The Economics of Everyday Things - 55. Direct-to-Consumer Mattresses

Episode Date: July 8, 2024

Online companies promised to bring transparency to the mattress-buying experience. Did that work out? Zachary Crockett takes a look under the sheets. SOURCES:Derek Hales, founder and editor-in-chief of NapLab.com.Joe Megibow, C.E.O. of Casper Sleep. RESOURCES:"Drake Has a $400,000 Bed − We Asked Why and Where You Can Buy It," by Emilia Hitching (Homes & Gardens, 2024)."Casper Tests a New Store Design as It Rethinks Its Retail Strategy," by Anna Hensel (Modern Retail, 2024)."Is The Direct-To-Consumer Bedding Business Turning Into A Bad Dream?" by Warren Shoulberg (Forbes, 2019). EXTRAS:"Are We in a Mattress-Store Bubble?" by Freakonomics Radio (2016).

At his house in Scottsdale, Arizona, Derek Hales has plenty of space. He's got six bedrooms and a five-car garage. But sometimes things can get a little tight because Hales shares his home with dozens and dozens of mattresses. I am the founder and editor-in-chief of naplab.com. It's a platform that tests and reviews mattresses. I am the founder and editor-in-chief of NAPLAB.com. It's a platform that tests and reviews mattresses. Hales is a full-time mattress reviewer, and he takes the job very seriously.

So we have 10 different factors that we test. For cooling, we have a thermal camera that does surface-level temperatures. For motion transfer, we use an accelerometer. For response time, we're pressing a medicine ball into the mattress, and then measuring exactly how long in seconds it takes to recover back to its original shape. For edge support, we take photographs and videos and then measure those in Photoshop to the pixel level to determine precisely how much in terms of inches that something is bouncing or sinking. There's a reason Hales goes to so much trouble.

In the US, mattresses are a $13 billion industry. More and more shoppers now buy their mattresses from direct-to-consumer brands, like Casper and Lisa, through the internet. When customers search online for something like, what's the best mattress, NapLab tries to be one of the first results. And when someone buys a mattress

through one of the links on the website, the mattress brand pays Hales a percentage of the sale. Hales earns a very good living reviewing mattresses, more than most doctors and lawyers, but his job is also controversial, because when reviewers have an incentive to generate sales, things can get messy. There's all this pay to play, pay for placement, pay for ranking, pay for score. Mattress brands are all trying to game the system.

It's a pretty cutthroat business. For the Freakonomics Radio Network, this is the economics of everyday things. I'm Zachary Kroket. Today, direct-to-consumer mattresses. In today's market, buying a mattress can be a Herculean task. There are thousands of different models sold by hundreds of different companies. There are mattresses made with continuous coils, offset coils, pocketed coils. You have memory foam, gel foam, latex foam, poly foam. The industry

has an endless array of materials, technologies, support levels, and sizes. The average customer spends around $1,000 when they buy a new mattress. But there are products on the market at every price range. There are mattresses as cheap as $150 to $200, and then there are mattresses that are hundreds of thousands of dollars. So the price range is enormous. The rapper Drake sleeps on a Grand Vividis model from the Swedish company Hestens. It reportedly set him back around $400,000, nearly the median price of a house in the

US. So what's inside a mattress like this? You know, unicorn blood? No, but really horse hair. It's expensive for the sake of being expensive. It's not something that is going to massively improve the performance of the mattress. We're willing to plunk down big money on mattresses because we spend about a

third of our life lying on them. The quality of our mattress can make a big difference to the quality of our sleep. People have different preferences, some like a mattress to be really firm, others want more give. And because we're so particular about the way a mattress feels, many shoppers want to test them out before buying. But going into a mattress store isn't always a great experience. I think it can feel kind of sleazy. That

feeling may have something to do with knowing you're the 10,000th person to be lying on a particular mattress in your street clothes and shoes. It's also partly the prices. When we look at mattresses that are sold in stores, the markups can be quite insane up to 10x the cost of materials. A mattress that costs around $300 to make might be sold for as much as $3,000. Of course, physical retailers have bills to pay, rent, labor, utilities, but most mattress stores have relatively low overhead expenses. Other than the floor models, they generally don't stock much inventory at the

store. Orders tend to be placed with manufacturers on an as needed basis. A lot of that is you're paying for the experience, paying for the names of many of those brands. Mattress stores usually have tight-knit distribution partnerships with a handful of popular brands. And each of those brands has a tiered pricing structure with low line, mid line, and high line offerings. Many mattress salespeople get paid on commission. They want you to get a mattress you want, but they also want you to spend as much money as you can. Stores will also typically offer to match a lower price you might

see at another retailer. But shopping around for a better deal can be tough because different retailers can offer the same mattress under a different name. Mattress brands will often make the same or very similar mattress with a different cover, different names, and different price points depending on the retailer that it's sold. So it makes it impossibly difficult to compare mattresses in that respect. That lack of transparency carries over to the stuff that's inside of the mattresses. Many mattress companies use fancy terminology and marketing lingo to make mattress technologies

sound more advanced than they actually are. A lot of that is intentional confusion. It's trying to hide the real material quality and the performance of the mattress. If a mattress brand said, okay, this is a viscoelastic polyurethane foam, and it's a five-pound foam with a density of 5.0, and it's on top of a 16-g gauge coil unit with 10,032 coils and tells me exactly what's in the mattress. And I compare that to another mattress

that has different specs or materials or different price points. Then that gives me all the information I need to really make an informed decision. But that is very rare these days. We really just don't see mattress brands offering that level of transparency on what's actually in the mattress.

For instance, some brands will use the term phase change materials, which refers to substances that regulate temperature. Well, that sounds great, but how much phase change material is in that? How is it implemented? And what is the quality of the material? All these different factors are going to determine how cool that actually gets the mattress. And then there's the can of worms that is the mattress warranty.

I mean, even if it says 10 year warranty or 25 or lifetime, often they have prorated periods. So after so many years, the warranty gets progressively worse and worse. Mattress warranties often include a clause promising to replace your mattress for free if it starts to sag too much. But there are lots of ways brands renege on promises like that. Sometimes a mattress brand will say, okay, well, send us a picture of your frame and

foundation. And if that frame and foundation does not live up to the level of performance that they think is necessary, the warranty is voided. Major mattress brands can get away with those tactics because they have consolidated the industry. Just two firms make up around 60% of the market, TemperCeli International and Serta Simmons Bedding. Between them, they own many of the big brands you'll find at mattress stores.

Tempur-Pedic, Sealy, Sterns & Foster, Surda, and Beautyrest. Recently, Tempur-Sealy also purchased Mattress Firm, the nation's largest chain of mattress stores. But in the past decade, a new crop of competitors have entered the market. Companies like Casper Sleep. have entered the market. Companies like Casper Sleep. Casper was founded in 2014 and quickly became one of the most recognizable names in the mattress world. It raised hundreds of millions of dollars in funding

from venture capital firms and celebrities like Toby McGuire and Leonardo DiCaprio. And it spent much of that capital on marketing through mediums like podcasting and internet ads. Casper was part of a wave of direct-to- consumer companies that promised a more transparent and convenient mattress buying experience. I'm Joe Megabo, CEO of Casper Sleep. Joe Megabo is a veteran of the direct-to-consumer mattress industry. Before joining Casper earlier this year, he was the CEO of a competing mattress brand, Purple. The internet has been very

good at, hey, there's a better way. We could cut out the middleman, sell directly to you, and do it at a fair price on a high quality product with something entirely new. It was just getting over the preposterous nature of you can ship a mattress through the mail, which it turns out you can do. And we figured it out and the economics are pretty good. And that turned the whole category on its head. Casper and other direct to consumer mattress companies

can ship a mattress straight to your doorstep, compressed and rolled up like a giant burrito inside of a cardboard box. The mattresses are specially designed to be squashed. Our manufacturing partners are really at their core industrial chemicals companies. These are companies that learn how to make new materials that have the kind of support and responsiveness we want in our products, but also can be compressed for long periods of time and fully recoil.

Getting the mattress into the box requires some special machinery. The mattress rolls under this giant metal plate that squashes the mattress down to much less than an inch in height. There's plastic sheets around it. Once it's compressed and all the air is out, these hot plates come down and vacuum seal it.

It slides out and you've got this pancake of a mattress. It then goes in what's basically like a giant tootsie roll machine. It rolls it up in the plastic and you end up with something that is now fully contained and at that point it's clopped into a box and you're off. The last step of that process is getting that mattress delivered. Casper and other direct-to-consumer mattress companies have distribution centers around the country to make their supply chain as efficient as possible. The logistics side is kind of what makes or breaks the ability to make money. Shipping an individual mattress through the mail can be hundreds of dollars.

You're looking at the size of the box, the weight of the box, how they get palletized, how many can fit into a truck. Another challenge with logistics is the return process. Once a mattress is opened, there's no way to get it back in the box. And once a mattress is used, it's much harder to resell. In the early days, Casper would just refund customers in full and tell them to call a junk removal service. Today, they partner with gig economy companies that pick up mattresses, restore them, and sell them on the secondary market. Every state has its own code that's required to sanitize and clean a mattress, but they'll do everything they need to resell it locally. But the biggest cost for direct-to-consumer mattress companies isn't production or logistics.

It's marketing. It could cost $300 or more to acquire a customer. It's just a whole different acquisition strategy. A part of that acquisition strategy is building relationships with mattress reviewers like Derek Hales. And for online mattress buyers, that has introduced some serious trust issues. I think consumers are actually more confused now than they were before this whole disruptive online thing happened and that just drives me bonkers.

That's coming up. Derek Hales first ventured into the world of mattress reviewing back in 2014. He had just gotten married and was in the market for a new bed. We were sleeping on my old Innerspring full mattress, which was pretty tight for two people. So we did the whole in-store experience, which was really the only real option at the time. We went into the store, we tried some beds and we found one we liked, but they were, you know, expensive, more expensive than my first car. You know, the bed we liked was $5,000.

Hales and his wife left without buying a mattress. But later that night, while surfing the web, he stumbled across the beginnings of the new online mattress boom. About that same time, a couple bed-in-a-box, direct-to-consumer type mattress brands were just getting started, so we took a chance on one of those.

Didn't love the first one, took a chance on another one. It was a little bit better. And by this point I had a decent amount of research testing and these two mattresses. And I just wanted to build a website to put out these reviews and some comparisons. Now, Hales had a background in search engine optimization or SEO. It's a set of techniques you can use to make your website rank higher in search results for specific keywords, like best mattress for side sleepers. Hales' website started to get a lot of traffic, and he decided to put up more mattress reviews.

Today, he's got one for every category imaginable. Stomach sleepers, side sleepers, back sleepers, certain features, and then different firmness levels. We try to break down our best-of lists based on different needs and preferences and budgets and other factors that are important to sleepers. He tests each mattress for all kinds of things. Cooling, motion transfer, response time, edge support, pressure relief, off gassing. We basically have our inputs from our tests and we drop those into this equation and it gives us a numbered score from 0 to 10 to say, okay, this one is amazing or this one is just okay. There are now many websites like this on the internet.

When you search for any kind of mattress review, you'll get bombarded with blog posts from websites like Mattress Clarity, Mattress Nerd, Mattress Advisor, and Sleep Authority. Sites like these aren't just in it for the love of the game. They're part of the mattress sales ecosystem thanks to something called affiliate marketing. Users come to our site, they read our review, they maybe click a referral link for a particular

brand and if they make a purchase, then we would earn a commission on that sale. So let's say Hales reviews a Casper mattress. When a customer follows the link and buys a mattress, Casper knows the sale came from Hales' website, and they'll pay him for the referral. Some mattress brands give reviewers a percentage of the sale, typically around 5 or 10%. Others pay a flat fee of around $100 per mattress. But incentives like this can be problematic.

Unfortunately, it can get complex and kind of dirty when certain players are involved and they're operating in ways that are not always as transparent or, quite frankly, can just be kind of unethical. Under Federal Trade Commission guidelines, websites have to disclose the use of affiliate links. But they don't have to publish the amounts that certain brands are paying them.

Some mattress review sites are actually owned by the mattress brands themselves. Sleep Authority is run by the company behind Nectar Mattresses. Sleep Junkie has ties to the parent company of the mattress brand Amerisleep. Best Mattresses is operated by 8Sleep. Other sites accept bribes from mattress brands for the most favorable reviews. Or they favor the mattresses with the highest affiliate payouts.

Hales insists that his website, NapLab, is above board. We just test mattresses with our system and the score is the score. It's absolutely right for consumers to be skeptical. There are far more dishonest reviewers out there than there are honest. and the score is the score, it's absolutely right for consumers to be skeptical. There are far more dishonest reviewers out there than there are honest. Beyond the favorable economics, review sites have another reason to give out mostly good reviews.

Mattress brands can be vindictive. Some of these mattress companies will engage in negative SEO attacks, which are aimed at decreasing rankings and traffic to the site. Beyond that, being kicked out of referral programs if we don't give a glowing enough review or they feel like they just don't like the way that we're talking about their mattress. And so the repercussions can be extreme. Hales knows this firsthand. Before NapLab, he ran a different mattress review website called Sleepopolis, which published a prominent negative review of Casper's mattresses. In 2016, Casper filed a federal lawsuit against Sleepopolis, claiming the website was driving

traffic to Casper competitors without properly disclosing affiliate relationships with those brands. Hales initially fought back, but in the end he sold Sleepopolis to a different review site. The sale was funded through a loan from Casper. Casper CEO Joe Megabo says the mattress review ecosystem is causing some problems in the industry.

I feel like now consumers are actually more confused than they've ever been. You can find 10 roundups have 10 different mattresses, the best at XYZ. It's unclear what is paid sponsored content versus what is independent content. It's unclear where their affiliations lie. Where we all started, and this just kind of breaks my heart, was to actually have more transparency and a better consumer experience. But Casper has bigger problems to worry about. In 2019, the company was valued at over a billion dollars.

After it went public in 2020, its valuation plummeted to less than 200 million. The company was eventually delisted from the New York Stock Exchange and sold to a private equity firm. Like many of these disruptive millennial companies, we pumped a lot of investor money into this business, trying to grow as rapidly as possible and profits were secondary.

It's never really been a particularly profitable company at all. So it's now how do we make this a healthy, profitable company that has control of its destiny and a sustainable outcome? One strategy has been to move into physical retail, the very domain that direct-to-consumer mattress companies originally fought to disrupt. Casper now has more than 60 of its own brick-and-mortar locations.

Purple also has its own stores, as well as a partnership with MattressFirm. Whatever the solution is, it's clear that winning the mattress wars is going to require more than stuffing a mattress into a box and topping the list on review sites. more than stuffing a mattress into a box and topping the list on review sites. Because at the end of a long day, most people don't care if they have a Casper, a Purple, a Cerda, or a Simmons. They just want something that puts them to sleep. If I'm presenting at a public event, I'll often ask the question, how many of you know with certainty what brand mattress you're on? I rarely get more than 10 or 15% of people who can raise their hand and say they know for sure.

There's not a lot of brand love in this category. For the economics of everyday things, I'm Zachary Crockett. This episode was produced by me and Sarah Lilly and mixed by Jeremy Johnston. We had help from Daniel Moritz-Rapson. And if you want to learn more on the mattress business, check out episode 251 of Freakonomics Radio. It's titled, Are We in a mattress store bubble? Thanks for listening. Do you ever fall asleep on the job?

It's rare. It's rare. It almost happened this last year for the first time. How it's just sort of floating away on this sort of cloud of foam is It's like, oh man, this is so nice. The Freakonomics Radio Network, the hidden side of everything. Stitcher.