E-Commerce Week | The Rise of New Business Models

Modcloth screenshot | Source: Modcloth

In Part I, we examined the innovations and infrastructural advances that have improved the historically poor economics of e-commerce and set the stage for a renaissance in online retail. Today, we explore some of new and exciting business models taking shape, the companies exploiting them and the challenges they face.

SAN FRANCISCO, United States — For years, e-commerce suffered from capital inefficiencies and complexities that pushed investors away. But 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.

Elizabeth Knopf is a former investment associate and the co-founder of Sorced, an online showroom.

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15 comments

  1. Collaborative consumption is a movement which we have been involved in for some time with great success and we see no reason why this model would not show great results for fashion too.

    In the 10 years that http://www.carpooling.com has been around we have not found that trust is a serious issue for our 3.5million registered users who use our service to list or find empty seats in a car making a trip between A and B.

    Naturally as a carpooling platform we do not face the challenges facing a rental model detailed above and we are focused on helping people make the most of the under used resource of empty car seats.

    We trust fashion related collaborative consumption providers will have similar successes to us.

    Happy carpooling!

  2. Trust in the peer-to-peer business models is indeed a challenge. We at WhyTrusted.com believe that your reputation trail can provide a valuable insight into how trustworthy you are. The more transparent and consistent is your online presence, the more likely people will trust you.

    We have this question in our site banner:

    Would you not do business with someone with an excellent track record on eBay, has a social life (Facebook), does something important in LinkedIn and is interesting enough to have a lot of followers on Twitter?

    What do you think?

    Mauro Nunes, co-founder of WhyTrusted.com.

  3. Hi Elizabeth,

    would Sourced be interested in developing a on-line show-room for Brazilian brands? I would be more than interested to help, as finding investors and partners. Best.

    Fernanda ebert from São Paulo, São Paulo, Brazil
  4. Great to see such articles on latest trends that have the potential to become big businesses. One usually can see people talking about brands that have already become famous. But its good to read about such business models getting limelight. Even we happen to launch one on art http://www.artemporio.com where we sell licensed art prints in Asia.

  5. Great article – It’s definitely clear that businesses (especially retail) that aren’t catching up to the e-commerce demands are going to start trailing behind.

    Caitlin
    FASHIONOTES.com

  6. To enable your social merchandising far better, it would be better to find out a good private label manufacturer (OEM). With evaluated feedbacks from customers, then get your sourcing from http://www.vonstyle.net that can ship as fast as they can whenever you do have an existing order from your customers

  7. Interesting and informative article. Some important points to consider. Sales seem to be increasing on ASOS Marketplace.

  8. The only trend which is missing new start ups, with brand new concept – selling independent fashion design products. :)

  9. Great idea Elizabeth! You have a strong marketing sense as I can sense from the material presented above. Since the beginning of ecommerce era, the market has gone through an arc phase and I feel the entry level barrier for small business units and amateurs has again become tight as a bottle neck. Somehow, concepts such an ERP (Enterprise Resource Planning) and HCM (Human Capital Management) have a much brighter role to play in the survival of entry level firms amidst entry level competition.

    Maneet Puri from Hyderabad, Andhra Pradesh, India
  10. one hell of an article! absolutely what i was looking for when i searched for (innovative business models for fashion online retailers). thank to the author for the thorough explanation of the models and providing real examples from the web, many of which are not famous (Yet) here in the middle east. This article is a great place to start for new e-fashion retailers such as ourselves. And as i am here already, i’d love to invite e-commerce person’s opinion (be it the author her/him self) to give us insight on how we could develop our business model at Bjayem.ae that would be nice.

    and yes! we want more of these articles on E-commerce please

    all the best <3

    bjayem dubai from Dubai, Dubayy, United Arab Emirates