A Chat With Paal Gisholt, President/CEO, SmartPak Equine

© Profile of Success, Catalog Success magazine, January 2006

Catalog Success: When was the catalog established?
Paal Gisholt: The catalog was established in April of 2002. Prior to that, we were a dot-com company that started in June of 2000.

CS: How do you describe your primary merchandise?
PG: We have a core product offering, which is custom-packed equine nutritional supplements in daily-dose packs. We’ve used that as a platform from which we sell all different types of products that are useful to people who ride horses. Those are things like horse clothing, barn and stable equipment, rider gear, pharmaceuticals for horses, etc. And because a substantial portion of people who own horses have dogs and cats, we’ve gotten heavily into dog and cat products, including supplements, drugs and all kinds of pet care items.

CS: What’s your annual circulation?
PG: 2.5 million catalogs.

CS: What are your primary customer demographics?
PG: About 85 percent women; the target age is between 30 and 50. Household income, greater than $100,000.

CS: What are your main sales channels?
PG: Internet and catalog. Sixty percent over the Web, 40 percent to our contact center.

CS: How many employees do you have?
PG: About 100.

CS: Tell me a little bit about how the company got started.
PG: I got a call from my wife and co-founder [Becky], while I was sitting at my desk working as a venture capitalist. She said she had an idea for a business. This was common; she comes up with a thousand ideas a year. She had a problem. She had purchased a horse that had to be fed pretty high doses of vitamin E to ward off early blindness. So it was a high stakes game. Horses are expensive to begin with, and the last thing you want to do is spend even more money caring for a blind horse. So she went to her barn management, told them that the horse had to receive these supplements, and that it was really important so the horse wouldn’t go blind. And they said, “Of course.”

But when you look at how hard it is to feed supplements in a barn environment, it wasn’t being done correctly. There were misdoses. There were times when she’d look in the feed bucket that’s made up ahead of time and it would have a different colored product in it. And it was missing the vitamin E. This of course made her very frustrated. She went back to the barn manager and said, “I thought we had a pretty clear understanding that you would feed these supplements day in and day out, reliably.” And the person said, “I understand how upset you are, but we have 35 horses, nearly all of which get at least three supplements a day, and we’re challenged to get these done right.” Some of the staff didn’t speak English. There were high school kids in the mix. And everyone had their own idea of what the correct dosage was. It was a very complex regimen to enact, especially when you expect it of people who are making minimum wage.

The manager suggested putting all the supplements into a plastic bag labeled with the horses name and date to be administered. Becky, my wife, was a bio-chemistry major in college, and that didn’t sound right to her. You don’t want to put copper and iron supplements in the same container with antioxidants, as they’ll lose their potency very quickly. So she called the manufacturers and they said they wouldn’t do that either. So she came up with an idea where you take what looks very much like a strip of pudding cups, and you put each individual supplement into its own well in the strip. And you would do that in a commercial setting under good manufacturing practices. You’d do that in an industrial process in partnership with the main supplement manufacturers. You’d make the business model make sense by turning it into a continuity business where you ship this out automatically every 28 days. You’d build a stable of customers who would be happy to get their stuff on time; they’d never run out of supplements again; and they’d have total confidence that their horses would be fed correctly. Instead of having a bunch of open buckets in a hot and humid, fly-specked barn, you’d have individually sealed, portion-controlled packs that were customized to your horse with your horse’s name on it. She went out and asked a bunch of people if that was a good idea, and she got a lot of people nodding their heads and saying, “Yes.”

I had been doing venture capital investing for the past 10 years, and you can pretty much break new business concepts into two categories. Once is a new technology looking for a killer application, and the other is new business concept or technical approach that solves a real problem in the marketplace. One is pushing technology around to find a home for it, and the other is very much a market-driven thing. There are some good examples of the former, such as Gore-tex W.L. Gore company, which has taken Teflon and put it into everything, but in my experience, I’ve had a lot more success when you find people who are feeling intense pain based on having a problem, and you come in with a really good, clever solution. The reason for that [success] is because when people are having that pain, they’re much more likely to change their behavior. And in my experience, that’s the toughest thing to get customers to do—change their behavior. They’ll really only do it, and only in substantial numbers, if you’re solving a problem for them. Our philosophy has been: Don’t just offer products, solve problems.

CS: As a venture capitalist, had you had any experience with a direct-to-consumer business before?
PG: No, I had absolutely no prior catalog experience, nor did Becky. We both had substantial healthcare business experience, and this is kind of a hybrid between healthcare and direct marketing. So we had that as a source of experience, and that gave us a lot of credibility when we started dealing with manufacturers. It was a big leap of faith for them to allow us to repackage their products. The fact that we had very strong healthcare business operating credentials really gave them a lot of confidence in us. But we didn’t have any catalog experience at all.

CS: What was your biggest challenge in the first few years of running the business?
PG: The biggest challenge for us was that we couldn’t charge the same kind of premium for our product, which is custom and uni-dose packed, as other custom-packaged products. If you think about yogurt, for instance, in little individual packs compared to yogurt in big tubs, it’s probably a 50 to 100 percent premium to go to the little packs. Same thing with juice, water and soda. All of these are products the costs of which go up when you make them in convenient portion sizes. By the same token, when you go into something that’s customized for an individual customer, whether it’s a custom suit or riding boots, you’re going to pay a lot more for those things. In our case, because the person who’s paying the bill is usually the boarder, and the person who has their feeding chore dramatically simplified is the barn manager, we couldn’t charge a big premium compared to what people were paying to buy these products in buckets, which is how they’re typically sold. So we had to come up with an economic model and get our efficiencies to a place where we could make a profit without charging our customers a big premium. So for the first year and a half or two years, we were earning at a negative gross profit margin on every package we sold. We felt like we were stapling a $20 bill to every order. We had this very scary notion that the only way we were going to dig ourselves out of that was by substantially increasing our volume. So we had to sell a lot more and lose a lot more money in order to cross through that valley of death to profitability.

CS: Is that what you did? How did you overcome that obstacle?
PG: We did. We used a combination of a really maniacal focus on operating efficiency and rapid growth. Counting steps, figuring out how to handle items and material only once, and we are big believers in the “lean” approach to manufacturing. The Toyota production system is something we believe in here. We’ve used those kinds of approaches to eliminate most of the waste from our process. We’ve used that in combination with rapid growth to get to a point where we were able to reduce our costs and turn a profit. Use of automation, both physical automation in terms of machinery, and information technology, was important to direct all of this.

From the IT side, we’ve developed an entire integrated e-commerce engine from soup-to-nuts. You go on our Web site, and it’s built with just the Microsoft tools. We don’t have any kind of e-commerce engine underlying our business; we built it all from scratch. That allows us to do certain things that benefit our customers. For example, when it comes to reshipping orders, the first order goes out the first day, and the next order goes out 21 days later to create a 7 day cushion. Thereafter, orders go out every 28 days. We also have the ability, if you’re adding a horse to your account, to let you decide if you want to keep that cushion or synchronize your horses with each other. That would be an example of something that would be very hard to support with conventional IT structure. Similarly, we have a pharmacy, and we have to validate that every vet is a real vet. We have to validate that we haven’t already filled a prescription — or that a subscription hasn’t expired — and we’ve physically received a copy of the prescription. There are a whole bunch of requirements around the pharmacy — probably 15 of these specific issues — but we were able to create IT that fits our business perfectly, because it’s a custom business. At the same time, it’s been a big burden and a big expense.

CS: Are you manufacturing any of these supplements, or are you gathering and repackaging them?
PG: It’s the latter. We’ve developed about 30 partnerships with leading suppliers of vitamins and nutriceuticals for horses to the point that we have just about every product we want to offer in SmartPaks. It’s a really complete solution for the consumer. There are some small regional brands we can’t justify picking up because there are a large number of products out there. But the ones for which we’ve seen substantial demand, we’ve been able to work out partnerships where they permit us to repackage their product. And that’s great for the consumer. It’s great for us because we don’t have to engage in two sales processes. One: here’s a different way of administering the supplements you use. And two: here’s a new brand of supplements other than the ones you’ve had success with. We were able to say, “This is the exact same thing you got when you were buying in buckets, but it’s fresher and it will be delivered in a potency protecting package. And you’ll get it automatically and never run out. And you’ll know that it’s being fed correctly because if the SmartPaks back up, you’ll know the horse hasn’t been fed.” So that was all good as far as the consumer was concerned. And the fact we didn’t charge a big premium meant they were getting a tremendous amount of additional value for either nothing or a very modest premium.

CS: What has been your greatest career challenge?
PG: I’ve frequently been in advisory roles; I was a consultant with MacKenzie and Co., and I’ve been a venture capitalist. But while you may be starting a business, you have to find an entrepreneur to run it. So my biggest challenge was not being able to have the kind of impact on a business that I wanted to have, because I didn’t have as much direct contact. The way I solved the problem was to jump into the fray and start a business. I just had to see how it went when I had the ability to make decisions rather than just give people advice.

CS: What sets your company apart from others?
PG: The No. 1 issue is people, and it sounds trite because everyone says that. But this is by far the most talented, energetic, committed, passionate group of people I’ve ever had the chance to work with. And we’ve approached building this business with the same kind of missionary zeal that you do when you’re trying to revolutionize an industry. And in this case, for people who are not horseback riders, what we do seems trivial. Revolutionizing the administration of vitamins for horses? It’s almost comical. But if you know anyone who is a horseback rider, and you have a sense for their relationship with that animal and how much they care about that animal, you realize its importance. And it’s not just caring for them as a pet, this is their partner in their sport, and they’re passionate about it. If the horse winds up suffering from joint problems, the rider could be right back at square one, having to train a brand-new horse. That can set you back by years. The stakes for these people, our customers, passionate horseback riders, are very high. They’re very concerned when their horses are not cared for properly. And this allows them to eliminate one very major headache, one major source of stress when caring for a horse when you can’t be there to take care of it yourself. The fact that we’ve got superb, hyper-smart people who are committed to going the extra mile for the customer is just one thing that sets us apart. Looking around at the service experiences that I have, it’s very seldom that I feel I have a great service experience on a repeated basis with the companies I’m dealing with. And that’s a real shame.

We have a different model where, for example, our phone team aren’t referred to as customer service reps, because they aren’t. They spend a substantial portion of their time doing marketing tasks and selling activities. They have a very different form of compensation. Because 80 percent of our transactions happen automatically on a computer as part of our continuity business, it’s either self service or an automatic transaction. We’re interacting with only about 20 percent of the shipments. Most of our competitors have about 20 percent to 30 percent of their business on the Web and very limited continuity. We have the inverse relationship. We talk to about 20 percent of our orders, they talk to about 70 percent to 80 percent. We can afford to pay our people better, train them more, give them a lot more flexibility to have long, involved conversations with customers and to do research on behalf of the customer.

For example, if a customer calls us up and says [he’s] really interested in a product, and we don’t have that particular product, our phone team member will jump on Google, do a little research, determine where the customer can get that product, and then call or e-mail that potential customer back and give them information on how to get that product, even if we aren’t the ones to sell it to them. We will have served them, we will have shocked them with our willingness to go out of our way to do something nice for them, and hopefully they’ll contact us again. We’ll also add their e-mail address to our list, and that’s been a way we’ve been able to grow very quickly. And because it’s only affecting those 20 percent of our customers who actually call in, it doesn’t break the bank for us. Everybody talks about offering knock-your-socks-off customer service, where you generate these “Wow!” interactions and the customer hangs up and says to himself, “I’ve never received this kind of care or service.” So rather than measuring the average time per call, we don’t pay much attention to that at all, we pay attention to the number of people who e-mail us or call us with extreme praise for how they’ve been treated. We know they’re spending a lot of money on their horses, and we treat them well.

CS: What is your current biggest business challenge?
PG: Our biggest challenge, now that we’ve improved our profitability, is continuing to maintain our very high rate of growth. I think that’s almost every business’s challenge. From last year to this year, we’ve grown about 60 percent. That creates a set of challenges in terms of managing the operations and making sure we don’t run out of space. But maintaining that momentum also is very challenging. We find that doing more of the same is a really important thing. We’ve only been cataloging for three years; we’re getting much better at that. We have a pretty substantial Web presence, but we can keep improving in that area. But we have to keep reinventing ourselves, coming up with new business initiatives that have the potential to keep us in the phase of hyper growth we’ve seen so far, rather than just modest annual growth. We’ve got a few initiatives taking place right now. We’re experimenting with retail sales as an additional channel. We’ve been surveying our customers about this, and they’re very excited about it, so we’re going to try that.

Second, our core SmartPak essentially is a drug delivery system, a packaging-based, drug delivery system that really helps to increase compliance with a veterinarian’s recommendations. So we’re creating a partnership model with veterinarians where a vet would be able to visit a client, identify some recommendations, then they’d be able to sell SmartPaks to their clients and we would do all the work in terms of fulfillment and billing. They would collect a residual profit and we would get exposure to a group of customers that might not have heard about us through traditional catalog prospecting. That’s another growth initiative.

Another is in the dog area. We’ve been getting a lot of e-mails from people saying, “It’s great you do this for horses. You’ve changed my life!” We’ve gotten everything from marriage proposals to people saying we’ve saved their marriages because their spouses were messing up dosages and the like. And they’re saying to us, “If you could do this for my dog, that would be incredible.” So we’re in the process of working with some dog food companies to offer dog food and supplements. Supplements for dogs are really taking off right now. There are supplements for joint health, skin and coat, changing the pH of the dog’s urine to prevent burn marks on your lawn. Supplements are getting to be more and more popular. Daily medications as well. It’s often very hard to own and care for a dog that needs to be medicated twice a day. It’s a pain in the neck. So what we’ll do is send what amounts to a TV dinner for your dog and it will make it a lot simpler to feed dogs. We think that’s going to be particularly useful for people who like that level of convenience or who use doggy daycare or who travel. They can just pack a few meals for their dog and go. That’s an initiative we’ll probably be launching in January at the same time we launch a dog catalog. That will be title No. 2, but right now we just have the one title.

CS: That will be a separate book, not under the SmartPak Equine name?
PG: Right now, we’ve just been experimenting with supplements for dogs. Based on the reaction to that, we think that the demand for supplements and food would be even bigger. The initial testing we’ve done has proven positive.

CS: What are some key points to your success?
PG: If you had to wrap your arms around the various ways we operate, it comes down to using culture as a tool to create a high-performance organization, as opposed to using a lot of control mechanisms. What I mean by control mechanisms is even though I don’t have experience being in other catalog companies, I’ve seen, for example, extensive use of scripts in the contact center. People often have very rigid job descriptions or are kept in a particular role. They may have very limited authority to solve a problem for a customer, or limited authority to go outside their specific functional area. What we’ve done to try and get everyone marching together in the same direction is to spend a lot of time thinking about the values that matter. And if people buy in to the values, understand the values, understand the basic economics of the business because we share with them the profitability of the business, you’ve got everybody acting and behaving like a business person and all moving in the same direction. And things happen that are not exactly as I would like, but in general they are directionally correct. And if they’re not, then that person probably isn’t a fit, won’t enjoy [her] time here and won’t be with us very long.

And so we spend a lot of time working on defining the values that are important to us as a business. We tell new employees about them; we celebrate them through awards. We spend each quarterly meeting discussing a particular value and examples of things that people have done in the organization that really illustrate those values. As a result, we don’t have extensive scripting of our telephone interactions. We give people a lot more authority and autonomy, a lot more control over their day-to-day existence. And it frees them to perform at very high levels and to grow incredibly fast. When a business is growing very fast, it’s like a big sucking sound pulling people up in terms of responsibility and authority. And if you’re not growing people very, very fast within your organization, you’re going to hit the wall in terms of being able to do all of the things you need to do to keep the wheels on the wagon. And so, by managing the team through culture and a set of expectations as opposed to micromanagement of exactly what needs to happen at every moment and every interaction, it’s a lot easier for us, and it’s a lot more fun for our people. And they grow fast and develop and can take on more and more responsibilities. And that’s a really nice element in terms of creating a career path for people.

CS: Have you had any mentors?
PG: I’ve had several. At a young age, my mom and dad, who were immigrants from Norway — neither of whom had four-year degrees — started a business. I was involved at an early age, licking envelopes and that sort of thing. I was put to work early on. So I worked all through college in my family’s ship brokerage business, and I learned a great deal about how to take care of customers and give them your all. I learned how hard you have to work to make your business a success through my dad. Then in venture capitalism I had some mentors.

Right now I have a mentor, his name is Frank Zenie, he had built a couple of businesses up to $100 million plus. Whenever I ask him a question, he has a great ability to help me find the answer for myself by asking good questions, in a kind of Socratic fashion. For example, when I asked him about a business initiative recently, he didn’t tell me whether he thought it was a good or bad idea, he said, “Well, let me ask you this: What do you think are the core competencies of your business?” And he drew it out of me that this particular idea, while it might be attractive from a return on investment standpoint, and it could be a pretty neat business, it wasn’t the best fit with the assets of our organization. I really feel that I get a tremendous amount of support and encouragement, and also he’ll tell me when he thinks I’m full of it, which is really important in a mentor. He was so effective at coaching me as a new CEO of a business that I asked him to join our board of directors, which he did. So now it’s a more formalized mentor relationship, but it started out much more informally. We hit it off, he invested as an angel investor in the business, and he did that because he liked us and thought we had a neat idea to solve a true problem out there. I kept using him informally, and then I made him a board member.

CS: What about the catalog business appeals to you?
PG: Having grown up in both consulting and venture capital, one of the mantras of both of those businesses is “make good, fact-based decisions.” And if you have a much better batting average in terms of making good, fact-based decisions as opposed to trying to be intuitive, generally you’ll win. And that’s very easy to say, but if you’re talking about a business that’s heavily reliant on advertising or other things, there’s a lot of work between having good data to make decisions on and actually being able to make them. It’s sometimes easier said than done. Whereas in the direct business, you’re swimming in a sea of great data, and if you have the discipline to control experiments and vary one thing at a time, and you have the rigor to close the loop and take action based on what you’re finding — it’s nirvana. That’s what appeals to me most about the direct business.

CS: If a new cataloger asked you to name three keys to success in business, what would you say?
PG: I would say, “Don’t just offer merchandise, solve a problem.”

Move extremely fast and fix your mistakes fast, rather than be hyper analytical and slow to make decisions. Make rapid decisions and fix any mistakes quickly, as opposed to avoiding making mistakes.

Surround yourself with people who have the technical skills you lack, because in the catalog business, as I’m learning with each passing month, there’s tremendous technical knowledge which helps you to be successful. There’s not one single secret strategy that makes a difference. You’re building a business brick-by-brick with thousands of bricks, each of which are important, but none of which alone will get you there. There were probably areas where we operated a little bit in the dark for too long after starting the catalog where if I had to do it over a again, I’d say, “Swallow hard, pay someone who really knows their stuff and get them on-board early.” You’ll operate faster, you’ll build faster and you’ll have more fun in the process than trying to figure it out on your own.