How We Started A $1.5M/Year Gourmet Marshmallow Brand With $200

Published: July 21st, 2022
Lindzi Shanks
Founder, XO Marshmallow
XO Marshmallow
from Chicago, IL, USA
started January 2016
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Hello! Who are you and what business did you start?

My name is Lindzi Shanks, and I am the co-founder and co-CEO of XO Marshmallow. XO is the premier gourmet marshmallow company in the world and home of the world’s first marshmallow café. We create delicious gourmet marshmallows in a variety of flavors from salted caramel to pistachio to our iconic Butterbeer.

While we now carry a variety of marshmallow-based treats such as our OMG (aka Ooey Marshmallow Goodness) and Oh Dough You Didn’t (a cookie dough meets marshmallow treat) – our flagship products are our marshmallows. Many flavors on our menu have been with us from day one such as Bourbon and Lavender Honey.

While it seems marshmallow companies continue to be on the rise, XO remains the leader in this market because of our compelling lifestyle brand. Our customers (primarily millennials and GenZ women) want to support a brand that they can stand behind. From our beautiful packaging, quality ingredients, merch that allows the consumer to experience the brand beyond the mallow, and our mesmerizing social media accounts – we have created a brand that people want to support. It’s bright, colorful, fun, and puts a smile on your face – and frankly, the world needs a lot more of that right now.

S’mores Kit for 2

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

My business partner, Kat Connor, was the original creator of XO Marshmallow. In her final year of law school, she was looking for a creative and interesting gift to make for her family on a law student budget. She stumbled upon a recipe for “hot cocoa in a jar” with homemade marshmallows. While people loved the cocoa – they could not stop talking about the marshmallows. Kat felt the recipe was too complicated and developed her own that blew the first batch out of the water. For her graduation, she decided to host a s’mores bar and experiment with flavors. Once again, it was a hit.

She realized she wasn’t quite sure she wanted to pursue law and instead began playing with making marshmallows at the café she was working at. She decided she wanted to get another job for the holiday season and that’s how she met me.

Similarly, I got a degree that I was sure I wanted to use. After graduating with a Master’s in psychology, I decided to expand upon the online gift and clothing boutique I started while an undergrad – culminating in a popup shop in downtown Chicago during the 2015 holiday season.

Kat applied for a job at my popup and mentioned she made marshmallows. As a mallow lover myself (and someone who sold coffee mugs), it made total sense to have her make marshmallows for the shop. At the end of the holiday season, unsurprisingly, the mallow + mug combo was the best-selling product. We decided to become business partners – each putting only $100 into a bank account to start this venture.

We rely heavily on customer feedback and suggestions when concepting new flavors and new products. We keep records of what people are asking for and the flavors they are guessing/suggesting.

She had the culinary creativity that I lacked, and I had the branding and eCommerce experience to make people fall in love with her creations. We knew from the two-month-long popup what flavors worked and which didn’t – plus how to improve the packaging. We used the emails collected for the popup to help launch the new marshmallow concept in January of 2016 – right after the popup closed.

Kat Connor (on the left) and Lindzi Shanks (on the right)

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

The truth is when Kat first started making marshmallows and tweaking the recipes, it wasn’t something she was planning to sell. She was going through the process of prototyping it and perfecting it without really realizing it. She was simply trying to create a product that she loved to make that tasted amazing – while trying to streamline the process. The first recipe she used from Pinterest had almost double the steps and ingredients that our current mallows use.

Honestly, I’m really glad it worked out that way because the marshmallow wasn’t forced. It was created out of pure joy and primarily for the sole purpose of being delicious. I think that still really comes through even though we are now making a million+ marshmallows a year.

The process of developing a new product today is a completely different story. We rely heavily on customer feedback and suggestions when concepting new flavors and new products. We keep records of what people are asking for and the flavors they are guessing/suggesting.

We also know what historically has sold well for us and what does poorly – we use that feedback loop to create new items that should sell well. We as a team come together and pitch ideas for new products and “debate” which ones should be put into effect, and which should wait. From there, our culinary team begins to R&D the new products through test batches and sourcing ingredients. Each test batch is tried by almost every team member and feedback is given.

Test batches continue to be made with the same feedback loop until we either perfect a recipe or find a reason to cease attempting to make that product. For example, some flavors prove more challenging than others to achieve from the very beginning and might be scrapped for an easier flavor to develop as an intricate flavor may be more cost-prohibitive if the labor to make it is too high.

From there, we concept new product packaging and we send the final test batches off to be photographed. We set a launch date and start making the product about two weeks before the launch date so that we have a healthy inventory of the product before launch. How long a product remains in production depends on how well it’s selling.

Describe the process of launching the business.

In many ways, the company has gone through multiple rounds of “launching” as we’ve concepted new avenues for the business. You have the first “launch” which was introducing the marshmallows to the popup shop. This was very informal – packaging was what could be easily found. The logo was just black and white text. It was more about answering the question… “would people buy these?”. Once the answer to that question was a clear and resounding yes, we began concepting a brand.

Shortly after becoming business partners, Kat began setting up the formal paperwork for creating the LLC and Articles of Incorporation. I began working on the brand. The branding you see now is not what we started with. Originally it was darker, moodier, and focused more on “luxury.”

We each only started with $100 in a joint bank account – so our packaging was minimal and mainly doctored versions of existing packaging. Since I already had eCommerce experience with my first company, I set to work getting a Shopify store designed and opened. When Kat asked if we should start an online shop, I explained I had already done it and that we had orders that needed to be fulfilled. Kat likes to say I’m “go, go, go” and she's “woah, woah, woah.”

Our very 1st packaging with our “moody, luxury” brand

vs. today’s packaging

It soon became apparent that the tiny mixer we were using was not going to cut it to handle the order volume, and our $200 total start-up costs were not going to be enough. We needed a new mixer, better packaging, and a brand refresh. Moody, luxury was not the vibe. We wanted to be colorful and whimsical. No other marshmallow company at the time was doing that. Everything was craft bags and “camping” style – we saw an opportunity to stand out in the crowd, but we needed money.

We launched our first Kickstarter with a small goal of $5,500. We wanted to use these funds to get a new mixer, truly have some start-up money to develop flavors and new packaging, and get our name out there. We set the Kickstarter up so that the orders would be filled for the holiday/Christmas season. We quickly met our goal and raised a total of $6,288.

Our 1st Kickstarter

Our 2nd Kickstarter

Between the Kickstarter orders, online orders, and markets – we had an incredibly successful holiday season. Our customers started to demand a physical location. A marshmallow café. This had never been done before – and we had our doubts that people would come to the shop. So, we decided to launch another Kickstarter – this time to fund the build-out of the café. The goal was $6,500 and we raised $9,524. In hindsight, that was not enough to build out a café, but luckily, we were able to save costs by building so much of the space ourselves and using our profits/cash flow to fund the rest.

Over the years, we’ve learned that bigger launches take at least double the time and double the money that you’ve planned for. And that nothing goes perfectly – but ultimately, it’s more important to just start and put yourself out there than wait for perfection. You learn more from your mistakes anyway.

The biggest piece of advice I can give you is to just start. I know sometimes that feels counterintuitive or not possible with everyone now expecting these perfect and shiny D2C companies from the beginning, but it’s the easiest way I know to learn.

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

Without a doubt, social media, particularly Instagram (and now TikTok) have been our primary source of attracting new customers. Pre the iOS changes, we would use Facebook and IG ads with 20x ROAS (return on ad spend). Since the changes, our ROAS dropped so low it wasn’t worth it for us (about 2-3x). After that, we decided to do a relatively controversial thing in eCommerce and that’s run zero ads. Instead, we’ve focused on creating high-quality, hyper-engaging content on our platforms. We’ve seen our follower count, engagement rate, and sales rise significantly.

In the last 90 days since making this decision, our Instagram follower count has grown 30% -- gaining almost 23k new followers. Our engagement rate is up 200% and many of our reels (and TikTok videos) have garnered over a million views – with one of our reels sitting at 4.7 million views. These two platforms have become the biggest generators of eyes to our site.

The other is organic traffic through a focus on SEO. Love to hate it, hate to love it. Either way, SEO is incredibly important for making sure your products are found via search engines and are high-ranking on Google. We spend a lot of time making sure all our meta-tags and images are appropriately named with keywords.

We take every opportunity we can to backlink our site – including creating blog posts that not only show lifestyle images and ways to use our marshmallows but are written in a way to increase SEO and the number of times people “pin” the posts on Pinterest. Did you know one of the top things searched on Pinterest is s’mores boards? We rank high in that search based on a blog post we created – you’re already on our site learning how to create the perfect s’mores board – why not order some marshmallows to go on it?

Attracting customers is one thing, but it doesn’t mean much if you can’t convert them and retain them. We focus heavily on our email newsletter. We have multiple touchpoints on our site for gathering emails. We use these to launch new products, recover lapsed customers, and keep customers informed on the shipping process. Our newsletter goes out consistently twice a week on Tuesdays and Thursdays. We find that this allows our customers to stay engaged with our content but doesn’t overwhelm them into hitting the spam button.

We also put a lot of effort into our reviews/rewards program. We use Growave for both, and we have found it adds a level of authenticity and trust that our customers can see reviews for products directly on our site. After someone places an order, two weeks later they are asked to leave reviews on our site about their experience and to please include photos if they have them. Our customers get reward points every time they leave a review. Those points can be used for discounts on future orders – so they are incentivized to leave their honest opinions – generating more reviews that lead to more trust from new buyers.

Example of reviews for our Cosmallow Brownies

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

Looking back at where we are now compared to when we started six years ago is insane. We went from just the two of us and a tiny mixer to having 21 employees, three-floor mixers, and four tabletop mixers in an almost 9000 sq ft facility. We also just moved our first café location to a new space that is almost 3x the size of the original one. We have continued with YoY growth ranging from 25-300%.

Last year we did $1.5 million in sales and are on track for 30-35% growth this year. We’ve been profitable for the last 4 years, but profitability is a tad uncertain for this year. After building out two new facilities this year and expanding our team and equipment – all while inflation is causing margins to tighten – this year may not quite reach profitability. We are hopeful that it will – given our predictions for the holiday season – but it ultimately will depend heavily on continued inflation and the potential recession.

All that said, the future still looks great for XO! We are continuing to see massive growth both online and in our new café space. This year we are focusing heavily on café sales in preparation for future locations. Since our eComm conversion rates are strong, we are spending an increasing amount of time and energy on the growth of our social media accounts. The more “viral” moments we can achieve, the more those viewers are more likely to convert into sales and become part of “Troop XO” (what we call our fans).

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

I’ve simultaneously learned to trust my gut and to know when it’s time to let go. I’m someone who almost always has an intense gut feeling for things. Is this the right hire? Should we launch this product? Will this be a good partnership? And for a long time, I ignored my gut and relied more on the counsel of others – only to have my gut feeling be right in the first place. I’m not saying to not seek counsel or advice from mentors or others, but instead, I’m saying to give your gut more thought than you normally do. The reality is nobody knows your business as you do – and your gut and instincts are typically more on the money than you realize. So many people around you are believing in you as a business owner – trusting your gut is you believing in yourself.

Similarly, it’s also really important to know when to let go. You need to focus on hiring the right people who you trust to make decisions when you aren’t in the room. You can’t do every single thing yourself, but you can hire people who can take over areas that are either not your strength or that you don’t have time to do. And then let those people do their jobs by coming up with new ideas and putting them in motion. If you are going to try to continue to do it yourself, then why did you hire them?

What platform/tools do you use for your business?

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

When it comes to books and podcasts, I feel like I can never get enough. I’m constantly trying to consume knowledge and learn as much as I can. The top three books that have been the most helpful over the years are:

Cooking Up a Business by Rachel Hofstetter: While this book is now a little dated, it was still one of the books that had the biggest impact on me when starting a food company. It gives so many examples and anecdotes from other food companies of how they started, and more importantly, how they grew.

First Time Manager by Jim McCormick: Like many entrepreneurs out there, I had never been a manager before starting my business. I had a great idea and knew how to work hard to get it off the ground and be successful – but once we started to grow to the point of hiring people, I had no idea what I was doing. First Time Manager easily breaks down steps and concepts for new managers that can help them become successful at leading a growing team. We now require all of our new managers or any staff that might be interested in management to read it.

MOVE by Patty Azzarello: There are so many great books out there that show you how to start a business, and so many of them focus on the same things. But it’s really hard to find books that focus on scaling and growing your business after you’ve already launched/had some success. It’s all about building on your inertia and focusing on your ruthless priorities.

My favorite business podcasts are Shopify Masters, How I Built This and Financial Feminist. Kat also wrote a really great blog post on some of her favorite books on our site.

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

The biggest piece of advice I can give you is to just start. I know sometimes that feels counterintuitive or not possible with everyone now expecting these perfect and shiny D2C companies from the beginning, but it’s the easiest way I know to learn. If you wait until something is “perfect”, you’ll never start, and frankly, you’ll miss out on the opportunity to learn from your community/customers about mistakes or ideas that you never even thought of. Just start putting yourself out there – authentically – and listen to your followers and customers as soundboards for everything.

Do not underestimate the power of the right team. You cannot do everything on your own – especially as you grow and scale. It’s important to hire the right team that can help you grow in all the ways you can’t do on your own. Start trying to hire before you need someone so that you can spend the extra time being picky about who you hire instead of just hiring to get a body in a position.

Are you looking to hire for certain positions right now?

We are looking to hire a Head of Production at our new headquarters space. This is a full-time, managerial position. Our Head of Production would work closely with our founders and our Head of Fulfillment to manage all products produced in our facility. They will produce marshmallows and marshmallow treats and handle scheduling, ordering, and other admin tasks that improve the efficiency of the production process. Must have pastry and candy-making experience.

Where can we go to learn more?