This story appears in the December 25, 2017 issue of Forbes. Subscribe
Thomas "Mac" Harman grabs hold of the plastic-encased steel trunk of his company's 7-foot-5-inch Noble Fir and pulls off the top section. "This is a flip tree that's really cool," he says, as he turns the bottom two thirds upside down. The branches flatten over the metal base, which rests on four wheels, ready to be bagged and stowed in a closet until next year. One of Balsam Hill's most popular designs despite a $1,349 price tag, the fake Christmas tree comes "pre-lit," festooned with more than 1,000 LED bulbs.
Based in Redwood City, California, where it's surrounded by venture-backed tech startups like the cloud-storage company Box and the music-identification app developer Shazam, Balsam Hill's parent, Balsam Brands, stands out like Rudolph the Red-Nosed Reindeer. The 11-year-old company has raised no venture capital, has few recurring customers and sells the most seasonal of products. "From a business standpoint," says Harman, 41, "this is a stupid, stupid idea."
But the Stanford M.B.A. has made it work. Launched in late 2006, Balsam is expected to reach $120 million in revenue this year. Of the 100 million U.S. households that put up Christmas trees, according to a Nielsen survey, 81% put up fake ones. While 90% of the $1.2 billion fake-tree market is captured by mass retailers (like Wal-Mart and Home Depot) that sell trees made by multiple vendors--most at less than half the price of Balsam's--Balsam targets people who want to invest in a higher-quality tree.
To make them, Harman uses five factories in China, with some specializing in specific tree types or parts, like boxwood topiaries that have fake leaves instead of needles. For needle trees, he trademarked the phrase "true needle" to describe the polyethylene spikes that surround each hand-painted stem. Miss the smell of a fresh-cut tree? Balsam sells a $99 fragrance machine.
Harman traces Balsam's origins to 1999, when he paid his first holiday visit to his Korean-immigrant in-laws in Beaver, Pennsylvania. Remembering the live trees he grew up with in Cleveland, he cringed when he saw their fake one. "It was just a really sad, cheapo tree," he recalls. "The needles looked like green plastic sheets that had been put through a shredder and attached with wire."
At the time, he was 23 and working as a consultant in the Cleveland office of McKinsey. Two years later his father died of lung cancer at age 59. An only child, Harman took over his dad's struggling wire-product manufacturing plant. For the next seven years he juggled work, business school, the early days of Balsam and flights to Cleveland, until he finally sold the 30-employee company in 2007. The proceeds went to his mother, but Harman says the experience gave him confidence. He'd manufactured steel-wire products and used the internet to find new customers, and he believed he could do the same with Christmas trees.
After graduating from Stanford in the spring of 2005, Harman spent six months kicking around business ideas. Over coffee with Stanford friends at the Coupa Café in Palo Alto, he joked about selling Christmas trees online. His friends laughed, but when he searched, he found only a handful of rudimentary sites offering a limited selection. Since it would be a seasonal business, he figured he could run it part-time while pursuing other projects.
In June 2006, after connecting with a Stanford business school alum whose family ran a Chinese factory that manufactured artificial Christmas trees for the U.S. market, he traveled to Dongguan with a stack of photos and several guides showing the kind of detail he wanted to produce on 16 varieties of fake pine trees. With $120,000 he raised from friends and family, combined with savings from his McKinsey days, he ordered 15,800 trees, staggering delivery from the Chinese factory so he could pay for them in increments. He sold the trees from a website with descriptions he wrote himself and from a pop-up store at the Stanford mall. Maxing out his personal credit cards, he spent $300,000 on marketing. He hired a search-engine-optimization consultant but poured most of the money into pay-per-click ads, which drove Balsam's first-season sales to $2.9 million.
Early on, hiring was tough, with nearby tech startups offering fat salaries, nap pods and massage rooms. Harman's selling point was his commitment to being an atypical Silicon Valley startup. He encourages parents on staff to leave early to pick up kids and to work remotely as needed. He and his wife, Stephanie, a physician, have three children, aged 8, 6 and 2, and he helps coach a Little League team. In 2010, on the recommendation of a Stanford friend, he started hiring in the Philippines, initially just to handle online marketing. He soon discovered that his Filipino staffers, who cost 30% less than their U.S. counterparts, were skilled at customer service, graphic design, copywriting and operations, and he expanded the head count there to 75.
As sales rose, Harman and his staff struggled to manage a crushing workload for the six-week period when Balsam collects two thirds of its annual revenue. That requires a temporary army of 600 customer-service reps, up from Balsam's usual 20. He would prefer to stay busy year-round, but his attempts to diversify have failed: He has tried selling $139 pet beds, an assortment of lighting fixtures and $300 above-ground plastic swimming pools manufactured by the factories that produce Balsam's trees. He also bought a maker of low-priced Catholic items like plastic rosaries that sold for less than $1. Total losses: more than $1 million. Today non-Christmas merchandise still makes up less than 5% of Balsam's sales.
Meanwhile, reaching Christmas customers through online ads has grown more expensive. When Balsam started, Google AdWords delivered clicks for as little as ten cents each. Today the cost to appear at the top of a search for a term like "artificial Christmas tree" can run as high as $10 a click, and only a tiny fraction of people who click wind up buying. "Some people come to our website repeatedly but wait five years to buy a tree," Harman says.
Selling on Amazon is also a challenge. "I call Amazon a frenemy," Harman says. The site takes a 15% cut and requires vendors to communicate with customers through Amazon, which precludes Balsam from sending special product offers and from collecting data on Amazon purchases. But Harman has learned that Balsam has to be there because, according to a 2016 study by the cloud-marketing company BloomReach, more than half of all consumers start their product searches on Amazon. His strategy is to offer a limited selection on Amazon but focus on Balsam's own site, which accounts for more than 95% of the company's sales.
Last year, on the Monday before Thanksgiving, Amazon shut down sales of Balsam products after a spike in orders tripped a fraud filter. Harman says Amazon was unresponsive until he called a well-placed friend at the company who pulled strings. Balsam's products suddenly reappeared just as the company's float was making its way in the Macy's Thanksgiving Day parade. (An Amazon spokeswoman declined to comment on the incident, except to say that sellers "have access to 24/7 e-mail, phone and chat support.")
Harman also spends millions on cable and network TV ads and on product placement, including decorating the sets for the CMA Country Christmas special in Nashville. He relies on software that estimates the number of orders that come when the ads air, but the data have been inconclusive: "It's all extremely messy and inaccurate." Nevertheless, he says, the company has turned a profit every year since 2008.
Fluorescently lit and cluttered with artificial trees, wreaths and flowers, Balsam's headquarters is upstairs from a bank in a two-story 1970s office building. Harman says his Valley friends have made fun of him for trying to sign a 14-year lease (the best he could do was 9). "My friends will be on their fourth company in 20 years, and I still plan to be doing this," he says. "That's the weirdest thing in Silicon Valley."
