Over the past few years, we have seen an emergence of peer to peer “rental” sites that allow people to rent out their belongings to others looking for short term use of that asset.  Users can log on to relayrides.com to share their car, airbnb.com to share their house, or zilok.com to rent just about anything else.  Additionally, we have seen an exponential increase in the success of multi-sided e-commerce websites that connect sellers and buyers from around the world to facilitate global commerce.  Alibaba.com, Tradekey.com, and globalsources.com are a few of the sites that are attracting hundreds of thousands of users and million dollar valuations.

The single biggest threat to these business models, as I see it, is a loss of trust between the two parties.  The fundamental issue here is the balance of power – the perception that one side has a lot to lose while the other side has little risk in the transaction.  To explain:  In the peer to peer sharing sites, the lender risks renting to an irresponsible renter who trashes his or her valuable property; for the e-commerce site, the buyer risks paying for an item only to be delivered an inferior product, or, even worse, delivered nothing at all.

To further illustrate this point, two examples have appeared in the media recently.  Their potential to undermine the business models serves as a warning to this fledging industry.

Airbnb came under attack this summer when a renter nicknamed EJ lent her apartment to a vacationer, and returned to find it vandalized and ransacked.  EJ described the experience in a blog post that went viral, garnering the attention of Techcrunch, USAToday, and CNN.  She writes, “[the renter] and friends had more than enough time to search through literally everything inside, to rifle through every document, every photo, every drawer, every storage container and every piece of clothing I own, essentially turning my world inside out, and leaving a disgusting mess behind.”

Airbnb isn’t the only site where a breach of trust occurred between its two parties:  in February of this year, Chinese police arrested 36 people accused of fraudulent practices on Alibaba.com.  These “business people” are accused of scamming buyers out of an estimated $6 million by taking payments for items that they never actually delivered.  The event was made even more scandalous by the fact that these sellers were granted “Gold” supplier status by Alibaba employees who were allegedly aware of the scam.

Despite the verification systems that were in place in each of these cases, people still got burned.  Such examples bring the reputation of the world-wide, multi-sided platform business model into question.

So, what needs to be done to ingrain the integrity of the business model?  Below, I offer some advice on how to build trust between the parties:

1.    Take responsibility:  It’s not enough anymore to simply build a site that facilitates transaction.  Users expect more.  Perhaps expectations have been set by industry trailblazers like eBay, which acts in a no nonsense manner when dealing with questionable or suspect transactions.  Both buyers and sellers risk removal from the site if practices are called into question.  Multi-sided platforms need to protect both sides from the risks inherent in the transaction, through tools like insurance policies, escrow accounts, and post-transactional feedback tools.

2.    Find out what’s broke and fix it, immediately:When Alibaba discovered that its own sales staff had been involved with some or all of the 2,300 cases of fraud over the last two years, leaders were held accountable.  The company’s CEO and COO removed themselves from the organization after the fraud was uncovered to take responsibility for the “systemic breakdown.”  This, combined with their public admission of guilt, has gone a long way in keeping down bad press and building user confidence.

3.    Be proactive:  Rather than waiting for an unfortunate event to occur before acting, anticipate the risks and protect your users.  Relayrides, for example, holds a $1 million supplemental insurance policy for its car renters and installs an immobilizer on the vehicle to prevent cars from being started without a reservation.  It is necessary to implement stringent requirements for both sides of the platform – be it mandatory compliance to a legally binding Code of Conduct/Ethics or compulsory screening of rental properties and manufacturing sites.

In summary, there is value created for both sides using these platforms.  If a platform wants to remain a viable business, however, they must invest in security measures to protect their customers and be prepared to take responsibility when something does occur.  Building trust, taking responsibility and underwriting a product or service are just good and basic business practices.

This past summer I launched a pop-up e-commerce business called Indie Cases, which produced and sold iPhone cases with exclusive designs from graphic artists. Soon after launch, Fab.com reached out to feature our products on their site. Though we passed on the offer for timing reasons, I was intrigued by their model and impressed by their customer acquisition stats. What follows is a brief description and analysis of their business… 

About Fab.com

Fab.com is a flash sales site for design, cutting across art (the highest-grossing product category), jewelry/wearables, tech, etc. In January 2010, founder Jason Goldberg started working on Fabulis, a social network for gay men. After growing to 150k users in the first year, the team scrapped Fabulis and launched Fab.com in June 2011 (for the rationale behind the restart, read Jason’s Tumblr post). Less than six months after launch, Fab now has over 750k members, 10k orders per week and 500 featured designers.

The Model: Sustainable and Scalable

One might wonder why Fab entered the flash sales space when earlier entrants such as Gilt and Rue La La were already struggling to achieve profitability and continue to grow. The answer is that Fab’s model is quite different. Luxury fashion flash sales businesses are in a bind due to shrinking supply of inventory and growth in users and competitors. In response, they are going down-market to lesser known brands, offering smaller discounts, and even expanding to full-price offerings.

Fab differs from the traditional flash sale businesses in several ways, not just in its focus on design.

• Perhaps the most significant difference is that Fab is not reliant on excess inventory. Less than 5% of sales are liquidation, and brands can make to order.
• Fab holds minimal inventory as 90% of brands drop-ship. This results in low working capital requirements and enables simplified scaling.
• 90% of suppliers are small independent producers. These brands view Fab as a new retail outlet and marketing vehicle.
• Fab compensates brands such that each sale is profitable. How? For one, Fab’s average margin of 30% is partially offset by Fab’s volume discounts on shipping and the brands’ larger-than-usual production runs. Two, Fab offers a lower average discount to end consumers. While the discount ranges from 0-70%, the average is only 20%. Consumers are willing to accept the lower discount because the products are neither out-of-season nor the least popular. Consumers value Fab for product discovery as much if not more than for discounts.
• Fab has minimal sizing issues. Most sales are final, leading to very low return rates.

Fab is even differentiated from its closest competitors, One Kings Lane and Etsy. In comparison to OKL, Fab is focused on design in more than just the home context, and is more modern and eclectic. And whereas Etsy is a “pull” model, Fab utilizes a “push” model that keeps members coming back to the site regularly and creates a sense of urgency.

Customer Acquisition: Fast and Cheap

How did Fab sign up 170k people before launch and rapidly grow to 750k? Surprisingly, not by porting over the Fabulis user base. Only 6k of the 150k Fabulis users signed up for Fab. Of today’s 750k members, over half have come through member-to-member viral share links, with email being the strongest channel. How did Fab achieve such success? Three months before launch, Fab implemented a viral loop with varying levels of incentives (see screenshot below for current version).

Today Fab’s social strategy is augmented by sharing features and an inspiration wall similar to Pinterest and Svpply. It also helps that design is a social product category, Ashton Kutcher is an investor and Fab is a catchy domain name. The net effect of Fab’s investments in social is a lower cost of customer acquisition, which in turn directly results in increased profitability and/or allows Fab to pass on savings to brands and consumers. It’s worth noting that social/viral referrals aren’t free due to referrer and referee credits, but of the 750k members, fewer than 4k have received referrer credits through the primary viral campaign.

What’s Next

Fab as is seems poised for continued growth and profitability, but it is already experimenting with new concepts such as pop-up shops, i.e. shops curated around a specific theme that last for a month or more. Will Fab make even larger changes to its model such as holding inventory to ensure a more consistent customer experience?

There used to be a time when e-commerce used to be e-commerce and editorial content used to be editorial content. That time is not now. Today, it is almost mandatory for every high-end e-commerce site in the fashion space to create its own exclusive editorial content to drive consumers to their site and to keep their product offering looking fresh. But when did e-commerce sites become magazines? When did marketing entail hiring ex-magazine editors?

In this new age of editorial content becoming increasingly important, there are a few online retailers who are at the forefront of creating high quality editorial content which subtly pushes consumers towards its product offerings and are as well known for their content as they are for their actual product offering. Mr. Porter and Shopbop are definitely among this new breed of online retailers.

Mr. Porter is the online brother site to net-a-porter.com and is focused on high-end men’s fashion. Mr. Porter not only presents consumers with a broad range of high-end product offerings, but also with a broad range of editorial content including “The Journal”, which is Mr. Porter’s own online magazine that allows consumers to “shop the magazine”, as well as the “Style Directory”, which is comprised of “Style Icons”, an aggregated list of men’s style icons and descriptions of each of their style aesthetics, “Style Advice”, a Q&A column for fashion advice, and “Video Manuals”, which are short videos giving style advice from “those who know”, among many other such offerings.

Shopbop is a leading women’s contemporary online retailers and bridges product and content in a way similar to that of Mr. Porter. They too present a very comprehensive product offering as well as high-quality and creative editorial content including lookbooks, trend watch, and short video content/films featuring the latest trends and products.

Why has this shift towards the merging of editorial content and e-commerce taken place, you ask? I have a few theories.

(1)  Firstly, there has been a growing trend even in brick-and-mortar retail for consumers to want to know the “story” behind a brand or retailer as well as the relatability factor. A brand or retailer can no longer just be a corporate creation, but rather, it has to resonate with consumers and must scream “authentic.” For this reason, selling the brand’s story has become increasingly important and as such, creating editorial content that tells a compelling story is more important than ever.

(2)  Secondly, I think editorial content is even more significant online versus in brick-and-mortar channels because online retailers must compete with the in-store experience. While online retail is much more convenient than shopping in-store, it robs consumers of the fun that comes with the in-store shopping experience. To compensate, online retailers must present consumers with interactive and/or fresh editorial content that makes online shopping fun in an entirely new way.

(3)  Lastly, I think there is a growing consumer interest around styling. Consumers love to get inspiration for outfits and often look to the editorial content to inspire them and teach them how to pull a look together. Shopbop does this particularly well. Their lookbooks always present a slew of outfit ideas centered on a certain trend that drive consumers (or at least me) to purchase in order t

This merging of editorial content and e-commerce puts even more pressure on online retailers to stay one step ahead of the creativity curve and always be innovating on ways to make their websites and content that much more interactive and fresh to keep consumers coming back.

by Cynthia Samanian and Barry Malinowski

ShoeDazzle is a pioneer of sorts in the retail e-commerce space and has achieved impressive results in just a couple years, making it an incredibly interesting company for us to profile. The company boasts over 3 million registered users, 1.5 million “likes” on Facebook, and is shipping more than 150k pairs of shoes each month, which implies annual revenue north of $70 million (up from $25 million in 2010). In addition, the company has raised $60 million of venture capital, the most recent round at a valuation of $280 million.

In this post, we’ll explore ShoeDazzle’s use of the subscription model, assess its growth trajectory through new product lines, and reflect on the company’s influence on the retail e-commerce industry.

About ShoeDazzle
ShoeDazzle was launched in March 2009 and is based in Los Angeles. Co-founders include Brian Lee and celebrity spokesperson Kim Kardashian. Incidentally, Brian Lee co-founded his prior company LegalZoom with another celebrity, Robert Shapiro. ShoeDazzle is one of many recent companies with a laser focus on the female “shopaholic” consumer. More specifically, the typical ShoeDazzle customer might live in one of America’s small towns and be disappointed with the lack of styles offered by the local brick and mortar retailers.

Enter ShoeDazzle. Their idea is to bring the real world boutique experience to the masses via an online environment. When a prospective customer lands on the ShoeDazzle homepage, she is asked to fill out a quick “style quiz” to capture her taste in fashion. After a 24-hour wait that gives the illusion that a real celebrity stylist is hard at work, the customer is invited to view her personalized online showroom, which includes five different pairs of shoes, all ShoeDazzle manufactured and branded. Each shoe costs $39.95, which includes shipping both ways. If nothing appeals to the consumer, she can request alternate selections or “skip” the current month and wait until her showroom is refreshed the following month. The monthly “subscription” kicks in only after the customer’s first purchase. It’s worth noting that only around 5% of ShoeDazzle’s registered users buy in a given month – and a significant portion of registered users have yet to make their first purchase.

A New Twist on an Old Model
Subscription models date back nearly a century to book-of-the-month clubs, and since then have appeared in many forms – e.g. CD-of-the-month clubs, magazine subscriptions, replenishment of staples. While subscription models aren’t inherently bad for consumers, more often than not they’re designed to benefit the company in the form of upfront payment, recurring revenue, predictability of demand, reduced competition, etc.

Women’s shoes seem a reasonable fit for a subscription model given the product seasonality and the stat that that the average woman buys nine pairs of shoes per year. ShoeDazzle has adapted traditional subscription models to make the model more consumer-friendly by eliminating the obligation to buy each month. But there’s a catch… If the customer does not buy or opt out by the fifth day of each month, her credit card is charged $39.95, which can be applied toward future purchases within the next 12 months. This detail benefits the company in several ways. For one, the penalty for not responding results in email open rates that are higher than those for the e-commerce industry. In today’s world of email overload, just getting consumers to read your emails and visit your site is half the battle. The upfront charges that result from failure to buy or opt out benefit the company’s cash flow. Our experience with other opt-out models suggests that these charges could amount to millions of dollars. Finally, the subset of credits that ultimately go unclaimed go straight to the company’s bottom line. This is all well and good for ShoeDazzle so long as consumers continue to put up with it.

The Future Beyond Shoes
Recently, ShoeDazzle has extended their product line to include jewelry and handbags, maintaining the single $39.95 price point. From a consumer perspective, this appears to be a natural set of complements, given that accessories can be styled with shoes. On ShoeDazzle’s end, the hope is that product category expansion leads to a larger share of consumer spend. But the monthly subscription model may be conditioning consumers to buy only one product per month, thereby rendering the accessories substitutes for the shoes. If that’s the case, and we assume margins for handbags and jewelry are equal to shoes, overall company margins will decrease as production scale decreases on each individual product. The company may be best served by adding a higher price tier, especially in light of rising manufacturing costs in China across the board.

Industry Influencer
The emergence of ShoeDazzle copycats such as Just Fabulous and Sole Society is to be expected, but the rise of subscription models in other product categories is more interesting. There’s Birchbox for cosmetic samples, Stitch Fix for women’s clothing, StyleMint for t-shirts, and the list goes on – supposedly the BeachMint founders have  identified over 100 subscription businesses. There are quite a few differences in the models (e.g. private label vs. third-party products, obligation vs. no obligation, monthly vs. quarterly), but we believe it’s only a matter of time before consumers reach subscription overload.

Will the proliferation of subscription models like ShoeDazzle, each with its own rules and obligations, squeeze the fun out of online shopping? Or will this model provide an opportunity for companies to better serve the needs of consumers through personalization and value, in an otherwise crowded marketplace?

Social Commerce is a very hot topic in the tech world at the moment and continues the trend towards the “socialization of the consumer internet”. Every website you see now has some form of social widget that lets you tell your friends which product you “like” and companies increasingly flock to Facebook to directly sell their products via their brand pages (this is also referred to as F-Commerce). While I agree with a previous blog post by Samantha Harrison where she claims “it will be a longtime before we see any real traction on this front”, I do believe that social commerce on the back of your social  / interest graph is the future of shopping online. However we are as of yet only at the very early stages of how this space will look like in a few years.

The core question the industry is grappling with is how to make online shopping sites more intelligent such that they only present you with products that you actually like and are thus more likely to buy. Many existing approaches are trying to leverage your social graph, meaning they establish a link to Facebook to figure out what your friends bought. The Levi’s online store was the first outlet to implement a feature to socialize purchases as can be seen on the screenshot of their campaign below:

Link: http://blog.marcopacifico.com/wp-content/uploads/2010/09/levis-facebook-declare-your-likes-e1289402126156.jpg

While Levi’s is a very powerful example of how a company can leverage social features to personalize your shopping experience, a startup called Hunch (www.hunch.com) goes one step beyond the social graph and actually claims to be able to figure out your “taste graph”. They do it by pulling in data from Facebook but also by asking you a set of targeted questions (which seem random at first) and by using a complex algorithm they claim to be able figure out your product tastes. For example they ask you whether you are a PC or a Mac person and infer a variety of characteristics about your taste profile, (see the Infographic for some cool data on this http://blog.hunch.com/?p=45344)

Using a set of 20+ such questions, Hunch then assigns you a “taste profile” and then recommends you products you might like which actually works surprisingly well. Over time the system actually improves by your activity on the site. They also go one step beyond this which for me truly shows the power of the personalized web – they developed an API that they implemented at 50+ online shops in the US which you can log in using your Hunch account and as a result get a tailored set of product recommendations from that store that fit your individual tastes. They also use that data for birthday gift recommendations for your friends, family, etc. The possibilities in this space are endless. Several other players in this space are the recently funded Pinterest and Svpply which are both online pinboards which are as of yet however not fully dedicated to the e-commerce space.

Hunch and other similar services are a very powerful example of how technology will enable us to tailor our shopping experience according to our individual tastes as well as the tastes of our social connections which will be far superior what current online shops are able to offer. I see a future where you have one highly personalized shopping aggregator which pulls your purchase history, social identity, taste graph, etc together and recommends you products on the basis of these characteristics. Amazon is already at the forefront of this innovation with their product recommendation engine, but so far no central player has emerged that aggregates products across various e-commerce retailers. Will Hunch, Pinterest or Svpply win the race or will it indeed be Facebook via their social shopping storefronts? My bet is with Hunch at the moment due to their advanced algorithm and easy-to-use exportable taste-graph API although their user growth has been pretty slow and Pinterest is emerging rapidly being a well-funded, well connected rival. Exciting times – looking forward to hearing your views.