Naked Wines: Testing to Build | In Practise

Naked Wines: Testing to Build

Founder and Former CEO at Naked Wines

Learning outcomes

  • The essence of good business model design
  • How Naked built a meritocratic culture of testing ideas
  • The power of voucher-led promotional activity to kick-start growth
  • How to measure and use LTV
  • Challenges in leadership and entrepreneurship
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Executive Bio

Rowan Gormley

Founder and Former CEO at Naked Wines

Rowan Gormley is a South African serial entrepreneur who has successfully built 4 out of 5 startups to date. He was hired by Richard Branson in 1995 to identify new opportunities of which Rowan started Virgin Money, the UK retail bank which has over £1.6bn in net interest income today. Rowan founded and ran Virgin Wines from 2000-08 before starting Naked Wines in 2008. Naked Wines is a leading global online wine retailer with over £200m in revenue from 150,000 subscribers. Read more

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When you set up Naked Wines, how did you look at making that company different?

We set up in 2008, which was the last crisis, before the current crisis. It was a weird time, but it also meant that everybody was willing to look at new ideas. The whole thought behind Naked was that, wine costs too much money, because winemakers need to spend so much selling it. If we could get customers to buy the wine, before it was made, then the winemakers wouldn’t need to waste the money selling it, which means the customers would get good wine, for better money. This means you wouldn’t need to sell hard to them, so you’d keep them for years, which meant you would have a good business. That was the original thought.

The thing about 2008 was, winemakers needed money desperately, because the banks weren’t lending. We didn’t have enough money to fund them, so the only place it could come from, would be our customers. It was partly inspiration, but partly, also, just desperation, that forced us into that. What we discovered, much to our surprise, was when we went to people and said, here’s a really good bottle of wine and you can have it tomorrow, whatever level of response that generated, we’d get four times that, where we said to people, here’s a winemaker who’s run into problems. You can’t taste the wine, but if you pay today, we can let you have it in a year’s time. People were much more engaged in that, than they were in a simple transaction to buy wine.

Although we didn’t quite understand it at the time, that turned into what we call a virtuous circle, where we wanted to build a company where our winemakers, our suppliers, our founders, our staff, were all in it together. We weren’t trying to exploit one group of people to the benefit of another, but that by everybody sharing in the benefit of the company, everyone would benefit.

We started doing that by making them into shareholders. With shareholders, you do that because they’re really shareholders. The new thing was to bring the winemakers in and make them part of the deal, as well. It took a few years to find exactly the right shape of the business but building it, eventually, into a business where the customer has funded wines in advance and winemakers could leave their day job and set up and just focus on making wine. That’s what made it different. Out of that, a lot of other benefits came, as well, such as, you don’t need to hard sell, because people have already bought. That changes your marketing approach, it changes the way you talk to your customers, your investors and everything else.

Clearly, you’ve thought about a new way to build a business, with customers at the forefront, that actually become the shareholders and finance the business, in a way. What about the culture that you looked to build, at Naked?

The interesting thing is, we never really thought about the culture. The first time I thought about culture was when Naked was acquired by Majestic Wines and, all of a sudden, I was stepping into a job. I’d never had a job before; I’d always started the companies that I worked for. When you start the company, you never think about the culture, because you start with nothing. When we were setting up Naked, to be honest, I think the way the culture was formed was a function of a couple of things.

First of all, it was 2008 when we started, so it was quite a weird time. There was a real feeling of, we’re on our own here; no one is going to help us. The second thing was, one of our competitors tried, quite hard, to get us closed down. They called our suppliers and said, don’t deal with these guys; they’re going to bankrupt you and that kind of thing. So it was a bit of an, us against them, against the world. We landed up with a very tight group of people. I read that one of José Mourinho’s techniques was always, us against the rest of the world. In a way, that happened for us. Then, of course, we were a bit anti-wine establishment, so a lot of the wine critics were scathing, I think is the kindest thing to say. It did build up this really strong feeling of, we’re trying to do something right, here. Lots of people don’t want us to succeed and, for that reason, fuck’em. It just spurred us on.

What I think that led to was a really collective sense of responsibility, which was aided by the fact that everybody left good jobs to start at Naked and everyone was a shareholder. Everyone had burnt their bridges and, if we succeeded, everyone was going to benefit from that. But if we failed, then we’re all in the shit together. I think, without doing anything else, that does create a really strong culture. I think a lot of start-ups benefit from that.

I think the hard thing is when you then go from one office to an international operation. Naked Wines is based in Norwich, which is quite a small town; a lot of people socialize together. All of a sudden, when we had an American business and an Australian business, I think one of the most surprising things to me was how similar the culture is. In fact, the Australian business was six months old, the first time I set foot there. The weird thing was, it was instantly identifiable as a Naked culture.

I think the key was, always try to move enough people into a new business. So if you were making sourdough bread, there was a really good starter and there were enough people to get the culture moving. It is an attractive culture. It’s very meritocratic, so there are a lot of young people who have not come from a glamourous track record – unemployed French horn players, unemployed actors – very talented people, who have gone on to do great things at Naked. I think it’s very meritocratic.

Secondly, we’ve got a very strong culture of testing, which means that a lot of the things that eventually end up working, actually, a lot of the ideas originate out of somewhere else in the organization. It’s not a case of, the higher salary wins, because the organization is built around trying to build a better sort of company. I think that the fact that the people feel as if we are trying to do something good, really helps, as well. There are a couple of things which, I think, are emblematic of that. One of them was, we had the big wildfires in California and we said that it was completely inappropriate to be trying to sell wine to customers, while there were fires burning around us. So we did an appeal to customers. We said, people are going to need money. We don’t know who and we don’t know how much, but there are going to be some people who are going to be in a real pickle, after this fire. Please help out. We raised about $800,000 on the back of that.

By contrast, I think Facebook raise half a million dollars and Google raised a million dollars. Tiny little Naked Wines raised $800,000. I think that just shows that our culture extends beyond the people who work for the company, into the customers themselves. I think when your customers and your people feel the same way about a company, actually, the culture tends to survive. I think where you see culture fail, is where what happens inside the company and what it looks like, outside the camp, are two different things. Eventually, it becomes obvious that one of them is a fraud.

How do you, as a leader, think about this testing culture? Why do you think that most leaders find it so hard to follow such a similar test and learn culture?

Very early on, we developed a ‘don’t debate, test’. It’s one of our key founding principles. The reason we did that was, as the organization grew and we brought people in, especially marketing people, what we found is, they placed a lot of emotional store on trying to be right; trying to be a water diviner. ‘I think the answer is over there.’ We kept going, ‘we don’t care what you think; we don’t care what I think, either’. We just want to know where the water is. What we really care about is, are you going to do a really good job of finding the water. Once you’ve found it, are we going to be certain that’s all the water?

So what had started as being something which was just instinctive, as the organization grew and we bought more people in, from the outside, we realized we needed to codify it. What that boiled down to was three things. First of all, anybody who’s got any idea, we’re not interested in the idea, unless you can turn it into a test. I think there are a lot of companies who ask people for ideas and ideas are cheap. If you really believe in your idea, you have to be prepared to put the energy into figuring out how we are going to prototype it. We want ideas, but only if you’re prepared to show that you believe in it enough that you can develop it to a prototype.

The second thing was, we found a way of just answering questions really quickly. A lot of people would build big, complex supply chains, around potential new business ideas. Everyone gets really absorbed in the minutiae of building a new business – it’s fun, it’s exciting – without really knowing if there were ever any legs in it. We developed something we called paint a door testing. This was, if you want to know if an idea for a new nightclub is going to work, don’t open a nightclub. Just find a wall, paint the door in it and if you see lots of people trying to open the door, you know it’s a great idea. Then build the nightclub. But if everyone just walks by, don’t bother building the nightclub as it’s just a waste of time.

The third thing is, we don’t care if you can guess right. We only care that you’re thorough. We used the example of an oil prospector. Oil prospectors don’t pay people to go, I think it’s over there, I think it’s over there. They pay people to map out the landscape and do survey testing and drill lots of cheap holes. So that, number one, if there is oil, you’re going to find it. Number two, once you’ve found the oil, that’s all the oil. There isn’t another pot of oil somewhere. In a way, the best thing about testing is celebrating negative results. It just means, right, we can stop talking about that. We can stop diverting our attention. We can stop challenging and questioning ourselves. We’ve tested it, we know our customers don’t want that; don’t waste another second thinking about it.

It’s like the data wins and the data is all we care about and is important, but the key corollary to that is, you celebrate negative test results as much as you celebrate positive ones, because they are just as valid.

Take me back to the early days of Naked and your marketing strategy for those early adopters.

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Naked Wines: Testing to Build

April 10, 2020

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