This fall, for the first time in the brand’s history, Missoni, a luxury Italian fashion house known for its brightly colored knitwear, collaborated with a mass retailer. The brand joined forces with retail giant Target to create a diffusion collection showcasing its signature zigzag prints, splashed across categories as far reaching as travel accessories, paper goods, and baby clothes.

Limited partnerships between high-end designers and mass-retailers have become increasingly popular in recent years. Target, Macy’s, and H&M have all embraced this format, collaborating with designers such as Jimmy Choo, Karl Lagerfeld, Matthew Williamson, Rodarte and Lanvin. These partnerships are theoretically beneficial for both parties; designers enjoy free marketing and the opportunity to reach a lower-end consumer who might one day purchase the full priced line, while retailers enjoy increased sales from impulse purchasing and the chance to attract customers who might not otherwise shop at their stores.

Following a lengthy PR campaign including social media efforts on Twitter and Facebook, ads on TV, a lengthy spread in Vogue, and multiple launch parties, Target released the collection on Tuesday, September 13 at 6:00am EST on its website, with stores opening a few hours later. What followed can only be described as complete mayhem. Stores were inundated with the usual flow of crazed customers scrambling for goods, and most in-store items sold out within a few hours. Target’s website crashed within minutes of the 6:00am launch and was intermittently down for almost an entire day, coming back online after 11:00pm.

Target’s decision to launch the Missoni collection online as well as in stores was an interesting one. On the one hand, the online platform clearly presented the opportunity to reach a much larger audience for the Missoni collection, which, with over 400 unique items, was Target’s largest diffusion collection to date. The theoretical availability of the collection to all consumers in the US certainly generated more buzz (and, free marketing for Missoni) than an in-store launch would have. But, many of the issues Target ultimately faced are potential reasons why most other mass-retailers such as H&M choose to launch limited-edition collections only in-store.

As I’ve mentioned, Target’s website crashed almost immediately following the launch of the collection, and the company attributed the crash to “unprecedented demand and excitement”. While I may be cynical, it’s hard for me to understand how Target couldn’t foresee this demand after such a widespread advertising effort that had already clearly paid off in the form of buzz, press, and editorial fashion coverage. As a consumer, I was prepared to log onto the website and see that items had already sold out, but logging onto the website to be greeted by a landing page that said “Woof! We are suddenly extremely popular. You may not be able to access our site momentarily due to unusually high traffic. Please stay here and we’ll try to get you in as soon as we can!” was fairly infuriating. Such a significant technological fumble by a trusted retail giant like Target incited a large consumer backlash, with would-be customers taking to Twitter and Facebook to bash the store and its unpreparedness.

In addition, because of technological issues associated with the online launch, Target’s order management systems completely failed and many consumers who placed orders ultimately had them cancelled, inciting further consumer rage about the launch. I personally had the unfortunate experience of ordering a bikini (top and bottom sold separately), receiving the bottom, and subsequently receiving an email from Target notifying me that the top would never arrive. As you can imagine, after seeing how cute the bottom was, I was particularly disappointed.

Marketing experts seem to think that consumers’ negative experiences shopping the Missoni collection online will likely not have a long-lasting impact on Target’s brand. But it was certainly an embarrassing misstep for a brand that had only three weeks earlier switched from an online system run on the back-end by Amazon to its own platform. Also, I would argue that many consumers will be less likely to attempt to shop these limited-edition collections online after being faced with such a frustrating shopping experience.

Target’s online launch of the Missoni collection also highlighted one of the perils associated with online retailing: reselling. Reselling is particularly relevant to limited-edition collections whose availability is scarce, and by choosing to release the collection online, Target made it significantly easier for consumers to resell the goods on platforms like eBay and Craigslist. Selling only in stores creates a barrier to reselling because procuring the goods takes a degree of effort that many would-be resellers don’t find worth it. But ease of access to the Missoni collection meant that within days over 21,000 items were listed on eBay alone, with many items marked up by as much as 5x the original price.

Some might argue that it doesn’t matter to Target whether its products are resold at a markup, but if the point of a limited edition collection is to deliver high fashion to consumers at lower prices, reselling inhibits this. eBay consumers frequently paid for a Target item a price equivalent to that of a comparable item from Missoni’s mid-priced line M Missoni. Buying a lower quality item for a similar price is certainly an example of irrational consumer behavior, but nonetheless also detracts from Target’s stated goal. In addition, active reselling means that consumers’ willingness to pay is higher and that Target isn’t capturing as much value as it theoretically could.

The challenge with limited edition online retailing and the reselling that results is that Target seemingly has few options to combat the problem. Target could raise base prices for the line, reducing profits for resellers. But, higher prices potentially eliminate the point of a diffusion line for both brands: Missoni no longer creates the low-priced line it envisions, and higher prices aren’t aligned with Target’s brand as a low-price retailer. Other retailers such as Saks have experimented with limiting the number of each item a consumer is permitted to purchase. This strategy might work for Target, but only with a line significantly smaller than 400 pieces.

While Missoni continues to ride the wave of publicity generated by the collaboration, with orders for the company’s spring 2012 line coming in stronger than expected, Target on the other hand must consider how to improve its online retail offering so consumers aren’t disappointed in the future. With an upcoming limited-edition collaboration with Jason Wu on the calendar for early next year, it will be interesting to see whether Target can resolve the technological issues that so plagued its efforts with Missoni.

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?

As the popularity of flash sales models grow, it is intriguing to see the evolution from general, broad Groupon daily deals to the emergence of niche commerce sites.  An example of an up and coming niche site is One Kings Lane, is a flash sales site for the home market.  They sell home décor, furnishings, and accessories at up to 70% off retail.  With the competitive environment heating up in home retail, One Kings Lane has clearly pursued a full-fledged strategy of editorial content and partnerships to maintain their branding edge above the competition.

About One Kings Lane

One Kings Lane was founded in 2008 by Alison Pincus and Susan Feldman.  As style-conscious women, they noticed the lack of high quality and affordable home décor options online. Three years later, One Kings Lane is on its way in becoming a household name for purveyors of home décor.  The company has a very simple business model: buy at lower prices than they sell to consumers.  Also, One Kings Lane doesn’t carry inventory risk that a traditional retailer would, because all transactions with the manufacturers happen after the sale ends (usually lasts for 3 days). Even as a niche e-commerce site, One Kings Lane has garnered a large user base of over 2 million members to date.  And these members are certainly buying; the company experience revenue growth of 500% between 2009 and 2010.  They expect to generate $100M of sales in 2011, and was recently valued at $440M, backed by numerous investors including Kleiner Perkins, First Round Capital, and Greylock Partners.

When Price is Not Enough

Given the recent trends in flash sales sites, many competitors to One Kings Lane have emerged including Gilt Groupe’s GiltHome, Joss & Main (Wayfair/CSN), fab.com, and Amazon’s MyHabit Home. Competing on price is just the bare minimum and One Kings Lane has found impressive ways to stand out among the crowd of home retail sites.  One of the ways they’ve done this is by focusing on creating amazing editorial content.  In fact, this is so important to One Kings Lane that they actually bought a publishing design firm called Helicopter.  Examples of well-branded content include how-to videos (i.e. how to make a bed – 9,500 views), which resonate with a Martha Stewart-esque audience of aspirational home décor enthusiasts.

Additionally, One Kings Lane has identified strategic partnerships with celebrities and media outlets that are aligned with their brand identity.  This provides the company with channels to market their products in a refreshing way, without getting lost in a potential customer’s email inbox.  Specifically, One Kings Lane partnered with Gwyneth Paltrow last April to promote her first cookbook.  This relationship enabled the company to reach Platrow’s existing fan base (roughly 500k Twitter followers) and strengthen the One Kings Lane brand in the mind of consumers.  Most recently, One Kings Lane snagged a huge endorsement from Bravo, which put the brand front and center in episodes of the Bravo TV show “Million Dollar Decorators”. 

In a business that is fundamentally about getting the best value, One Kings Lane has made it clear that competing on value is not only about price, but also about the brand.

When Jane Smith walks into her neighborhood boutique to buy a sweater, how does the shop capture the information about her purchase?  In traditional customer relationship management (CRM), Jane’s sweater purchase is recorded at checkout into a database along with her credit card information.  To link up Jane’s information to an email address, the store associate will often ask Jane for her email.  With the advent of the smart phone and as adoption of check-in services like foursquare and Facebook becomes more and more mainstream, there is significant opportunity for retailers to take advantage of the changing behavior of its customers.

 This year, foursquare launched a “Merchant Dashboard,” allowing businesses to access data and analytics about the type of customers checking in.  This tool allows merchants to see how many people are checking in, when they check in, gender breakdowns, new vs. repeat check-ins, and broadcasts to social networks.  This represents a huge step for merchants in thinking about how to drive traffic into its physical stores.  While group-buying sites like Groupon and LivingSocial have proven successful in driving traffic and increasing awareness for retailers, there is debate as to how representative the users of such sites are in terms of the customer profile for that retailer. Check-in services seem to be less distortive and present a more robust way for retailers to segment out their customer base based on behavior.  As check-ins become more mainstream, the potential for targeted segmentation is huge:

-       Loyalty: Ability to create robust customer loyalty programs based on frequency of patronage.  Able to micro-segment and offer individualized rewards at a much cheaper cost than traditional loyalty programs

-       Brand Awareness: Sharing of check-ins on social media sites like Twitter or Facebook is invaluable – ability to reach a more targeted audience via a medium (your friends/word-of-mouth) that is arguably more powerful than traditional advertising

-       Promotion Driving Traffic: Ability to promote as needed to drive traffic on an individual level – no need to dilute the brand by promoting to entire customer base

 While this is a great first step, what is lacking still is a way to tie check-ins with actual purchase behavior.  If purchase behavior integration can be achieved, retailers would have the ability to further deepen their segmentation.  The other main challenge will be how to get large national or international brands to adopt the same platform, since customers are likely to use only one platform for all their check-ins.  

For years, websites have used personalization to enhance their customers’ experiences.  Personalization has often been based on on-site behavior, including items browsed or purchased, or stated preferences.  Recently, a number of new fashion websites have begun to use personalization to identify items of interest to customers; however, I am concerned that personalization techniques used on these websites may not improve the shopping experience and may impede sales.

Although fashion websites use personalization in many ways, two types of personalized sites have become popular recently.  Both types of sites use surveys to collect customer preferences at sign-up.  These preferences impact product recommendations.  First, there are sites like Google’s Boutiques.com and ShopItToMe.com that aggregate products sold by other retailers.  When customers sign-up for these sites, they are asked to fill out a survey.  At Boutiques.com, members are asked their likes and dislikes for different styles, designers, silhouettes and colors.  Based on responses, members can view products “inspired by their style” and boutiques curated by celebrities and stylists.  At ShopItToMe.com, members are asked about their favorite brands and their sizes.  They only view products from those brands. 

The second type of personalized fashion sites use stated preferences to recommend products specifically made for the website.  For example, Shoedazzle.com members take a short survey at sign-up that asks for style and brand preferences.  Based on survey results, members review a monthly boutique which highlights product they are most likely to enjoy.  All product is designed and produced by Shoedazzle.

The primary goal of personalization on these sites is to make it easier for customers to view items they will like; however, I have concerns about their ability to identify products based on my experience in the retail industry.  My main concerns are:

-          Limited Brand/Designer Loyalty – In online shopping simulations, I have viewed how customers shop, and I have seen that designer/brand is often not part of customer shopping criteria.  Additionally, customers often have a difficult time identifying their preferred brands/designers.  This is especially problematic for ShopItToMe.com as the site only shows product that falls within the customers’ specified list.

-          Misalignment of Stated Personal Style with Actual Purchases – In focus groups, I have watched many women describe their personal style.  At the same time, I have been able to view what they are wearing and what types of products they like in magazines and advertisements.  There is a surprising amount of difference between their personal style assessment and what they actually buy.  As a result of this difference, these personalized fashion websites are likely showing products that closely align with their members’ stated style that may be very different from what members would actually purchase.   

-          Impact of Trends – Additionally, these sites are often very focused on showing trends that are most relevant for their members’ stated style.  There may be additional trends that are attractive to customers that they never see based on this focus which may limit sales.  In a real world example – faux motorcycle jackets consistently sell well at Ann Taylor.  Motorcycle jackets are not typically associated with the Ann Taylor style, but customers still want them.  If an online boutique never shows items not associated with a specific style, customers aren’t able to make these unexpected purchases.

Results from Google’s Boutiques.com indicate that the site has not held customer interest.  In January 2011, the site had 2.6 million visitors.  In April, the site only had 170,000 visitors (June 13 – Signature9.com).  And, in September, Google announced that the site would be rolled into Google Product Search (September 23 – searchenginewatch.com).  Although other factors contributed to the decline of Boutiques.com, an inability to consistently show relevant product is likely to have contributed.

Although Boutiques.com is ending, the other fashion sites have an opportunity to re-evaluate their current strategy of using up-front preferences to personalize their product assortment.  Although collecting information from customers up-front may be helpful, these sites must realize that customers cannot always tell them exactly what they want.  They need to realize this limitation in stated customer preferences and offer a wider assortment when members sign-up.  Then, they can further refine assortments based off actual browsing and purchasing on the site.