NEW YORK, United States — Moda Operandi (M’O) is less than two years old. But we recently announced a major shift in strategy. In addition to our original pre-order model (pre-order clothes today that will be delivered next season), we are launching in-season e-commerce (buy clothes today that will be delivered immediately) for which we will be buying and holding inventory just like a traditional retailer.
As a result of these shifts, a lot of questions have been asked of me, both inside and outside the company. Why are we making these changes? Shouldn’t we just focus on our original business model and simply add new brands and customers? And if we are going to reinvent ourselves, why do it by adding a traditional e-commerce business?
Here, I explore some of the key inputs and trade-offs that we examined while making the decision.
Our original pre-order model is superior to the traditional retail model we recently added for a few important reasons.
• Upfront payment: Before a product is actually made or delivered, we collect 50 percent of the retail price from the consumer and pass on 50 percent of the wholesale cost to the designer.
• No inventory risk: 100 percent of what we order from designers has already been ordered from us by end consumers, meaning we can minimise inventory costs and don’t get stuck with excess product at the end of the season.
• No discounting: As all inventory is sold at full-price at the beginning of the season, we don’t need to discount product in order to drive sales.
• Fewer returns: The pieces we offer are special and not easily found elsewhere, so our customers generally prefer to tailor them rather than send them back should size be an issue. As a result, we see fewer returns than traditional retail.
Conversely, the traditional retail business model we have adopted will require us to lay out cash upfront in order to purchase inventory, assume inventory risk, be prepared to discount excess merchandise at the end of the season and, in all likelihood, deal with a higher rate of returns.
Furthermore, barriers to entry are significantly higher for pre-order than traditional retail due to operational requirements and the relationships that need to be developed with vendors, making our original model more defensible against competition.
So then, why did we decide to shift strategies and adopt a traditional retail model?
Better servicing our customers
We realised that, as much as our existing customers love to pre-order next season’s runway pieces, they also want to buy a dress for a cocktail party that’s happening this week and have been fulfilling their ‘buy now, wear now’ needs at other retailers. With the launch of traditional, in-season e-commerce, M’O will be able to service this need.
Seizing a larger opportunity
Perhaps the most powerful reason for the shift, however, was the sheer size of the opportunity that traditional retail allows us to tap. Simply put, the customer base that wants to buy product for immediate delivery is much larger than the customer based that’s willing to wait. Now, take into account the fact that our pre-order business is largely for expensive runway pieces and the size of our original target customer base becomes even smaller. Ultimately, the shift towards traditional, in-season retail will allow us to capture a much larger new customer base who simply won’t prepay to wait several months for next season’s fashion.
Finally, pre-order and in-season e-commerce make a great pair. Indeed, our pre-order sales generate data that can be used to make our traditional e-commerce buys more efficient. Keeping track of our best and worst selling pre-order pieces helps us better forecast consumer demand for these (and similar) items and thereby reduce the risk of getting stuck with excess product that needs to be marked down at the end of the season.
As with all things in business, however, correctly timing a major strategy shift like this is critical. At inception, a company needs to have a unique and compelling business model. If we had tried to launch a traditional online retail business on day one, we would have faced some major challenges. Indeed, a big part of our initial ability to attract both brands and customers stemmed from the fact that our pre-order model radically differentiated us from other stores. Today, however, with a large roster of designers, a loyal customer base and a recognized brand, M’O is well-positioned to make the shift towards a traditional e-commerce model.
Previous articles in the Finding Your MO series:
Part 1: From Big Idea to Launch
Part 2: The Need for Speed
Part 3: The Business Plan is Your Roadmap
Part 4: Making the Most of Mentorship
Part 5: How to Choose the Right Investors
Part 6: How Wise is Conventional Wisdom?
Part 7: Going International
Part 8: Managing Investors
Part 9: Acquiring Customers
Part 10: Building the Team
Part 11: Motivating and Retaining Talent
Áslaug Magnúsdóttir is co-founder and former CEO of Moda Operandi.