In recent years, major infrastructural
advances and the success of innovative start-ups like Gilt Groupe have
rekindled investor interest and set the stage for an explosion of promising new
business models including personal subscription, social merchandising, mass
customisation and collaborative consumption.
PERSONAL SUBSCRIPTION
Opportunity: The
model is relatively simple: consumers join a monthly club, complete a personal
style survey, and are then shown a selection of products each month that they
can choose to buy for a flat rate. While traditional online retailers struggle
to gain and retain customer mindshare, and must constantly re-engage and
convert customers to stay profitable, subscription style services generate far
more predictable revenue streams. Subscription retailers also capture data on
the tastes and size measurements of individual customers in order to deliver
personalised product selections. This not only drives greater customer loyalty,
but also enables retailers to better manage inventory risk.
Key Players:
·
Shoedazzle offers
personalised, stylist-selected shoes and accessories at affordable prices,
delivered straight to doorsteps, and has attracted over 3 million members and
over $60 million in venture capital from top tier firms.
·
Beachmint has
raised a total of $38.5 million and launched several subscription services
across a number of verticals, working with celebrity designers, including
jewelry site Jewelmint, launched
with actress Kate Bosworth and her stylist Cher Coulter; Stylemint, launched with Mary-Kate and Ashley Olsen;
skin care site Beautymint, launched
with pop culture phenomenon Jessica Simpson; and shoe site Shoemint, launched with actress Rachel Bilson.
·
Birchbox, an early
subscription retail innovator, is a beauty subscription service that addresses
product discovery and sampling and has raised a total of $11.9 million
·
Manpacks is a
convenience-focused men’s subscription service for staple male essentials like
razors, underwear, socks and shirts.
Challenges: Competition
in the subscription retail space is heating up, so we might start to see
increasing churn rates. While subscription services have stickier revenues,
they are vulnerable to cancellations. In order to succeed over the long term,
they must continue to offer products that are constantly exciting and relevant
to their customers. Multiple months of disappointment will most likely result
in lost customers.
SOCIAL MERCHANDISING
Opportunity: Social
merchandising enables retailers to collect consumer feedback on goods prior to
buying them. Typically, consumers are asked to vote, comment or curate products
(sometimes through contests), indicating their preferences in a way that
generates hugely useful data that retailers can leverage to more accurately
predict what will sell, better aligning supply and demand. Social merchandising
also engages customers and drives greater loyalty.
Key Players:
·
Threadless was
one of the first online fashion retailers to let the crowd vote on their
favourite t-shirt designs and determine which designs would be put into
production and sold on the site.
·
Modcloth, which raised
$19.8 million in a Series B round led by Accel Partners in 2010, has
experimented with a successful “Be the Buyer” program, which lets consumers
vote on their favourite items, generating data that informs Modcloth’s
merchandising strategies.
·
ASOS now
encourages consumers to vote on, curate and share the designers and products
they fancy most, a sign that larger e-commerce sites are experimenting with
social merchandising as well.
Challenges: With
social merchandising, timing is a challenge. What consumers want today may not
be the same as what they want in a few months time. So, for these feedback
loops to be most effective, short cycle production and fulfilment are
essential.
MASS CUSTOMISATION
Opportunity: Mass
customisation lets businesses deliver individualised products to every single
customer, based on the buyer’s choice of aesthetic, functional, or contextual
components such as styles, colours, materials and measurements. The individualised
tailoring of products has, traditionally, been too costly to scale. But mass
customisation allows customers to participate meaningfully in the design of
their goods, restoring individuality to the process, while leveraging the
cost-efficiencies of mass production to make the model feasible. Customers get
the exact products they want. And by offering goods that, by definition, cannot
be found elsewhere, the model enables companies to differentiate themselves
vis-à-vis competitors and build stronger, more engaged and loyal relationships
with consumers. Plus, by getting commitment (and payment) at the top of the
purchase funnel, mass customisers avoid the perennial issue of excess, end of
season inventory that didn’t sell. Indeed, customers pulling — rather than
companies pushing — product designs offers practical, emotional and economic
advantages.
Key Players:
·
Nike first
launched its highly successful mass customisation platform NikeiD back in 1999, allowing consumers to add a
personalised look and feel to select shoe models. Ten years later, following a
2008 redesign of the application, the company reported that the
platform had “surpassed $100 million for the first time.”
·
Zazzle and Cafépress, which earns over $100 million in revenue per
year, are white label companies also active in the space.
·
Burberry Bespoke allows customers to create trench
coats to their personal specifications, choosing from a wide range of style,
fabric, colour, embellishment and detail options.
Challenges: The
downside of mass customisation is the increased cost and complexity of
production, which is ultimately reflected in higher prices. Prices for Burberry’s
custom trenches start at about $1,800, while special materials can bring the
price up as high as $8,800. Customers derive greater value from personalised
products and are willing to pay a premium for these goods, but it’s simply not
feasible that every part of a product design will be customisable. The trick is
identifying which key elements of a product to make customisable and offering
the right degree of variability in order to provide a made-to-order feeling,
while ensuring manageable and scalable production.
COLLABORATIVE CONSUMPTION
Opportunity: Collaborative
consumption is the next generation of swapping, sharing, bartering, trading and
renting, behaviours which are being re-energised through the growth of
peer-to-peer marketplaces and other technology-enabled platforms. Sellers can
get rid of used or depreciating assets, while buyers can consume the items’
residual value at a price point that is substantially cheaper than retail.
Collaborative consumption also includes rental models. For high cost items,
especially those that are fashionable or ephemeral, renting items often makes
more sense and gives a new customer base access to products that would normally
be outside of their reach. As a result of the troubled economy and the rise of
flash sale and daily deal sites, consumers expect discounts as a matter of
course and routinely seek out high quality or high design items at cheaper
price points, creating an environment ripe for the growth of businesses built
on collaborative consumption.
Key Players:
·
Rent the Runway, a
mail-order service which lets women rent designer fashion and is sometimes
described as “the Netflix for fashion,” has attracted over 1 million members
and secured over $30 million in funding from top tier firms Highland Capital,
Bain Capital and Kleiner Perkins Caufield & Byers.
·
Bag Borrow or Steal lets consumers rent designer
bags by the week, month or season.
·
TheRealReal, backed by
start-up accelerator 500 Startups and other noteworthy angel
investors, recently launched an online consignment store selling previously
owned luxury fashion at prices as low as 90 percent below retail.
·
I-Ella enables
consumers to easily swap and exchange fashion.
Challenges: Peer-to-peer
models faces obvious challenges around trust and quality control. And, as with
any marketplace business, getting liquidity through a critical mass of products
and users is essential, but challenging. The rental model is initially capital
intensive, because a company has to purchase inventory upfront and absorb the
depreciation and maintenance costs associated with each item, which creates
barriers to entry for copycats aiming to get off the ground and achieve
profitability. Overtime, the model can be lucrative, especially for companies
that are able to make accurate assumptions around depreciation from wear and
tear and the costs of upkeep.
Although winners are already emerging
from the current explosion of e-commerce start-ups, we will continue to witness
constant e-commerce innovation for the foreseeable future. Indeed, with only 9
percent of commerce currently being conducted online, there is still tremendous
room for growth. Beyond the aforementioned approaches, a number of promising
young companies are building businesses around innovative models like shoppable
media (Joyus), multi-level marketing (Stella & Dot), curation (AHAlife), local shopping (Aisle50) and retail
gaming (Lockerz and Sneakpeeq). And while venture capital investment is a
symptom of a good market, not a cause, investment in e-commerce more
than doubled from $1.06 billion in 2010 to $2.39 billion in
2011. This kind of interest from VCs will surely accelerate the explosion of
new start-ups set to disrupt the retail industry in the months and years to
come.
