Secrets of Growth

Skullcandy's delicious ride

November 22, 2011: 1:42 PM ET

The Park City, Utah-based company made a name for itself — and a killing – selling rococo headphones to teens and twenty-somethings. Now, it has to grow without alienating its core customers.

By Richard Nieva, contributor

skullcandyFORTUNE -- Skullcandy didn't invent the formula of selling audio gear as if it was fashion. But in a few short years, it has used it to grow a thriving business that dominates the headphone market among teens and twenty-somethings. The lifestyle brand -- which markets mainly to snowboarders and skateboarders -- went public this July. Now, Skullcandy must continue to grow without alienating the core customers that gave it legs to begin with.

The company, founded in 2003 in Park City, Utah, made its mark selling colorful, street art-inspired audio gear in an iPod white or everyone-else-black world. Skullcandy (SKUL) earned a reputation for innovation, releasing rococo over-the-ear headphones as well as earbuds designed to stay put and tailored-made for its action sport crowd. The appetite for trendy headsets has grown since the company started, largely due to the ubiquity of smartphones that double as music players. Varied brands like Sony (SNE), Bose and the Beats by Dr. Dre have gotten a big boost from the trend. The US market for headphones this past year was $2 billion, up 79% from last year, according to NPD.

Even in a booming market, Skullcandy has done remarkably well: a healthy IPO announced last summer; a 57.5% increase in sales from last year at this time; and the acquisition of Zurich, Switzerland company 57 North in August, which has marked Skullcandy's entry into Europe. These are good strides for the company, but they also bring potential problems.

Overexposure has been a concern for the company ever since it first became stylish. CEO Jeremy Andrus is aware that the more successful Skullcandy becomes, the more it risks losing touch with its base. "The discussion we have everyday is: How do we remain relevant to the core consumer?" he says. "It's important to our business model to treat them as we did in the earliest days of the business, when they were our only customers." (The company's previous CEO was ousted one month before its IPO.)

What's changed, besides an influx of profits? Hardcore snowboarders and skaters are not the only customers anymore. After initially being sold exclusively in specialty stores like Zumiez or Tilly's, now Skullcandy products are available at major retailers everywhere, including Best Buy (BBY) and Apple (AAPL) Stores. That risks over-exposure.

Every burgeoning company faces a balancing act between growth and freshness -- Ben and Jerry's is a classic example -- but it seems to be more of an issue for Skullcandy because the brand's fate is hinged so directly on a youth subculture deeming its products cool. How easy is that to lose? "Easy. So easy. It's very delicate," says Dean Crutchfield, branding expert and CEO of Caffeine, an international business growth consultancy.

Andrus believes he has an approach that he says will help the company avoid a backlash: spending a large chunk of marketing dollars on those smaller specialty stores, even though the national retailers bring in the bulk of revenue. Andrus declined to comment on just how much of the pie goes toward that demographic, but says it is "a very high percentage." He sees it as a long-term investment, as opposed to an inefficiency. "That kid -- that core customer walking into a skate shop or a lifestyle shop -- that individual is a trendsetter," he says.

That strategy could help Skullcandy maintain its connection to its roots. Action sports cultures place a premium value on obscurity: lesser known bands, local shops, hidden skate spots. Off the wall headphone designs were meant to give users a distinct means of expression. "It's about a unique point of view, the attitude of a tribe," says Crutchfield, the branding expert. Brands like Red Bull energy drinks and Vans shoes have pulled off similar moves, even after years of plentiful growth.

Even more changes are underway for the company: it seeks to expand its line of gaming headsets and has a higher end headphone model in the pipeline for 2012. As it expands, successful growth will mean nurturing its core crowd throughout an entire lifetime, says Crutchfield. "Remember that 15-year-old snowboarder?" he says. "Well, maybe he's married now. But he's still got that bit of attitude, right?" Skullcandy has served its tribe well so far. Its true test will be avoiding becoming just another fashion trend that, eventually, went out of style.

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