Boom.Boom - The Scent Aiming to Set an Industry Trend
Not every product featured on Shark Tank can land a deal. Sometimes, the product is lacking in some way, and other times the Sharks simply try to bite off more than the entrepreneurs can handle. John and Chelsea Pinto’s negotiations involved a bit of both, and it was pretty clear why.
On Episode 4 of Season 10, the entrepreneurs delivered a peppy, pun-filled pitch for their invigorating product, Boom.Boom, followed by a questionable ask of $300K for 10% equity.
Manufactured in Southern California, Boom.Boom is an essential oils-based nasal inhaler intended for intense rejuvenation. It includes all-natural ingredients like menthol and peppermint and can be conveniently used anywhere. Each inhalation leaves you cool and tingly while providing the mood altering benefits of aromatherapy!
After trying a few best-selling samples, like the “Tropical Rush” scent, some Sharks went wide-eyed while others shouted “woo!” Despite its amusing name, they could obviously smell the product’s intense potential.
Yes, Boom.Boom did have competition, but its vibrant branding made it superior, and its numbers checked out. Last year, the entrepreneurs made $754,000 in sales and were still on track to meet their 2018 goal of $1.1 million. They made half of their sales through their website and Amazon, and the other half through wholesaling to retailers.
What was especially impressive was that it only cost John 70 cents to make a single inhaler, yet it sold online for $7.95! That’s a 91% margin and 1036% markup that the Shark’s obviously loved, but did that really make Boom.Boom worth $300K?
Short answer, no, and John’s wholesale margin was the reason why.
His wholesale price was $1.50; retailers would then resell for $3.99, a meager 62% margin that every Shark had a problem with. John and Chelsea found that when split tested against a $5.99 retail price, $3.99 actually sold faster. That mindset actually earned them a few disapproving stares because this was simply bad business practice.
It seems the entrepreneurs confused quicker sales with better performance. Obviously, a cheaper retail price would sell faster, but the lower profit margin between them and retailers was too costly to ignore. Kevin pointed out that they were basically undercutting their sales with that margin, which was true, they were selling Boom.Boom for twice that amount on their own website.
“Why pay eight bucks for it when I can pay four?”, Kevin said, pointing out the glaring flaw in the structure of their business plan. That price differential essentially set up their retailers as the preferred place to buy the product. John tried to explain that it was a “point-of-purchase” product, but that didn’t change the fact that they were competing with themselves and could be making so much more money.
Mr. Wonderful said it best, that margin “sucked” and certainly wasn’t sustainable in the long run. However, having such a bad wholesale margin was only part of why John and Chelsea walked away empty-handed. When the conversation turned to the subject of equity, John stated that he and another co-founder each owned slightly over 36% of the company. Three others collectively invested $200K for the remaining 25%.
This revelation was John’s big mistake. Guest Shark and NBA Hall-of-Famer, Charles Barkley, immediately pointed out that they were asking the Sharks to pay more money for less equity than the other investors. By unveiling investor specifics, John unwittingly gave the Sharks a way to negotiate more aggressively, as his $300K ask now seemed too high.
Unfortunately, most of the Sharks lost interest in negotiating a deal after hearing this. Kevin backed out simply because he didn’t think their company deserved the $3 million valuation their ask implied, definitely due to their inefficient wholesale-to-retail margin. Lori expanded on Kevin's concerns, saying that although she enjoyed Boom.Boom’s fun and convenience, she saw it as a potential “one-time buy” with consumers that didn’t “resonate” with her, so she backed out as well.
Right after, Charles followed up with more discouraging news. He thought Boom.Boom was “neat”, but he didn’t see it as something he would personally use on a consistent basis, therefore he also backed out. Mark actually countered Kevin’s point about their valuation, saying that it wasn’t too high, their net margins were just too low. If half of their revenue was going to come from retail, with those margins, Mark didn’t see it happening for a product that was only “marginally viral”, so he backed out.
Robert Herjavec was now the lone Shark in the tank. He loved Boom.Boom, but its valuation would have to change, so he made a cutthroat offer of $300K for 36% of the company. Robert smiled while John and Chelsea looked terrified; the other Sharks watched with intrigue, knowing that Robert just backed John into a corner.
If John accepted, he’d no longer be a majority shareholder. Since he couldn’t part with that much equity, he made a counteroffer of $300K for 15%. When Robert said no, he bumped up the equity to 20% and even that wasn’t enough. There was no way to accept without losing control of the company, so with looks of disappointment, John and Chelsea thanked the Sharks and walked away empty-handed. That was the right move but if John hadn’t revealed what his other investors paid, things might have gone differently.
Overall, Boom.Boom’s an amazing product, but if John and Chelsea truly want a "booming" business then they need to refine their back-end costs because their product’s uniqueness isn’t enough to carry it to the top. It also doesn’t have the consumer awareness of other commodities like eye drops and lip balm. That is not to say that Boom.Boom doesn't have the potential for it; there is definitely space in the market, John and Chelsea just need to get out of their own way before that can happen.