Today, we’re going to be doing something a little different. Me and Jon Derkits have teamed up to do a Bull and Bear Case for the nationally known brand: Hug Sleep.
This brand is currently estimated to be doing ~$50k/month on Amazon. Jon will present the bull case for this brand while I will present the bear case.
Both analyses contain nuggets of information I haven’t seen anybody else talking about.
This is what we cover in this deep dive:
- Business Summary
- Bull Case
- Bear Case
- Final Thoughts
Let’s get into it!
Hug Sleep Overview
The idea for Hug Sleep came about in 2018 and after a year of product development, the first version launched in February 2019. In October 2020, the brand was seen on national television appearing on the show Shark Tank. At the time, they had $335,000 in the last 12 months in overall revenue and made ~$140,000 in net profit.
Today, Helium10 estimates that their Amazon listing is doing $47,118/month ($565,416/year in revenue).
Because of their Shark Tank Appearance, we know more about their unit economics than most brands we review. On Shark Tank, they revealed the COGS for 1 unit is close to $18 and on Amazon, their large size retails for $87.99.
Below me and Jon will go through a bull case and a bear case for Hug Sleep.
Bull Case (Jon Derkits)
1. Hug Sleep has high brand awareness on Amazon + low cost opportunities to expand SEO footprint
By virtue of its appearance on Shark Tank, Hug Sleep has a tremendous amount of both brand awareness AND branded search traffic:
Nearly 40k customers per month search specifically for Hug Sleep’s products!
Moreover, while the broader weighted blanket category is declining, Hug Sleep’s branded search volume is growing by +79% YoY.
Not many brands on Amazon have this dual luxury of both high brand awareness and branded search traffic. But, if I were running Hug Sleep, I’d take advantage of this fortunate position in two ways.
- Run PPC Brand defense campaigns
First, I would ensure that I’m running PPC brand defense campaigns. Now, there’s some important nuance here. Customers searching the Hug Sleep brand have high purchase intent for Hug Sleep products, so they would be unlikely to switch to another brand/product that appears in search. But…they might. And brand defense campaigns help to prevent those last minute switches.
The other side of brand defense campaigns is that, in theory, you’re cannibalizing some of your organic sales (i.e., if you’re in Sponsored position #1 and Organic position #1, some customers will click on the Sponsored placement). To protect against a gradual decaying of organic sales due to brand defense campaigns, my aim in these campaigns would simply be to push the Cost Per Click (CPC) high enough to deter most advertisers from even bidding.
Per Helium 10’s Cerebro tool, there are currently 689 other advertisers on the search term “hug sleep,” likely because the average CPC is only $1.05.
While my brand defense campaigns would aim to capture these sales in the short-term, my longer term goal would be to drive CPCs up to the point where less than 50 other advertisers find it worthwhile to advertise on my brand name.
The second way that I’d take advantage of Hug Sleep’s fortunate position of high branded search traffic would be to give myself permission (and budget!) to expand my SEO footprint through targeted PPC.
- Increase organic positioning through targeted PPC
Hug Sleep currently ranks poorly organically (Page 3 or worse) for a number of high volume and medium-high relevancy search terms related to weighted blankets. As an alternative to weighted blankets, Hug Sleep should be bidding on these keywords.
2. Optimized for FBA: Hug Sleep has lower FBA fees than comparable competitors
Hug Sleep loosely participates in the weighted blanket category, as a substitute for a weighted blanket rather than a true weighted blanket. This benefits Hug Sleep from an FBA fee perspective, as its FBA fees as a % of sales – at any price point! – will be structurally lower than its weighted blanket competitors.
Consider this competitor with a 7lb kids weighted blanket. Ignoring the lower selling price, FBA fees are $8.24 per unit, dictated by the item’s actual weight rather than dimensional weight.
Hug Sleep, by contrast, pays an FBA fee of $5.06 for its kids-size equivalent, both because it is a lighter product and because of its compact packaging.
Over the medium- and long-term, products that are optimized for Amazon platform fees tend to do well. The excess cash generated by these products can be deployed toward marketing, invested in new products, or simply taken home by the brand.
Source of negative reviews is fixable
Hug Sleep’s products have a 3.9 out of 5 star rating, which is roughly 0.3-0.6 stars below the category average. The chief complaint among customers is that the products are overpriced and there is little “value for money.”
This is fixable, though not overnight. If I were Hug Sleep, I’d be laser focused on bringing my star rating to 4.3 stars, which tends to be a threshold value for Click-Through Rate (CTR) and Conversion Rate.
The first prong of my strategy here is perhaps obvious: Lower the price!
Customers struggle to see value for money at a ~$90 price point, so test lower price points. Per #2 above, because the product is well-optimized for FBA from a fee perspective, there is likely margin to play with here.
In the near term, I would simply coupon the products to
- Drive CTR and CVR
- Increase visibility – coupons appear in the Deals Store, which is heavily trafficked)
- Take advantage of the fact that coupon redemption rates are less than 100%, which means Hug Sleep isn’t giving away margin on all sales.
In the medium term, I would install and experiment with dynamic pricing, either done manually based on intra-day and intra-week traffic patterns, or with a software tool like AZ Seller Kit or Profasee.
The other prong of my strategy is less obvious: Post-sale customer engagement. In the context of product reviews, Amazon unfortunately limits post-sale customer engagement to templated messages through its Customer Reviews dashboard.
However, one of the templated options is to offer customers a refund. In my experience, proactively refunding a customer that has had a negative experience tends to flip negative reviews to positive ones. This is an important practice for the brand to adopt.
Relatedly, and incrementally, I would recommend that Hug Sleep explore enrollment in Amazon’s Product Lifecycle Support (PLS) program. Originally launched for brands with technical products for which Amazon customer support was unable to service customers, it is now accessible through a small number of software vendors like OnSite.
Communicating with customers before a product return, or negative review, is critical for Hug Sleep in digging out of this star rating hole.
If Hug Sleep (dynamically) adjusts price to give customers greater value, and both fixes and preempts negative reviews, by my estimates, they can improve from a 4.0 star rating to a 4.3 star rating after about 35k orders, or 10 months of sales.
Bear Case (David Holmes)
This product is part of a fading trend
When weighted blankets were first introduced, they exploded onto the market. During 2015/2016 multiple e-commerce brands launched and grew to 7 figures in revenue within months before dying a slow death 1-2 years later.
With Hug Sleep, I see a lot of the similar characteristics. The product is inspired by weighted blankets which are already a declining trend filled with entrenched competitors. Interest in the niche as a whole has rapidly faded as time has gone on.
Similarly, I expect Hug Sleep to follow the overall market trend.
Increased competition will drive down margins and erode market share
Hug Sleep does have a patent on their design which will help prevent strict copycat products from entering the market. However, as we saw with weighted blankets – different competition will enter the market driving down prices and eroding market share over time.
As evidenced by their Shark Tank episode, currently the product has a gross margin of 80% which is extraordinarily high compared to average for a physical product in the fabric/apparel space.
If we look at the front page for the term “weighted blanket”, we see classic signs of a “red ocean” product category. There are multiple concerning trends here:
- Average price is 50% of Hug Sleep
- All of the top 4 organic results are running significant coupons
- 2 out of the top 4 organic results are running limited time deals
Despite the IP moat, I anticipate competition entering the market and driving down the average price point. Over time, this will drastically compress product margins.
So, after reading the bull and bear case what do you think the future holds for Hug Sleep?
From Jon’s analysis, we can see there are multiple tactical ways for Hug Sleep to optimize and continue to win on Amazon.
However, is that enough to succeed in an overall declining category?
Thank you to Jon Derkits for his contribution to this analysis today. If you want to reach out to Jon, you can do so via twitter or his website linked below
Here are actionable takeaways that you can apply to your business today:
- Take a moment today and look at your FBA fees compared to your competitors. Is there a way you can optimize your packaging or product design to permanently reduce your fees?
- Are you being proactive about addressing negative reviews? Your star rating is one of the biggest factors that impacts conversion rate on Amazon.
- Look at the Google Trends of your product niche. Are you playing in a declining or growing category?