Reforming Smile Direct Club

TLDR:

80/20ing & 20/80ing my life

Disrupting the Disruptor. Smile Direct Club.

Creating the Kill List across my life.

Before you go ‘whoa there’, I’m just talking about the 80/20 rule. I’m not really “killing anything”. But recently I’ve been spending a lot of time analyzing across all areas of my life to see where I can narrow my focus and go after bigger wins:

1. What is creating the most value for me?

2. What is draining the most value from me?

Anyone who’s been following along for a while knows I’m obsessed with the 80/20 rule. It’s one of the most effective principles I’ve found to understand what is winning and what I should prioritize.

The quick 80/20 reminder for anyone who isn’t familiar:

• 80% of your results come from 20% of your actions.

• 80% of your costs come from 20% of your actions.

The key is to identify the Top 20% of actions creating 80% of results and invest every ounce possible here. And what I’ve been focusing on recently is identifying the Bottom 20% of actions creating 80% of costs. And cutting here.

What always bothered me about 80/20 advice is it only focused on the Top 20% that generated results. Never the Bottom 20%. That’s like ignoring the hard, sharp edges on an aerodynamic car and keep trying to make the car faster. You can optimize the engine to kingdom come, but if you don’t remove those hard edges it’ll never hit peak performance.

The easiest examples to illustrate what I’m talking about are with investing and I rank everything from highest to lower performance. Identify the top . Kill the trends that make up the Bottom 20% and reinvest as much from thand bottom 20%e bottom into the top as possible.social posts.

1 example of this has been the content I talk about on Social. At the beginning of the year I covered 17 different topics. For the rest of the year I’m going to cover 4. I’ve done this every year for the past 3 years and it gets better every year.

By reducing the Bottom 20% I reduce my “drag” and master the core 4 in the Top 20%. I’ll align more resources (especially around #1 Let’s buy a biz) to make them even better. We can call it focus, prioritization, Marie Kondo-ing my life. The important takeaway is not to only invest more into the good, but to stop investing in the bad.

Enough philosophizing. Let’s get into the main event. Figuring out what to do with Smile Direct Club.

Gutting and Rebuilding Smile Direct Club into an actual $1B+ biz.

Smile Direct Club is getting taken to the woodshed in the public markets and for good reason. OPEX is out of control. It’s a poorly run company in desperate need of a leadership overhaul. This company has so much promise, but is run in the most obnoxious Silicon Valley disruption/growth-at-all-costs/technology over everything way it’s going to need a complete makeover to realize it’s full potential.

Down -96% since it’s Sep ‘19 IPO. Trading at $0.69/share with a $276m market cap. Losing -$65.6m in ‘22 and only had $46.7m in Cash to start ‘23. It doesn’t look pretty.

This company will be traded within an inch of its life. We should do it a favor and take it off the public markets for <$300m and grow into its true potential. A Multi-billion dollar biz.

This one is going to be more intense than our usual Sunday takeovers since we’ll have to tear this thing down to the studs and rebuild it from the ground up. But there’s a massive business waiting to be unleashed in this failed DTC darling.

The Financial breakdown

The Financial TLDR:

The biz has strong Gross Margins but this company is in a death spiral. It has the worst combination you want to see in a public company.

1. Topline is shrinking (-26% YoY)

2. Forward looking projections -15% decreases for 2023.

3. Marketing & Sales at 61% of Rev shows customers aren’t buying what they’re selling.

4. OPEX is ludicrously high at 121% of Rev.

This terrible performance is really sad. The company had a great market unlock: Introducing technology to provide a medical service (Orthodontics) at a more affordable price making it more accessible to more people. The problem?

While they nailed their big hypothesis, they did not get the right business model. Consumers wanted cheaper more convenient access to braces. In the process they disrupted the incumbents: Local Orthodontists + Metal braces.

They nailed the core features:

• 3D scan at home

• Cheaper options

• Payment plans

• Invisible aligners

But building a digital + IRL Orthodontics practice at this scale is impractical with the resources. Showing that they nailed the value proposition, but not the customer solution. They disrupted an industry but don’t have a strong enough business model to fill the vacuum they created, which presents a gnarly problem.

They’re destroying the market for both players. They’ve disrupted/killed the old business model that supported local Orthodontists and have shown consumers the better future. But can’t effectively grow into the massive market they’ve toppled.

So let’s step in and fix this problem to help more people get the smile they’ve always dreamed of.

Here’s my 3 Step plan to completely guy and turn around Smile Direct Club.

1) Abandon DTC and Pivot to a Marketplace.

Their earnings show you can’t automate Orthodontists out of a job. And attempting to do so is WWI-level entrenched warfare where everyone loses. Instead of competing with Orthodontists I’d pivot the entire business to support them.

Instead of trying to become the new orthodontic monopoly, let’s take the entire SDC validated Go-To-Market (GTM) playbook and pivot from a brand (Hilton) to a marketplace (Airbnb).

It’s 3 simple, but not easy steps:

1. Stop selling direct and connect consumers with local Orthodontists.

2. Be the Aligners/Braces financing provider.

3. Provide Orthodontists with the product & digital marketing resources.

When consumers hit the site the same value prop and messaging will work: sffordable, discreet aligners where a professional takes care of your teeth straightening journey. Show local Orthodontists with services, reviews customer testimonials and send them leads.

They already have the network providing Telehealth, leverage that infrastructure for Orthodontists to go omni-channel.

SDC can become the business that provides Telehealth, screening, tracking, and pipeline, bringing down costs and increasing the number of patients Orthodontists can see.

The beauty of the model? They create a new customer base, Orthodontists, to sell their products and generate the demand to guarantee more sales. Yes, they’ll lose margin by selling their aligners to Orthodontists wholesale, but it would stem the hemorrhaging SG&A costs from them trying to become Orthodontists themselves.

It’s a tough pivot for the company founded to disrupt Orthodontists, but their earnings validate Orthodontists aren’t going anywhere anytime soon. And they’re spending flying into that headwind.

All small business owners want more customers. Financing providers would rather work with one major company than hundreds of local providers. SDC brokering those relationships en masse would unlock financing options to tens of thousands of Orthodontists and millions of customers who currently don’t have great options.

There are plenty of other monetization options by becoming both the distributor and marketplace.

Takeaway: Pivot to a Marketplace + Distributor. Create your own Demand.

2) Replace the executive team

This is the first time I’ve felt the need to explicitly hit this point. But there’s something rotten from the top at this company. It’s manifesting in a squandered opportunities across multiple areas of the company.

Let’s put aside the insane lack of financial discipline/spending problems with this business for a minute. It’s too painful to write OPEX at 121% of Rev for a second time. And let’s talk about the reason they need to spend so much on Marketing and Sales.

A) The 2k+ BBB consumer complaints filed against the company.

The most common customer complaints:

• Being in considerable pain

• Their teeth being worse off then before they started

• Horrible customer support that gave them nothing but problems

BBB complaints happen. Consumers will resort to them if they don’t get what they want. But 2k complaints with a heavy amount of 1 stars with similar trends isn’t a fluke. When you add in the Local news stations with news stories like this covering them in the “provider beware segments”. Customers aren’t just complaining because they didn’t get what they wanted. This company is mistreating customers.

B) The Washington DC AG filed a lawsuit against the company in Dec 2022.

For making patients sign an NDA to cancel their subscription.

I hope I don’t need to say this, but that is downright wrong. If customers are unhappy with the service and don’t find value they should haven’t to jump through so many hoops to get out of paying for a product and be threatened with legal action if they talk about it.

These types of ‘dark patterns’ will hopefully become illegal soon, but are just outright, hands-down the worse customer experience possible. Customers also complain about having collection agencies chase after them. Just overall a terrible look for a company that should be accelerating growth in a rapidly accelerating market.

Whether they win this suit or not, they’ll be paying for it either way in their marketing costs. I don’t even need to dive into their specific numbers to tell you negative customer experiences like this are crushing the brand.

The word of of mouth flywheel every brand dreams about is actively hurting SDC’s growth. Every time consumers bring up SDC they’re just as likely going to actively sell against the brand as for it. When customers are anti-evangelists Growth is like climbing up a mudslide.

Takeaway: Systemic anti-customer behavior shows the problems at the top.

3) Become the Aligner Tooling Provider

Braces and traditional Orthodontists fees are so expensive because the tech, tooling, and training requires massive CAPEX investment to get started. SDC’s real brilliance is leveraging technology to greatly reduce teeth straightening infrastructure costs, to provide cheaper products/services to consumers.

The real money here is in dental tooling. Orthodontists could innovate on their core business model if a vendor could reduce those costs. Technology has the opportunity to be the deflationary driver unlocking an exponential market expansion for Orthodontists and the scale to support the tidal wave of new customers.

The US Orthodontics market is currently $3.7B+ and projected to grow to $9.6B by 2029. Industry experts predict the market expansion will be driven by 3D printing, Invisible braces and AI. Sound familiar?

All are areas SDC thrives in. The only difference is they want to be the Orthodontist (Gold miner) vs. becoming the Technology provider (Pick & Axe seller). Looking at it from a ten-thousand foot view it almost seems silly to chase the gold rush.

If SDC used their current scale to bring Orthodontists to the table then turned the proprietary technology they’ve built, to sell the complete Aligner Tool kit to Orthodontists that’s a business I’d get really excited about. I’m willing to bet the street would too.

Physical tools and apps for Orthodontists brought to you by Smile Direct Club. Then Orthodontists become the full stack customer: buying the tools, software and aligners they’d sell to the end customer. Offloading the service piece of this whole equation. Something clearly SDC can’t deliver on.

If SDC was also the marketplace driving traffic, they’d own the entire revenue experience, but wouldn’t need to own the heavy lifting of actually aligning people’s teeth. Greatly increasing their margins while offloading their G&A costs.

They could also get out of the physical retail business as well. Potentially even licensing Smile Direct Club franchises to aspiring Orthodontists with fully installed SDC offerings.

SDC is and would collect millions of customer data records to analyze, produce, and sell the best aligners/braces on the market. Plus, they could also leverage that data to sell that back into Orthodontists to further monetize their new core customer.

I’m just getting going here, but there’s a deep bench of ideals for this one.

Takeaway: Sell Orthodontists tools. Get into SaaS margins 😍.

Final Thoughts

This company has accomplished some impresive goals. They disrupted an industry, solved a really hard technical problem, and created tools that have rewritten a major highly visible consumer-medical market.

Currently SDC is flailing to support their ambitions of becoming an Orthodontic monopoly and it has made them a literal penny stock. The tough lesson is a tech company can’t just dislodge medical professionals. Their OPEX illustrates just how much it isn’t working.

Instead the company would need to about face on their core mission and set out to serve those they originally sought to destroy. It’s a hard decision to make. Especially for a founder-lead team that built the company identity around the disruption narrative.

But imagine a world where more Orthodontists will be more productive and serve more clients. Bringing down the costs of a medical practice that is currently cost prohibitive for both practitioners and customers.

The market is projected to triple in the next 6 years from decreasing consumer costs. Making the market more accessible to consumers. Why scrap and claw for market share, when they can disrupt the infrastructure layer.

What they’ve built makes them the best poised to take advantage of this enormous market shift. Their products and practices will become the norm. Why let that advantage be competed away? Plus, it enters them into a potentially even greater market. The $443B Dental market.

Let’s buy this biz! Redesign a major market. And help grow American small businesses.

🧠 The Takeaways

SDC is a brilliant idea, but poorly run company that needs to evolve. Or it will die.

1. In expensive to service business going vertical isn’t always the right move. Sometime Marketplace/Dropshipping models make more sense.

2. Bad Management leads to terrible business practices. Anti-customer + poor spending habits is the smoking gun something is up here.

3. Disrupting a major industry requires true innovation on many levels. Sometimes selling what you’ve built B2B is more valuable than the original product/service.

👷 What can you do about this?

1. Really rethink your sales motion. Is cutting or adding partners the great unlock to success?

2. If you see consistently poor spending habits or anti-customer behavior take a look at the Sr. Culture to see where it stems from.

3. B2B sales for consumer brands makes sense at a much larger scale. Don’t get distracted early, but that’s how most huge brands make a big leap.

The best ideas in business are usually approaching your same problems with a different approach.

Aspiring Acquirer

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