explain more clearly to how the customer will get charged. Right now, there’s nothing on their website that discusses the billing process clearly. As a result, customers think they are getting scammed.
2. Expand its physical presence and offline distribution:
Currently, Hims partners with a 3rd party pharmaceutical distributor like Truepill to help fulfill customer orders. This is money they could be reinvesting in their own supply chain. Hims is already building out its first brick-and-mortar location in Columbus, Ohio. This physical location will handle some regional fulfillment via mail orders. While one could argue Hims’ sales dollars are better funneled into ad spend for customer acquisition, I think Hims should invest in more physical locations for 4 reasons:
A physical location is a distribution point that can help speed up fulfillment which is important for winning over the consumer.
Consumers are increasingly channel-agnostic. For example, a customer may want to have the option to go to the store to try on a dress only to order it online. I’d imagine it’s going to be similar to prescription fulfillment. I want the flexibility to receive my order in the mail or pick it up in-store, depending on whichever option is the fastest.
A physical pharmacy with a pharmacist on hand can answer customers directly. While a brick and mortar pharmacy may lose some points on satisfying a customer's desire to be discreet, having a friendly in-house pharmacist on staff to address potential questions and patient concerns further advances the brand's desire to be perceived as conversational and approachable.
A physical space helps contextualize customer data. Hims can learn a lot about its customers’ raw data via online transactions, but having physical spaces can give HIms more localized market data on customer behavior. This creates a feedback loop that can generate potentially interesting insights for future platform product innovations about customer experience.
3. Build out a team of policy-savvy medical professionals
Hims recently recruited Pat Carroll as their Chief Medical Officer. He served Walgreens as Chief Medical Officer for 5 years. This is a strong move from Hims because they are already aware of the impending regulatory risk, and an experienced executive can navigate the murky waters of Washington for the brand. The company needs a specific health-policy oriented team to protect their brand.
Despite its meteoric growth, Hims is slated to face an uphill battle because of its undifferentiated product, reliance on heavy ad spend, a large number of competitors, and impending regulation risk. Nonetheless, Hims' emotionally resonant storytelling and entry into brick-and-mortar distribution could give it a sustainable edge over its competition. I’m going to be watching the company closely as it grows. I can’t wait to see how the service navigates 2020 and beyond.
The most valuable part of being a member in the Renaissance Collective community is that you're surrounding yourself with smart people who will challenge your assumptions and reasoning and help guide you to higher-level insights. Thanks to RenCo community advisers and members Jen Yip, Henry Su, David King, and Emily Hughes for reading drafts and helping me refine my thoughts. - Gavin Zhang