How We Built Our Discount Mattress Company To $24M/Year

David Smith

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Published: November 5th, 2021

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David Smith

Founder, Mattress Depot USA

$2M

revenue/mo

Founders

Employees

Mattress Depot USA

mattressdepotusa.com

from Bellevue, WA, USA

started August 2002

$2,000,000

revenue/mo

Founders

Employees

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Hello! Who are you and what business did you start?🔗

Hi everyone! My name is David Smith and I am the founder and Chief Sleep Consultant for Mattress Depot USA. I started the company almost 20 years ago along with my former girlfriend and now spouse, Torey Smith. Mattress Depot USA was established in the Pacific Northwest as a specialty discount mattress liquidator. However, over the years we have transformed our business into a specialty sleep omnichannel retailer helping customers find a better night’s rest by selling high quality, brand name mattresses and bedding products in a comfortable relaxing environment.

Mattress Depot USA originally started selling out of a warehouse location saving people money on quality mattress sets. We did it by offering brand name clearance and factory warranty off-brand mattresses, which can save customers up to 60% over traditional mattress retailers. We purchased truckloads of these brand-name clearance mattresses from factories all over the U.S. Initially, our customers were people looking through the classified ads for an inexpensive mattress but word of mouth spread quickly about our unbelievably low prices on high-quality mattresses.

Customers just needed to be comfortable with a scuff or blemish that was never seen under the sheets. This trade-off would result in savings of over 60% from other traditional mattress store retailers. Our warehouse hours were limited so customers would show up at the same time then start outbidding each other for the best mattresses.

Within the first six months, we could no longer source enough truckloads of the factory clearance mattresses to satisfy the demand so we started purchasing off-brand mattresses from smaller local factories. This allowed us to continue saving people money on quality mattress sets with a greater supply and choice of product.

About this time, we opened up our first retail storefront operating seven days a week. We continued to add one new storefront location about every 6 months. Our storefronts were purposely located next door or across the street from our competition. We understand that buying the right mattress set is an important purchase decision so most consumers will want to shop around. Mattress Depot USA would rely on our competitors to spend the money on advertising to bring customers into both stores.

We first launched from a storage warehouse in August 2002 and did sales of $200,000 in six months. In 2003, the first full year in business we had sales of $1,320,00 then the following year in 2004 we did $3,200,000. For the first ten years, we had phenomenal growth becoming one of the 100 Fastest growing private companies in the Pacific Northwest for more than six years in a row.

how-we-built-our-discount-mattress-company-to-24m-year

What's your backstory and how did you come up with the idea?🔗

I have always embraced the entrepreneurial spirit and enjoy pursuing my passion for business and commerce. Mattress Depot USA is the fourth company that I have started. However, it is the first one that I was successful in scaling into a high-growth company. While in middle school, I started and ran a neighborhood car, boat, and trailer washing business. Every weekend I passed out flyers and knocked on doors to get customers. It was seasonal and not being able to drive limited my market of customers.

Then in high school, I started my next company which was a pressure washing and painting business. I continued to grow and operate that company while going through my undergraduate college studies. After graduating with a BA in Accounting, my job offers were about half of what I was already making with my company. At that point in 1991, my business was doing about $400,000 in revenues with eight employees. I continued to operate the company for a couple of years but knew it was not my final career desire. During this period, I decided to sell the company then go to graduate business school to get an MBA.

If you are not growing then you are dying.

My first career job out of business school was with a commercial bank in Seattle. This was a great environment to learn about different companies, research business ideas, and meet entrepreneurs. About a year into my banking career, an old colleague approached me for a startup business loan to start a Mattress Outlet Store. The bank had no interest in financing a startup so I helped fund and co-founded what would be my third company. It was a Mattress Outlet Store that we opened in Las Vegas, Nevada in 1998. My co-founder moved to Las Vegas to run the daily operations but I remained in Seattle with my corporate career.

I eventually sold out my share of the business, but the experience helped me form many valuable contacts in the mattress industry. These proved useful years later when I got the idea for Mattress Depot USA after mattress shopping with my then-girlfriend (and now wife) in the Seattle area. Having been in the back-office side of the business, I was just amazed at what customers were having to deal with when they mattress-shopped at traditional retailers. The stores were fancy, but prices were high, service was bad, and selection was limited. Therefore, I decided to start a mattress company where prices were low, service was excellent, and selection was massive.

Take us through the process of designing, prototyping, and manufacturing your first product.🔗

Since Mattress Depot USA is a retailer, we have never manufactured our products and instead, it has been the sourcing of products that have become the “secret sauce” to our business plan. In the early days, we sourced truckloads of factory clearance mattresses from national brand name companies all over the U.S. My contacts were established while founding Mattress Outlet Store in Las Vegas, Nevada. My partner and I would contact Sealy, Serta, Simmons, and Spring Air factories all over the country to strike contracts enabling us to purchase the factory-blemished samples, R&D products, and warranty returns.

Originally, most factories were just selling these to their factory employees or donating them to local charities. Then we came along and agreed to purchase truckloads at $10,000 + each month and those profits went straight to the bottom line of the factory. My partner and I became very persuasive when we would fly around the country meeting Plant Managers and pitching a profitable solution to their costly problems.

During those early days, we had a lot of fun traveling around and learning the industry dynamics. We had to learn the regulations for selling “factory seconds” and some of the licensing agreement challenges between different factories of the same brand. For example, one of our first suppliers was the Serta Mattress Plant in Salt Lake City, UT. Their licensing agreement would not allow for them to ship outside of the state. Therefore, we would rent a Uhaul truck and meet the Serta Mattress factory truck in St. George, UT to unload into our Uhaul truck and drive back to Las Vegas, Nevada. Unloading and loading mattresses in the back of trailers in 110-degree heat are probably the most exhausting work anyone can imagine.

Describe the process of launching the business.🔗

As I mentioned earlier we first started operating out of a storage warehouse so there wasn’t an official launch date. Our total start-up costs were $10,000 which I made my girlfriend (now spouse) put up half the money. Fortunately, we both had the needed capital in our savings accounts and used $7,000 to purchase the first trailer of mattresses; the remaining $3,000 was rent, marketing, and working capital. Customers started calling and showing up the first day our classified ads would come out in the newspaper.

Start with a shoestring budget and become profitable first before focusing on growth.

It would take about two weeks to sell the entire trailer of mattresses bringing in about $20,000 in revenue. The $13,000 in Gross Profit every two weeks was more than enough to pay our operating expenses of $3,000 per month so we were very profitable from day one. Since both my girlfriend (now spouse) were already working good-paying corporate jobs we would plow the profits back into growing the business.

In the beginning, all of our advertising consisted of classified ads, Little Nickel, small display ads in Newspapers, and eventually Craigslist when it came into existence (cute story on that find later). We didn’t officially launch our website until 2005 or about 3 years after getting the business started. The first website did not have any eCommerce features and simply was a good graphical and informative website that promoted our brand. In 2010, we launched a major upgrade to the website incorporating eCommerce features and making the company an omnichannel retailer.

If I had to do it all over again, I would not change our strategy. My advice is to start with a shoestring budget and become profitable first before focusing on growth. Most of the biggest and greatest companies were started of homes without much outside capital. Companies like Hewlett-Packard, Apple, and Facebook started and operated out of garages or dorm rooms. Mattress Depot USA started a monthly rental storage warehouse. If you spend all your time focusing on raising capital then you won’t be focusing on the business strategy.

Since launch, what has worked to attract and retain customers?🔗

Over the years, I have learned that if you are not growing then you are dying. However, growth comes in many different forms. The most sought-after growth comes in the form of increased revenues but if costs and inefficiencies are accelerating faster than your revenue growth you might bankrupt your business. Our success has come from compartmentalizing the business silos that need growth and improvement. For example, there was a time we were adding 2-3 store locations every year and revenue growth would scale with the added locations. However, we focused less on attracting high-quality sales employees or training them properly.

There came a time when sales were decreasing more at older stores than the sales brought in by opening new stores. This was a pivot point in our business where we stopped opening new store locations and started focusing on training and hiring a better sales team for the older locations. Soon our workforce was invigorated and overall sales began to grow again even without opening new store locations.

Acquiring and attracting customers is always one of the most challenging aspects of a successful business. What works today might not work tomorrow. Companies must evolve and continue to be looking for the best ways to increase marketing to new customers and keep their current ones. Initially, when we were operating out of the storage warehouse all of our customers were driven by newspaper ads, classifieds, and referrals by word of mouth. This marketing strategy worked well initially but as we grew and started opening up retail store locations we needed to drive in more traffic to each store location.

One of our successful early marketing efforts was discovered after sitting down with an old lady customer at the end of a long day and having tea and cookies. I had been working in one of our stores all day and sold a very nice old lady a mattress set that I told her I would deliver to her that evening. After a long day, I loaded up the mattress set in the truck to deliver to her. It was about 8 PM and I hadn’t even had dinner so I was trying to finish the day and get home quickly. Upon delivering the mattress set to the nice old lady she insisted I stay for tea, cookies, and conversation. If she wasn’t so sweet I probably would have found an excuse to leave immediately but I stayed. She starts to quiz me on the business and our marketing efforts to bring in customers. She then asks if I had heard of “Craigslist” as they had recently launched in the Seattle market.

It was 2003, and I had not heard of the online classified marketplace but I did know that the traditional newspapers were dying. I went home that evening and started posting ads on “Craigslist” for our mattresses. The very next day we began seeing an increase in phone calls and traffic. Over the following decade, “Craigslist” probably brought in over a million dollars in business!

Now we are using almost every traditional and digital marketing effort to drive traffic to stores and the website. From TV and Radio ads to social media and email marketing. We sell through most of the online marketplaces including Amazon. For us, Amazon does a good job of selling certain products but not attracting customers to our brand. Therefore, we choose to not focus on growing the Amazon business and keep it at a minimal amount of our overall sales.

How are you doing today and what does the future look like?🔗

Mattress Depot USA is profitable and continues to grow after a negative (-15%) setback in 2020 due to COVID-19. We have been fortunate to never have a non-profitable year since our founding. Whether it is a housing crisis, financial bubble, pandemic, or global supply chain issues our business has continued to persevere in the face of adversity. Over the years, our Gross Margins have remained very stable with a small fluctuation in customer acquisition costs. We measure our customer acquisition costs inclusive of rent and marketing spend and it runs about 15-18% of sales revenue.

Today, we are an omnichannel retailer distributing through brick & mortar stores, eCommerce websites, online marketplaces, and some wholesale. The bulk of our distribution channel is still brick & mortar at about 90% of our overall sales. The future will be growth through the addition of franchises in other regions outside of the Pacific Northwest Market.

People want to live happier, healthier lives through better sleep. Our business model provides customers with better sleep by providing a combination of sleep education, high-quality products, and low prices in a friendly, low-pressure environment.

As a franchising opportunity, Mattress Depot USA offers a combination of profitability, long-term sustainability, attractive cost of entry, and comprehensive corporate support all in an industry segment that continues to grow. Most franchise opportunities can be started under $100,000 and move to profitability within months.

Through starting the business, have you learned anything particularly helpful or advantageous?🔗

All businesses are ever-changing and evolving organizations otherwise they will eventually cease to exist. Everyone makes some poor decisions, gets blindsided, and misses potential opportunities. “Success” and “Luck” are simply byproducts of a good strategy coupled with hard work and determination. Let’s look at that fateful evening I decided to have tea and cookies with a sweet old lady that resulted in over a million dollars in revenue. Was that “Luck”...no it was anything but luck to put me in a position to execute on a strategy later that evening to determine if “Craigslist” was going to be a successful marketing opportunity.

Over the years, I have learned most of the mainstream business advice is good. The most important part of any business is its employees (people). Culture and employee morale are the foundation of any organization. It is important to build a team that shares your vision and strategy otherwise it will be a constant challenge to execute the business plan.

At Mattress Depot USA, we subscribe to the K.I.S.S. and F.O.C.U.S principles for success. K.I.S.S. = “Keep it simple stupid” this just means not overcomplicating ideas or processes. F.O.C.U.S. = “Follow one course until successful” meaning to concentrate on a task until you have completed it successfully.

What platform/tools do you use for your business?🔗

Besides our P.O.S. inventory and financial system, the most used tools in our business are Dropbox and email. Dropbox has been essential for sharing and updating critical files used in the course of business. Before Dropbox, we kept files on each computer and then would email out the updated files to the team for them to save on each computer. This was a very cumbersome, error-prone, and inefficient way of keeping all the required files updated.

Since the late ’90s, email has been the backbone of communication throughout organizations. Even a simple brick & mortar store relies on email to communicate to employees, vendors, and customers.

What have been the most influential books, podcasts, or other resources?🔗

While I love listening to a great business podcast or indulging in a business book, I would say the most influential resource for some of our business strategies comes from business periodicals. Years ago, I remember reading an article in Business Week about “domain squatting”. After reading that article, I went out and purchased about 50 different domains that had slight mis-spellings of our competitor’s domain names and then directed the web traffic to our online website. Our website traffic increased about 20% instantaneously which led to an increase in revenues.

Years later, we purchased one of those competitors and at the closing of the deal, the owner told me that he knew he couldn’t compete with us after losing out on those domain names. Below are some examples of these domains like our competitors that point to our website

Advice for other entrepreneurs who want to get started or are just starting out?🔗

My first advice is “Don’t quit your day job until the idea has materialized into a real business”. The first big decision is to determine whether you need business partners or not. Going solo or bringing in business partners both have advantages and disadvantages. If you decide to bring in business partners, make sure they bring skills or resources that are different from yours. Until your business has achieved profitability and scale, be frugal and only spend money on what is necessary.

Finally, be relentless in your pursuit of success. Success is a journey, not a destination so you need to enjoy doing all of the hard work. Remember my story of when we drove to St. George, UT to unload and transfer mattresses in 110-degree heat? I would jump in a truck and drive there today if it meant adding to the success of the business.

Are you looking to hire for certain positions right now?🔗

We are always looking to hire great people and sometimes we will create a position if we don’t have an opening but have found a great team member. One of the attributes that have allowed us to hire and retain great people is our compensation package. We believe it is far better to run lean and pay talent what they are worth than over staff and underpay them. Candidates can apply directly through our website or by responding to one of our open positions advertised on a job board such as Indeed.com.