I would like to give you a general order fulfillment work flow of an eCommerce company

(Flipkart will be doing similar to this) here:

Step1-Order Download in OMS: Order is placed by the customer from the front-end (web
store) which is then downloaded into an order management system (OMS). This OMS can be a
part of your web-store or it can be a back-end Enterprise system where the customer order
gets downloaded.
Step2-Inventory Allocation: As soon as the order flows into an OMS, the inventory from the
Warehouse gets allocated to the order quantity. Thus the free quantity of that particular SKU
(product) is decreased by the order quantity.
Step3-Order Picking: The operations/fulfillment team then start processing the order in the
warehouse. First a picklist is generated against that order (usually its for multiple orders at one
go and using wave management) and is handed over to a picker in the warehouse to pick that
SKU from the bin/rack (in a zone). The picker picks that SKU from the location mentioned in
the picklist and bring it back to the picking station (a stage location)
Step4-Order Packing and generation of labels: After the picking is done, the next stage is
packing. At the time of packing required documents are printed that needs to be send along
with the shipment package to the customer. The order is then packed in a packing box and
reports like Invoice, Shipping label are printed and kept along with the shipment.
Step5-Order shipment: After the order is packed, it needs to be shipped out to the customer.
The order gets assigned with the courier as per the shipping location (usually either at the time
of order placement or at the time of packing) and a manifest is generated. Then the shipment is
handed over to the courier guy who comes to the warehouse to pick up the shipment. Once the
shipment is out of the warehouse the inventory gets reduced in the system.
Step6-Shipment Delivered: The shipment then gets delivered to the respected customer and
the courier company updates the delivery details back to the company whose consignment it
was shipping. There can also be the case of customer return or return to origin due to customer
unavailability which I am not discussing here.
The below flowchart gives the above explanation in brief:

The scenario discussed above is an ideal scenario where the inventory is stocked in the
Warehouse. There can be other 2-3 possibilities where the inventory is not stocked in the
warehouse, such as:
1. Back to back order fulfillment: In this case the operations download the orders and ask its
runner to go to the vendor immediately and pick up the required SKUs from the vendor and
bring it back to the fulfillment center to fulfill the order.
2. Drop shipment: In this case the orders are downloaded and handed over to the vendor
directly to fulfill the orders and ship it to the customers. The warehouse doesn't have any
control over this fulfillment.
3. Made to order: In this case, the orders are first taken from the customer and then the
purchase order is raised to procure the SKUs of that order from the vendor. Once the SKUs are
in the warehouse, the normal fulfillment cycle (as described above in detail) is followed to

process the order.

Flipkart usually does the stocking model or the back to back order fulfillment model. Let me
know in case you need to know other scenarios such as customer returns, procurement, etc. in
detail.

http://www.lean-ecommerce.com/2013/12/product-returns-workflow-steps.html
More important than the "ecommerce platform", a large SKU catalog will need to rely on three
major factors:
1. The Db platform: if you really have 5 million SKUs, then MySQL won't cut it. You'll need
PostGreSQL or perhaps Oracle (which is pricey). I would stay away from Microsoft on this.
2. If you're going to drop ship, then a decent order broker is a key point. Sterling Commerce
leads the pack here, but Oracle also has some systems, as well as ATG and GSI Commerce.
3. With so many SKUs, the site navigation becomes a crux point for conversion. This is
probably the most appropriate point when considering an ecommerce platform-- because most
platforms are really just a simple front-end engine and then some sort of navigation scheme
and search built-in. For the most part, I've found comprehensive packages "okay" at this, but
not likely to perform well with that many SKUs. Magento won't work, as most of it's navigation
management is manual (there may be some plug-ins). Demandware could work, but it would
be because Demandware has some partners that specialize in large-SKU catalogs and can be
integrated in the system. ATG would work, (part of Oracle), but it's pricey. IBM Websphere
would also work, but also is pricey.

We utilize predictive analytics methods (data mining, statistics, and machine learning) across
client to identify pattern and correlations in customer and non-customer attributes, interactions
and behavior. These capabilities are fundamental to real-time marketing, allowing us to target
the right user segments at the right time with the right offers.
Predictive analytics also allows us to accurately measure ROI and optimize future performance
and more effectively budgeting spend between channels, tactics, ads and keywords.

Typical Predictive Analytics projects for eCommerce:

Customer Micro-segmentation and Targeting: Through undirected and directed

clustering (using decision trees) of customer or subscriber databases, we identify key
customer segments and recommend messaging based on purchase drivers, typically via
email, and direct mail.
Product & Content Recommendations: By applying Market Basket Analysis and
Association Rule Mining to identify frequently co-purchased/co-viewed products and coviewed content, we serve product and content recommendations to end users on
product pages, landing pages, content articles, and via email.
Forecasting: We use multiple linear regression modeling to forecast revenue and
optimize media spend allocation.
Attribution Modeling: We typically utilize logistic regression models to analyze
converting and non-converting user paths, to provide accurate ROAS measurement and
conversion credit by marketing tactic.
Churn Analysis and Optimization: We usually quantify retention differences using
survival curves, and optimize email and logged-in website content messaging to reduce
customer inactivity and drop-off.

Other Predictive Analytics Use Cases for eCommerce

and Retail:
Location-based marketing
Natural Language Processing & Sentiment Analysis
Assortment optimization
Pricing Optimization
Improved inventory management

Some interesting eCommerce Predictive Analytics

nuggets from our experience:
Customers who return or exchange products with you are potentially your most valuable

customers. Treat them well.

For our eCommerce Retail clients, manual product recommendations (based on
Merchandiser intuition) rarely, if ever, beat algorithmic based product recommendation
strategies. If they do, it's always on sites with small catalogs (limited SKU quantity).
Oftentimes, the most tedious or time-consuming part of a Predictive Analytics project is
not creating and testing Models. Outcomes are generally delayed by a lack of
agreement on the technology or templates to deliver the real-time messaging to users.
====
You could implement some price testing. One example of a retailer that tried to create their own
demand curve through price testing is Victorias Secret. They sent out catalogs with different
pricing, and even though customers ended up paying the same amount for products in the end,
it was a way to measure a customers willingness to pay. Although this is a bit of a dated
example, retailers still continue to experiment. Amazon performed some price tests as well.
There can be backlash from consumers if its not handled properly or perceived as unfair, so
thats one thing to be careful of.
One thing to keep in mind is that you dont have to look at competitors and consumers
separately when considering the best pricing strategy. You can employ multi-dimensional
dynamic pricing using price intelligence tools such as WisePricer (disclosure: I am co-founder).
These types of advanced repricing tools help you optimize pricing based on not only competitor
prices, but inventory, your sales velocity, traffic, time of day, and more.
A more recent solution, WiseDynamic, uses a regression model which leverages historic sales
data to create an demand estimation engine. It aggregates pricing variables to optimize price
by SKU where profit is maximized. The self-learning algorithm continuously recalculates
variables to adapt to the dynamic marketplace.

https://www.channelsale.com/

The best accounting solution for you will depend on the size of your business.
<$50k in annual sales
Solution: Wave
At this size, you probably don't need to be synced with your point of sales tool; you can analyze
your sales by just eyeballing your bank account. Wave Accounting is a great, free tool to do
this. At the end of the year, you can hand over your wave login to a bookkeeper along with your
receipts/invoices and they can get everything polished up properly for tax time.
POS import: No
Multi-user login: Free
$50k - $3m in annual sales
Solution: Quickbooks, Bench
At this size you'll start to need a more timely and accurate tool, both for revenue and cost
tracking. However, you still don't need to import POS data into your accounting yet. If you use
Stripe as your POS tool, you can analyze your sales data using a tool like SumAll.

Quickbooks is good because it offers breadth of functionality (detailed inventory, payables etc).
It's a bit of a pain to use, so hiring a part-time bookkeeper will be necessary, especially around
reconciling your bank accounts, and entering your expenses/payables. If multiple users need
access, you can use Quickbooks Online. They try to charge based on how many people need
to access your data, but most companies I know just share a single login.
Bench is good because it provides both the software and the accountants to do the work for
you, so there's no setup required. You can scan or FedEx receipts/invoices to them, and they'll
handle all the data entry. The downside is they don't offer inventory, so you'll outgrow them
beyond $3m in sales once this becomes a bigger issue. Just like Wave, multi-user login is free.
$3m - $10m in annual sales
Solution: Quickbooks
At this point it becomes more challenging to analyze the profitability of different products due to
the sheer volume of data. You'll want to import POS data so you can compare sales of your
SKUs against the expense and inventory data that you're already tracking.
Quickbooks is the winner in this category. They've got enough functionality to keep you
covered in pretty much every area. By this point, you'll need to have a full-time bookkeeper to
run Quickbooks, or outsource to a Quickbooks-based bookkeeping service like
theprofitline.com or tadaccounting.com. Avoid off-shored services; they will cost you time and
money in the long run when they inevitably make mistakes. Again, if you need multiple people
to log in, you'll need to use Quickbooks Online.
>$10m in annual sales
Solution: Netsuite, Intacct
Greater than $10m in sales and you will most likely need a more customized solution that
allows you to communicate between sales, fulfillment, procurement, etc. Netsuite and Intacct
are popular choices. They typically charge per seat, so you'll be charged based on the number
of people that need to access your data.

Google Analytics Premium

+ Flat fee $175k/year
+ Export your data (true raw data, but a pain in tush)
+ Nicer API, but you're on your own to set it up
+ Data is still sampled (like free GA), but the sampling thresholds are raised [thanks to Arthur
for his comment correcting me]
+ Higher-level reports for ad spend attribution
Adobe SiteCatalyst
+ Starts at $50k/year, negotiated
+ Export your data (aggregate raw data, has been a huge pain point for our customers)
+ Comes with consulting to help with install, but ho'boy that code is gross.
+ Absolute control over how the data is interpreted
+ ... at the price of lots of customization
If exporting the raw data is a key piece for you, http://Segment.io can help you get a raw log of
all your users data into S3 for Redshift or map reduce. Developers love the API, and we can
forward the data on to SiteCatalyst, Google Analytics and about 70 other tools as you desire.

How do e-commerce startups like One

Kings Lane, Manpacks, and Dollar Shave
Club handle the inventory fulfillment side of
their business?
One Kings Lane, Dollar Shave Club, and Manpacks are three completely different
companies with three completely different business models:

Manpacks is a fantastic mens essentials startup (I am a huge fan of Ken, Andrew and
Manpacks and have written about them loads of times - mainly http://www.quora.com/FailHarder/How-to-Manage-Market-to-your-Seed-Round-Investor-Prospects ). Also, I have been

pretty close with Ken and helped out a little bit during their fundraise last year - so I can speak
from a decently authoritative position on that front).
UPDATE: The Next Web just did a huge article on Manpacks.com! W00t!
Check it out - Inside Manpacks http://tnw.co/HtIZEJ

This question is a little misleading as the question asks how they handle fulfillment, while the
question details are really requesting how do they manage inventory. For purposes of
answering this question, we are going to address the Shipping & Fulfillment side of these
retailers, since that is what the question explicitly asks for. To clarify the differences between
Shipping & Fulfillment and Inventory Management, here is how I qualify the differences:
Inventory Management is the process of employing historical and future forecasts of product
performance to acquire the optimal inventory levels for your strategic goals based on the
financial constraints of your company.
Shipping & Fulfillment is a function of inventory management that relates directly to
managing the process of pulling inventory from the current available stock, packing the items
into individual orders, packaging the orders for shipments (i.e. the pick & pack process), and
transferring the shipment to a delivery carrier for fulfillment to the customer.
Perspective: I have run three mens footwear brands and raised just a little over $11.3m for
product-focused startups over the last 24-months. Since your question explicitly asks about
shipping & fulfillment, this answer is going to offer the perspective of a guy who has
successfully beat his head against the wall numerous times trying to figure out how to make
this whole process work with the absolute bare minimum of resources (Read: we were
bootstrap broke desperately doing whatever it takes to make it work).
Across all three of these companies, the ability to pay $40k for NetSuite was just never in the
cards for me at the companies that I ran, but that did not mean that I didnt have to solve all the
problems that desperately required an e-commerce operations solution like NetSuite to run
well. I had to hack together a BPM solution to manage the of work through readily available
tools like Excel, Quickbooks, and free apps to keep the whole company barely functioning ya... it was stressful, time consuming, and a lot of work, but it was the army I had to go to war
with at the time.
And... Here... We... Gooo!
E-Commerce Operations: Managing Shipping & Fulfillment for Online Retailers
There are basically five stages of operations management that all e-commerce startups fall into
as they grow into dominant companies. This answer focuses on how to manage Shipping &
Fulfillment for an e-commerce startup scaling their operations model (i.e. this answer does not
apply to majors like Walmart.com, Amazon, Macys.com, Bloomgingdales - or any major ecommerce store that is an extension of brick and mortar or playing in the absurd big leagues).
These five stages are:

This answer is going to focus predominantly on Stages 1, 2, and 3 - The rationale is that these
stages are the most challenging periods for e-commerce startups and there is very little
published about how this works and offering advice for retailers trying to structure their ecommerce operations model. Stages 4, and 5 apply to much larger online retailers, which have
loads published information and guides via HBS case studies and in supply chain management
textbooks traditionally taught in MBA programs to provide retailers with the frameworks to guide
operations management. Additionally, retailers in Stages 4 and 5 have the financial resources
to acquire talent in-house with the experience to manage this process. This is in contrast to ecommerce startups that pretty much only have the good ol Quora to turn to for help on
understanding how this works.
For simplicity sake, we are going to assume that you have all the following done:
Customer Narratives: Before you launch the site, you need to spend loads of
time walking around and taking pictures of customers at retail / restaurants / bars
to have an selection of 15 - 20 customers that your e-commerce store is going to
sell to - basically the narrative is the story of who your target market is, what they
do, and how you resonate with them. Know your damn market.

A Live E-Commerce Site: Start with a basic site built on Shopify or Magento - it
does not need to be amazing or perfect. Dont worry that you dont look like Gilt
Groupe, get your site off the ground and start making some money - but you
need a live site to make this process work.
Demand Generation Model: This is the most, insanely challenging process in
all of online retail - she who has the customers makes the rules. Understanding
demand generation is a 20-page article in and of itself, so well just assume that
you understand the basic idea of social engagement & demand generation
(getting people on your site, following your shop, and subscribed to the
newsletter).
Stage 1: Launching your E-commerce Store
Every large e-commerce player was small at one point and they were most likely working out of
their apartments - probably the most exciting company in the game, Bonobos, started out of a
Andy Dunn & Brian Spaly's Atherton apartment while they were attending Stanford GSB:

The online retailers that are most interesting for me are those that just say Screw It and open
up shop. Retail is hands down the most challenging industry that I have ever been in and if

you really try to plan everything out, you will get into analysis paralysis driven by the insanely,
mind-numbingly ambiguous nature of the business.
The best piece of advice that I can give you is to Be Smart. You dont need to place big
orders - get in a couple of items that are focused around products that fit perfectly around your
target market and begin to expand from there. A good guide is to purchase inventory that you
see 50% of ideal customers in your primary narrative is wearing on a Friday night or Saturday
Morning. If your new customers already own the item, this is a strong signal about
merchandise you want to retail because even if the customer has the item, it shows that you
understand them as a customer (i.e. generates good will as a retailer that understands me).
Below is a short infoguide about e-commerce operations management in Stage 1:

This model is pretty straightforward - so I am not going to spend a lot of time really diving into
it.
Stage 2: Surviving Means Outsourcing Fulfillment
Your e-commerce startup is starting to take off, orders are coming in the door, and you are
learning a ton by managing the entire Pick & Pack process yourself - congratulations! It feels
really good to be here because your vision and risky bets are providing you feedback that this
whole thing could actually work. However, you are going to quickly reach a limit to what you
and a small team can do on your own as you will run out of space and hours in the day to
continue with controlling this process.
Once you reach about $350k to $500k in revenue run rate, devoting your teams resources to
this highly labor intensive process is not the best use of your startups limited and
overstretched resources. However, the most frustrating aspect is that you dont have the
financial resources to hire the appropriate resources to continue to keep this process in-house.
If you are going to hire anyone it is going to be a developer to make the e-commerce site better
or a killer marketing person to drive the revenue growth through this challenging phase - not
someone to manage the process of work.
This is where working with an outsourced warehouse or third-party logistics partner comes into

play. A third-party logistics company (3PL) is a warehouse that handles the Shipping &
Fulfillment part of inventory management for your business for a fee. This basic overview of
what a 3PL does:

This will fundamentally change your workflow process - orders that come into your e-commerce
store will need to be routed to your 3PL and then passed off to them for fulfillment.

It will probably be more helpful to provide some actual numbers and metrics to help color in the
picture about the financial implications of Stage 2:

But alas this conversation was asking about Manpacks specifically:

These are actual numbers from three different startups that I have run or been a part of helping
over the past two years. Managing this process without a system is a huge problem for most
startups it takes an unimaginable amount of time on task to keep this process running
smoothly, nothing to say about efficiently. You might have caught a piece that I recently wrote:
http://www.quora.com/Fail-Harder/One-System-to-Rule-Them-All-Simplifying-the-eCommerceApp-Ecosystem-Powering-your-Business
and this should give you a good intro into how I recommend growing online retailers structure
their e-commerce operations model.
Historically, the problem with building an e-commerce business has been that the little guys or
girls (dont want to be gender discriminatory here) could never compete with the massive ecommerce platforms that the big retailers employed. The tectonic shift in consumer spending
to the web has gathered unprecedented momentum in the last three years. The best part
about that has been the commoditization of these e-commerce platforms to work for the little
guy or girl.
It always bothers me when articles or answers dont contain explicit advice on how to make a
solution applicable to you (the reader). This is how this all works in practice of a system:

Although, I will implore you to get setup on the right system to power your e-commerce
business from the start I know that you are going to be so stressed out with everything else
that its just not a priority. And begrudgingly, I understand that and hence why I saved that part
of the model for talking about here.
Running Your Store & Making your Life Easier
Managing the growth of your e-commerce store can quickly overwhelm the entire team without
the right tools in place to power the business. Keeping track of returns, updating orders the
details from the 3PL on shipments that went out, inputting orders into the accounting systems Man! Oh! Man! There are a lot of moving parts that are all separate aspects of the workflow
process - your company can grind to a halt without a system to keep track of it all.
Three years ago, there simply were not any good options on which growing retailers could build
a business. Additionally, each cog in the system tries to push their own system on the retailer that makes managing the process even harder. The most common place I have seen this is
when third-party logistics warehouses force the retailer to use their WMS (Warehouse
Management System).
I have used almost five different systems over the years with 3 different 3PLs and let me tell
you - they all suck! The best advice that I can give you is to Control Your Own Destiny
because you are going to be under a lot of pressure (especially in the early years) for the 3PL
to push you onto their WMS system to manage orders because it is in the best interest of the
3PL.
After trying out every ERP / Order Management / Business Suite on the market, here is how I
have structured my e-commerce operations:

Check out this article in more detail:

http://www.quora.com/Fail-Harder/One-System-to-Rule-Them-All-Simplifying-the-eCommerce-

App-Ecosystem-Powering-your-Business
The reason that I like Brightpearl (check them out: https://www.google.com/enterpris...) is that
it structurally solves all of the headaches and problems in a way that I can fit into my overall
operations model. Is it the perfect, be all end all, solution? No - of course not - there are things
that I want to change or that need to function better, but this structurally solves all the business
problems that occur while growing a online retailer.
The other cool part is that the system is smart enough to not control me - if I want to use
another application (odds are they have an integration for it), but there is an API to pull data in
and out - really awesome for reporting and analysis.
If we boiled it down to one aspect - its valuable because it connects shopping cart orders to
accounting - making data entry for accounting about the work! The second part most
attractive feature is that by keeping track of my inventory - my shopping cart is always up to
date.
I dont want this to feel like marketing BS or anything (yes, the co-founder and I are good
friends, but that is because I loved the platform and then we started hanging out. My social
circle in SF is primary driven by startup founders, who are building products that I respect, and
those products serve as the catalyst for a friendship - I have made better, cooler, and more
intelligent friends this way than in any other capacity)!
Short Version: This is what I use and think solves most of the problems that you are going to
face. Hence, this is what I recommend will work best for retailers at this stage - for whatever
that is worth.
To learn more about Brightpearl - give one of the co-founder's a shout - Andrew Mulvenna - he
is a blast to talk with or check them out: https://www.google.com/enterpris... ) - he is my Ken
Johnson of 2012 (i.e. Ken was the coolest founder that I met in 2011 and Andy is hands down
the coolest person that will meet in 2012)
Managing a Subscription Business Model
Subscription e-commerce was definitely one of the trendiest topics at the end of 2011 and it
has most certainly carried through to the first part of 2012. The question details wanted to
shed some insight as to how the inventory management side of the business works in regards
to subscription e-commerce.
This part of the question was rather interesting for me because it strikes me as the most
straightforward aspect of the inventory management puzzle. Subscription e-commerce is
broken down into two different models:
1. The Manpacks Model:
Manpacks is an awesome mens essentials subscription service that allows guys to schedule
regular shipments (i.e. every quarter) of their favorite socks, undershirts, boxers, and shaving
gear. In terms of inventory management, this is an online retailers dream! You have
customers locked in to purchase product at known future dates a concept called known
demand.
The subscription model takes a lot of the demand estimation out of the equation because the
retailer has the customers credit card and a fairly high probability of the customer completing
the transaction. Why I have been so excited about Brightpearl (
https://www.google.com/enterpris... )lately is that I have implemented it with three companies

now and they are the only, I mean the only, and I cant emphasize this enough the only, damn
system that offers subscription functionality out of the box. They use a Copy to Multiple Sales
Orders that you can schedule according to the order schedule. Is it perfect? Not really - but
that is not really the point - the point is that the system does it - makes buying inventory super
easy and straight forward.
This is why I call Brightpearl (https://www.google.com/enterpris...) the central command system
because it literally lets you finally become Houston and serve a mission control to run your
business. Brightpearl (https://www.google.com/enterpris... ) has a copy to multiple sales
orders functionality that allows the retailer to create the multiple subscriptions in the system
and package them all up nicely for easy ordering.
Ohhh ya since it manages your accounting too you can convert all those up-coming orders
into a PO to push to each of your suppliers.
2. The Stylist / Curative Subscription Model:
The stylist model is employed by e-commerce startups like Trunk Club or Shoedazzle. The
service establishes itself as an expert resource to supply the right product to their customer.
This is significantly better than the traditional e-commerce model of buying on averages
because you have deep customer insight into what they like and their sizes (size runs are the
most challenging aspect of retail).
The fact that the stylist / curation model serves as the resource means that they are
responsible for demand generation if they recommend four or five articles of clothing to their
customers, the companys historical data gives them pretty high confidence statistics that the
customer will purchase the product. The entire business model around subscription fashion is
built to make the inventory management side of the business easier to manage.
Okay, this is the last time I promise, the coolest thing about Brightpearl
(https://www.google.com/enterpris...) is that its the only platform to provide the retailer with
pseudo-eCRM functionality. Customers can be added to the CRM portion of the system and
instead of using the platform to manage the sales, like a traditional CRM, you can use it to build
customer insight and make the inventory procurement process significantly easier
Drop Shipping:
This should round out the answer to the question - its going to be short & sweet.
Matthew Carroll's answer to Dropshipping: Is drop-shipping the best way to bootstrap an ecommerce company?
Lets start out by getting a good general definition of drop shipping to make sure that we are all
on the same page:
Drop shipping is an inventory management technique that enables a retailer to
sell a product for which the retailer is not currently holding in inventory. The
retailer is able to do this because they have have setup a drop ship arrangement
that allows the retailer from the product manufacturer's inventory of Available To
Sell products.

There are three primary drivers for employing this methodology are:
Positive Cash Flow: Once the drop shipping agreement has been arranged, the
retailer is in a prime spot - they have product to sell, but they are not financially
obligated to purchase any of it. When a customer places an order, the retailer receives
the cash for the transaction and then enters into a financially binding relationship with
the brand / manufacturer / supplier for transferring ownership rights of the product.
Reduces Inventory Risk: We all remember how scary and painful the Great
Recession was and it actually becomes one of the most significant driving forces to
widespread adoption of this technique. Drop shipping provides the cash flow flexibility
to the retailer (only paying for what you sell) without the shackles of inventory from prepacks or case-packs (pre-defined assortments that most of the time sticks the retailer
with odd sizes or odd colors). Additionally, the manufacturer retains ownership of the
product, so it reduces much of the apprehension and risk from consigning goods.
Reduces Transportation Expenses: The theory of drop shipping is brilliant because it
cuts out the retailers Inbound Shipping (the amortized cost for the shipment from the
brands / manufacturers store to the retail shop) - this figure is about 2.75% to 4.25% of
Retail Price ( for a $100 Retail Price item).
Read More at:
Matthew Carroll's answer to Dropshipping: Is drop-shipping the best way to bootstrap an ecommerce company?

What does Matthew Carroll think about the

model employed by Fabricly, Garmz, Quirky,
and Made?
response to the inbox messages, I am going to take a little bit of a different approach to writing
this post. I will be iterating this to give you additional insights into the logic process for how I
build an answer]
You are going to get to see all of my notes as I go through this analysis - Here is where I stand
after 3 hrs on the answer
Intro
What do these companies do?
1. Users submit designs (Do the designers understand tech specs?)
2. Community Members Vote on what they want
3. High votes go into production & Community can purchase
Rev Model:
Rev:
They are not pricing to market norms
There is no way that costs $35.00... Cut & Sew in LA should be $18 - Are they marking

up 8x?

Are they basing a distribute contribution % to cost basis!? (eg if they believe that the
overall company can sell 1k units are they dividing OpEx to get a cost premium)

This would look like Sewn Price + (50% of OpEx / Forecasted Sales) + Marketing
Allocation + Amortized Warehousing & Fulfillment = adjusted cost basis

If they are doing this, they are bloody double counting OpEx (Pricing Build & in terms of
what they pay out), thereby inhibiting creative submissions
Margins:
GM Industry Norm = 60% for full integrated direct model ( See 267 up-votes - What's
the average Profit Margin earned by apparel distributors? Brick & Mortar Retailers? ECommerce / Online Retailers?

They appear to be driving something like 92%?

There is no product description to sell the consumer (They are branding Fabricly over
the Designer)

Emphasizing that there is not emphasis on the designer (eg the emerging brand)

Intro to Fashion Startups

Overall process

-----------------------------------------------------------------------------------------Branding in Fashion
-----------------------------------------------------------------------------------------Fashion is Emotional
One of the most important points to qualify is that fashion is a hugely emotional
experience. Humans are inherently social animals & desire to be accepted by the herd
(i.e. social & professional networks) - thereby, your choice of what you wear is a direct
reflection of whom you are as an individual. Over several hundred thousand years of
evolution, humans have learned to draw immensely on visual cues as a means of
assessing character risk about the people we interact with & therefore your similar to me
mentality. Fashion is one of the few external manifestations of whom we are as
individuals and serves as the impetus for visual feedback to observer about our
personalities.

Think about the d-bag bankers/consultants/VCs that go to the Redwood Room at the
Clift hotel in black oxfords, jeans, and pressed striped button-up shirts( I started my
career in banking & trading

What is this demographic trying to say? They are making a statement that they wear
this because it's who they are as a person (a successful professional). The fashion is
what their peers are wearing and visually they look follow the "similar to me"
Consumer psychology needs to be lead by comparative norming
the normal fashion curve revolves around buyers 6-months before a new style goes to
market.

if it were up to consumers they would downvote items because they are too aggressive.

Fashion substantively evolves every season in a matter that when we launch stuff at the
tradeshows this week, we know that the consumer's purchasing mindset will
substantively evolve as most people adopt fashion & it becomes more congruent with
the herd to purchase what we see our peers wearing (Ie. comparative norming of
subjective evaluations of what's cool - think about it like scenesters from the early-00s &
Music diffusion of popular bands).
-----------------------------------------------------------------------------------------Pros
-----------------------------------------------------------------------------------------Cultivating Emotional Bond to the Purveyor:
Following in line with Zara & H&M, retail organizations that have become incredibly popular in
recent years by virtue of their high-fashion runway inspired fashions being available at
affordable retail very quickly.
- This model works.
Low startup costs
The most difficult period of a brand is the first 26 months (8-months pre-launch & 3
seasons until you launch into scale of larger distribution)

Immediate market insight into feedback (a huge risk too because)

Never forget how dumb the customer is... Fashion is the embodiment of Plato's
Philosopher King. You have to stay 1/4 step ahead of a customer.

Parent Organization to source growth financing

Ostensibly, this is no different from what i do on a more formalized, distributed basis.

Distributed Operational costs = Lower cost synergies

-----------------------------------------------------------------------------------------Cons
-----------------------------------------------------------------------------------------Unauthentic
Fashionista's are a lot like hipsters (i.e. this demographic derives social value by unique
value opportunities for something that you can't get anywhere else)

Great brands cultivate an emotional connection around the fact that the brand as a
company is a reflection of who they are as a professional (see above PPs on Fashion is
Emotional).

Confusion on Whom you are Branding?

The huge weakness of this model is that it implicitly degrades the designer. The
consumer is purchasing from Fabricly and not from Designer (that person has been
related to a subset of

The model doesn't build designers, it commoditizes them for the glory of the parent.
Thus, the model inherently discourages from any instance evolving beyond the
purveyor. This model
No Authoritative Distributive Presence:
Fashion diffusion into the market revolves around utilizing the distributed sales network
to foster growth

Fabricly will need to build a fashion presence meter in their social model - whereby, the
"who in the hell is this person" can be readily accessible as people evaluate new fashion

Think about this like a sales rep at a retail location. Brands rely on the sales reps at the
retail location to cultivate brand awareness by virtue of their existing as an ambassador
of the retail network (this can be you trendy boutique or Bloomingdales)

You Need the Startup Period to Fail

There is a reason why Majors (eg Nordstrom, Bloomies, Macys) don't pick you up on
average for 3 seasons.

Knowledge capital is tied up in the parent and does not enable the designer to build LTV
to scale to a possible liquidity event

You need the internal organization emotionally committed to building a company Incredibly difficult to foster in an incubator type environment

"Profits are Shared"

Now this is pure rubbish.
I submit my work, you drive revenue, then distribute OpEx, and I get a % of the
balance?
This monetization model doesn't work.

Competing Priorities of the parent

the individual designer is suffering by virtue of the parent organization have conflicting
marketing agendas. It is too costly in terms of organizational resources to truly invest in
a crowd-sourced network with conflicting strategic objectives.

There simply aren't that many creative people

Great designers rise because they see what's going on and can evolve past it

After all, if you are too far out in front of the parade no one knows your bloody in it

You are not in the proper channels of distribution to drive LTV

If you are a really good designer, why am I going to post my stuff here to have it
branded to the consumer as Fabricly?

2. Branding - Tech Vs Fashion

Similarities
Highly Correlated Revenue Models
Differences
Comparative Norming

Consumptive Vs Expressive Environments

Active Social Feedback (eg if you say something stupid on facebook, you can hide
behind tech. Active judgements when you are in an in-person environment have a
greater emotional impact on the consumer).
Market Opportunities
Drivers are based on "Need" Vs. "Wants"
Comparable Model is Music & SoundCloud
3. The Transition Out of Fabricly, Sourcely into Majors
- How does Fabricly manage scale the designer?
- There is no incentive for Fabricly to leverage the designer into a larger distribution
network (well, there is, but this is highly unlikely that they are going to employ a fashion VC
model).
- What is the goal of an acquisition?
- The business of fashion systemically is based on the scale
- Thereby, brands are readily accessible models into a larger organization (i.e. Rock N
Republic & VF Corp)
===================

Dropshipping: Is drop-shipping the best

way to bootstrap an e-commerce company?
Over the past several years, drop shipping has emerged as the go to strategy for most ecommerce retailers. This method has become the de facto standard for most of the ubersuccessful e-commerce startups from the last several years including:

Everyone here at Brightpearl talks with customers and new prospects dozens of times per
week about drop shipping, but we definitely found that there really wasnt a great overview of
the process to give growing retailers a detailed analysis of this process as part of a lower-risk
vertical expansion strategy.
For a how-to guide on shipping & fulfillment, please check out: Matthew Carroll's answer to
How do e-commerce startups like One Kings Lane, Manpacks, and Dollar Shave Club handle
the inventory fulfillment side of their business?
What is drop shipping?
Lets start out by getting a good general definition of drop shipping to make sure that we are all
on the same page:
Drop shipping is an inventory management technique that enables a retailer to sell a product

for which the retailer is not currently holding in inventory. The retailer is able to do this because
they have have setup a drop ship arrangement that allows the retailer from the product
manufacturer's inventory of Available To Sell* products.
There are three primary drivers for employing this methodology are:
Positive Cash Flow: Once the drop shipping agreement has been arranged, the retailer
is in a prime spot - they have product to sell, but they are not financially obligated to
purchase any of it. When a customer places an order, the retailer receives the cash for
the transaction and then enters into a financially binding relationship with the brand /
manufacturer / supplier for transferring ownership rights of the product.
Reduces Inventory Risk: We all remember how scary and painful the Great Recession
was and it actually becomes one of the most significant driving forces to widespread
adoption of this technique. Drop shipping provides the cash flow flexibility to the retailer
(only paying for what you sell) without the shackles of inventory from pre-packs or casepacks (pre-defined assortments that most of the time sticks the retailer with odd sizes or
odd colors). Additionally, the manufacturer retains ownership of the product, so it
reduces much of the apprehension and risk from consigning goods.
Reduces Transportation Expenses: The theory of drop shipping is brilliant because it
cuts out the retailers Inbound Shipping (the amortized cost for the shipment from the
brands / manufacturers store to the retail shop) - this figure is about 2.75% to 4.25% of
Retail Price ( for a $100 Retail Price item).
[* Available to Sell is a report of the available inventory from the brand / manufacturer that is
currently not allocated to orders (i.e. Qty. of Medium Green T-Shirts - Sum of all future orders
with a Medium Green Shirt Currently remaining to be sold = Medium Green T-Shirts Available
to Sell. Basically, the report tells the retailer how many units are able to purchased by the
retailer - not necessarily how many are on hand at the warehouse. This is an important
difference because, as youll see, sometimes drop shipping can get a little messy - so that
distinction could potentially be of use to grease the wheels to make your customer happy ]
Three primary implementations of drop shopping?
For purposes of explaining the different the different drop shipping models, we are going to
define just a couple of terms to make sure that we are all on the same page:
Customer - the person who has engaged in the transaction with the retailer
FashionSite.com - the retailer who is selling the product that the customer has purchased
BrandXYZ - the brand / manufacturer / supplier of the product to our retailer, FashionSite.com

This process is designed to feel completely painless with the customer never knowing that
FashionSite.com never took physical ownership of the goods. This process is designed to be
efficient and reduce the considerable transportation costs and inventory risks associated with
FashionSite.com holding the inventory while enabling the brand, BrandXYZ, to sell more
product in more venues.
This process generally takes anywhere from 4 - 12 business days:

Until a brand reaches about $20m in top-line revenue, it does not make financial sense to own
your own warehouse and manage the shipping and fulfillment process yourself - we are all
over-worked and over-stressed, handing the actual order fulfillment is something that we simply
do not have time for nor physical ability to do (well... some of you do and my hats are off to
your supermen or superwomen - we are gender inclusive here at Brightpearl). This is all by
way of saying that the majority of brands / manufacturers will be working with a 3PL (third-party
logistics) or outsourced warehousing & fulfillment company (i.e. a vendor that warehouses the
inventory and whose sole job it is to manage inventory and ship orders that are submitted).
Hence, the two numbers that are probably making you raise an eyebrow are:
BrandXYZ Warehouse Fulfills Order: After working with five different 3PLs or
outsourced warehouses over the years, pretty much every contract that I have read and
signed stipulates that the warehouse has a one (1) to three (3) day ship window from
when the order is received by the warehouse to be fulfilled (i.e. out the door the

shipping company - usually DHL / FedEx / UPS).

Shipping to Customer: FedEx / UPS Ground service in the US will take approximately 2
- 5 days depending on where you are shipping from - If BrandXYZs warehouse is in Los
Angeles (LA) and the customer is in New York City (NYC) that is a Zone 1 to Zone 5
timeline and its 5 business days. This is essentially not an issue for the UK, but
certainly an issue that many of you are facing in shipping to Western Europe.
Figure 1: Model 1 Drop Ship from Brand to Customer

2. Drop ship to retailer on a per-item basis and then shipped onto the customer

Now this may appear inefficient, because FashionSite.com is basically incurring all of the same
transportation costs. However, for retailers who are hyper-focused on customer experience
need to control the product risk and make sure that every customer receives their box with
branded by the retailer.
Adding this extra node to the link will obviously add some time, this process pushes back the
delivery window pretty significantly:

This is the logic for how these types of relationships can work - hence why this method has
become so popular with the Private Sales phenoms like Gilt Groupe and Fab.com. The
customer receives the Private Sales Price (i.e. a large discount on designer goods) in
exchange for longer delivery windows, where the discount is designed to compensate the
customer for the lengthy delivery window.
The three windows that we should explain are:

BrandXYZ Warehouse Fulfills Order: Same explanation as above, the warehouses contract
states that the warehouse agrees to ship the order in one (1) to three (3) days after the order is
received. Now the interesting little detail that I am going to add to that is: most 3PLs /
outsourced warehouses will only accept orders for fulfillment that are submitted before 10am
local time. Lets take a look at how this can start throwing wrenches in the machine:

Shipping from BrandXYZ to FashionSite.com: This is the same logic as in Model 1 BrandXYZs warehouse is in Los Angeles and the order needs to travel to FashionSite.com
who is in New York City - this is a 5 day window. Now maybe the Retailer will tell BrandXYZ to
Ship the order on the FashionSite.coms DHL / UPS / FedEx Account. BrandXYZ is generally
going to try and avoid that because we generally add a 20% markup on shipping to cover the
cost of outbound warehouse fees. Hence the shipment is going Ground-service to
FashionSite.com
Shipping from FashionSite.com to Customer: FashionSite.com is in NYC and the
Customer is in San Francisco, California - this is another cross country trip that takes 5business days via DHL / UPS / FedEx Ground service.
As retailers grow into larger companies and their inventory needs grow this process becomes
more and more refined with better integrations with systems, agreements, and vendor
compliance on shipping times that reduces the majority of these concerns.
Figure 2: Model 2 Drop Ship from the Brand to Retailer and onto Customer

3. Large orders are drop-shipped from factory to a major retailer

This version of the drop shipping model involves FashionSite.com placing a large order with
BrandXYZ pre-season - roughly about six to nine months before the product is scheduled to be
available to purchase by customers at retail. Considering the large quantity of the order,
BrandXYZ instructs the factory to break their order up into two shipments - one explicitly for
FashionSite.com and the other part for the balance of BrandXYZs customers.

This model applies to when you are doing business with a large retailer that - most likely an
Special Makeup Unit (SMU - a special color way or model that is designed & produced
especially for a particular retailer). When a brand like BrandXYZ is doing significant business
with a retailer like FashionSite.com, picking the order here in the US is too expensive (about
$1.30/unit at standard 3PL rates) - hence BrandXYZ issues special instructions to their Chinese
factory to cartonize the FashionSite.com order (where the FashionSite.coms order is put into
specifically delineated cartons) and then in a specific FashionSite.com container so the
shipment can be easily separated at the Port and shipped to FashionSite.com.
Figure 3a: Model 3a Drop Ship from the factory in China to retailers distribution center

Figure 3b: Model 3 Drop Ship from the factory in China to Stores

This approach is a more common approach to drop shipping when BrandXYZ is dealing with
retailers with physical stores. The drop shipping agreement is setup to drive down the costs
associated with fulfillment in the manner
What are the advantages of using this model?
Positive Cash Flow:
Once the drop shipping agreement has been arranged, the retailer is in a prime spot - they
have product to sell, but they are not financially obligated to purchase any of it. When a
customer places an order, the retailer receives the cash for the transaction and then enters into
a financially binding relationship with the brand / manufacturer / supplier for transferring
ownership rights of the product.
In order to emphasize the biggest advantages of drop shipping, lets use the hypothetical
example of a product that:
Retail Price:
$100.00
Wholesale Price: $50.00
In this simple example, we are ignoring Sales Tax / VAT and Shipping Expenses (Inbound &
Outbound).

Reduces Inventory Risk:

We all remember how scary and painful the Great Recession was and it actually becomes one
of the most significant driving forces to widespread adoption of employing drop shipping as an
inventory management technique..

Drop shipping provides the cash flow flexibility to the retailer (only paying for what you sell)
without the shackles of inventory from pre-packs or case-packs (pre-defined assortments that
most of the time sticks the retailer with odd sizes or odd colors). Additionally, the manufacturer
retains ownership of the product, so it reduces much of the apprehension and risk from
consigning goods.
Reduces Transportation Expenses:
The theory of drop shipping is brilliant because it cuts out the retailers Inbound Shipping (the
amortized cost for the shipment from the brands / manufacturers store to the retail shop), an
example of which, we see below:

In practice, the process of drop shipping - saves time & money to your organization.

What are the disadvantages for using drop shipping?

Uncertainty on Inventory Availability
Drop shipping relies on open and robust communication lines between the retailer and the
brand. When you are working with a fully integrated system like Brightpearl, this process
becomes infinitely easier as the Brightpearl API ensures that your retailers can have accurate
up to the minute information about stock levels - in short, Brightpearl makes drop shipping a
dream!
However, most e-commerce retailers and brands / manufacturers / suppliers are just coming
into the modern age of technology and as much as we would like the entire retail world to be
flourishing under Brightpearl-enabled systems - this is not always going to be the case.
In the US, there is only about 55% - 65% accuracy into the actual supply levels of retailers and
brands at any given time in the country - in other words, the stated inventory levels of retailers
and their suppliers (brands) will be inaccurate by 35% - 45%. This presents significant risks to
the drop shipping model that we want you to be aware of and cautious in protecting your brand
against.
Brand Value Risk
When employing a drop shipping model for your retail shop or e-commerce store, these
inaccuracies can cause significant turmoil for your brand and do considerable harm to the
customer experience that you are looking to cultivate. For example, if there are not appropriate
inventory accuracy safe guards in place and a customer places an order for a drop shipped
product then the retailer must manually contact the customer and inform him or her of the
mistake. This process is always messy and involves a lot of time and frustration for your staff
and your customer.

In the age of Twitter, you can destroy any social traction by virtue of screwing up one order.
Think about it - the prevailing theory for employing social tools is that it is supposed to market a
brand effectively by virtue of communicating the fact that one member of the social group
likes something and thereby his/her social network is more receptive to it being applicable to
them.
Do you want to know how pissed off a customer gets if they have executed a transaction,
transmitted funds, and established an emotional expectation for the product - and it DOESNT
come? You can destroy any social traction & eliminate a large segment of potential users. In
addition, you are competing in the age of Zappos & free overnight shipping. Even under the
BEST timelines, you are still between a rock and a hard place.
Now we are going to run through a couple of scenarios that underscore this risk:
Scenario 1: Drop Ship Orders Compete with Brand Wholesale Sales
Drop shipping relies on one inventory set from which the retailer has arranged to be able to
drop ship orders from, but it is also the pool from which the Brand / Manufacturer / Supplier is
selling to other customers from. To illustrate this point, the following example should offer
some clarity as to the risks of this scenario:
FashionSite.com has an existing drop ship arrangement with BrandXYZ
At the beginning of every week, BrandXYZ forwards an inventory report to
FashionSite.com to update their inventory levels
During the week, a customer places an order on FashionSite.com for 1 Medium Green
T-Shirt
On that same day a major retailer like Nordstrom places an At Once order with
BrandXYZ that pulls all of the stock of Green T-Shirts
FashionSite.com submits the order to BrandXYZ who is hyper-focused on the Major
Retailers order and does not respond promptly to FashionSite.com about the
unavailability of the inventory
This creates a big problem for FashionSite.com - the odds of a prompt response to
FashionSite.com are unlikely and FashionSite.coms customer is the one who is adversely
impacted by the relationship
This major retailer, Nordstrom, most likely represents a large strategic interest for BrandXYZ
that will be a launching pad for future growth. BrandXYZ will bend over backwards to fill every
possible piece of this Majors order leaving the drop shipper, FashionSite.com left out to dry.
Additionally, BrandXYZ will generally send out the inventory reports one time per week pushing the responsibility for inventory accuracy onto FashionSite.com, who understandably
has no control over the situation. Furthermore, BrandXYZ will be frantic to hit jump through the
hoops that major retailers require, meaning that it will be one (1) to three (3) days before the
new inventory levels are sent back out to FashionSite.com. An information discount that can
adversely impact sales and customer experience during the state of inventory availability flux.
Scenario 2: BrandXYZs Competing Sale for Sale Inventory

When dealing with drop shipping relationships, the retailer needs to be careful about protecting
themselves. Most Brands / Manufacturers / Suppliers have explicit goals of driving 15% - 25%
of revenue through consumer direct channels - meaning that your suppliers will come into
competition with you more and more.
Lets use our favorite Medium Green T-Shirt example that we have been working from this
entire series - both FashionSite.com and BrandXYZ.com receive orders for 1x Medium Green
T-Shirt - the last one in stock. Both orders hit the system at the exact same time - when you
take a look at the numbers, BrandXYZ simply cannot fulfill FashionSite.coms order:

BrandXYZ is seeking to build their e-commerce presence and it is in their best interest to fulfill
the order to BrandXYZ.coms e-commerce order. Simply put, FashionSite.com is in no
negotiating position to command priority over BrandXYZs e-commerce orders FashionSite.coms customer suffers by virtue of this example.
Vendor Risks
1. Credit Risk WAY beyond your control
Lets assume that we are talking about a 3PL model for warehousing & fulfillment and
subsequently the 3PL warehouse is a vendor of BrandXYZ. As you know sales in Consumer
Products are highly seasonal (Spring/Summer & Fall/Winter) and cash varies widely (i.e.
BrandXYZ have HUGE cash outlays at the beginning of the season and gradually recoups
them during the cash build cycle leading up to the end of the season when we dump it all back
into the next seasons product).
Think about the risks that you are taking on by virtue of not controlling your inventory and the
fulfillment process. For example, lets say that it is 1-mo into the season - I have just spent all
my cash on buying the product, my revolving credit line is maxd because of just paying my
suppliers, and my US Customs duties are scheduled to ACH my account. At this point, 70% of
my product has already shipped to the stores, and BrandXYZ owes the warehouse $155k for
receiving inventory and then shipping to all 300 retailers in the US. It is still a little early for
reorders, so the 3PL is one of lower items on the Accounts Payable. It would not be uncommon
to allow the 3PL to freeze BrandXYZs account for exceeding credit terms for 5-10 business
days.

The drop-ship person is screwed in this case as a 5 unit direct ship order is not going to
incentive me to to deviate from my Cash Expenditure Plan. Cash Expenditure Plans are
detailed analyses that every CEO/CFO knows about the most effective use of crucial cash that
will be spent at the exact time that it needs to be to ensure the effective functioning of the
brand.
[Note: One of the main reasons that this happens for brands under $75m in Revenue is that a
Major Customers (e.g. Nordstrom) invoice becomes un-factorable, meaning that I cannot sell
the invoice to a bank and generate cash. This can destroy your cash management and is
something that smart CFOs are constantly preparing for.]
2. FedEx/UPS will only deal with the shipper (e.g. BrandXYZ as the owner of the shipment)
One of the biggest problems with drop shipping is the use of shipping accounts for the actual
fulfillment of the shipment from BrandXYZs warehouse to FashionSite.coms customer. There
are three main problems with this:
1. BrandXYZ Insists on Using BrandXYZs FedEx Account: BrandXYZ is trying to
aggregate as much business with FedEx to gain purchasing power that will be used to
drive down rates for the entire company. More importantly, it is common for Brands /
Suppliers / Manufacturers to mark up shipping - meaning that I always add 20% to
FedEx Posted Rates to achieve the amount that I bill FashionSite.com
1. FashionSite.com MUST use the FashionSite.com FedEx Account: None of the shippers
will speak to anyone that is not the registered shipper on the account. Meaning that if
the drop ship order for FashionSite.com gets screwed up, lost, or the customer needs to
make a change - FedEx / UPS / DHL simply will not take to FashionSite.com. In a world
where customer service is do or die and the lynch-pin for all retailers - this is a major risk
that can significantly hurt customer experience
1. 3rd-Party Logistics (3PLs) / Warehouses Want in on the Action: After having worked
with 7 different 3PLs (outsourced warehouses) in 3 different countries for 5 different
brands - these people see shipping fees as part of their revenue model. Many of them
will force their clients like BrandXYZ , for example, to use the 3PLs FedEx Account since they will be handling all the shipments and the warehouse pools the discount, it
will be in every ones best interest - WRONG!
This seemingly simple shipping issue can cause huge problems for drop shippers and
something that we want you to be aware of and protected against.
Based upon Model 1 illustrated above, the order will most likely be fulfilled via BrandXYZs
FedEx/UPS account. This means that I own the customer data & the shipment. What happens
if the customer needs to change the shipment? FashionSite.com has no authority to act on the
customers behalf. FashionSite.com cannot call FedEx/UPS to change delivery details or the
order. Here would be the process:
Customer Calls FashionSite.com
FashionSite.com has cannot solve the customers problem
FashionSite.com must place a call to BrandXYZ - who is under no obligation to respond
in a timely manner
BrandXYZ will maybe get to it later today or tomorrow

FashionSite.coms customer experience suffers as a result

3. Return Errors
When an order is drop shipped from BrandXYZs warehouse to FashionSite.coms customer the order usually doesnt look pretty. You know what I am talking about when you receive an
order from ASOS / Gilt Groupe and its in the stylish Retailer packaging that makes you feel all
good to open it.
Traditionally brands like BrandXYZ have been hyper-B2B focused - meaning that making
shipments look good was a distant second level priority to getting the shipment to the retailer
as quickly and cost effectively as possible. However when you employ the Model #1 method of
drop shipping, FashionSite.coms customer is going to receive a packing list from BrandXYZ
and most likely a packing slip from BrandXYZs 3PL / warehouse.
Returns are a fact of life, but having the documents in the FashionSite.com shipment for
BrandXYZs warehouse creates a huge level of uncertainty. About 70% of the time when I
have shipped orders in this method - the order goes back to BrandXYZs warehouse and not to
FashionSite.com - creating a whole world of headaches for BrandXYZ and FashionSite.com.
Customers ALWAYS make mistakes and dont understand how the business works. When
BrandXYZ drop ships your order, BrandXYZs return details are included in the packing slip.
FashionSite.coms customers will most of time ship back to BrandXYZ. BrandXYZ will not have
created a RA for the order and it will most likely get lost. BrandXYZ has no liability in this case
as its FashionSite.coms customer and order.
You might be sitting there thinking that we spent an awful lot of time talking about problems that
arise out of Model 1. Ironically enough, Model 2 arises to popularity in most e-commerce
circles circa 08 / 09 when I started seeing the Privates Sales startups like Gilt, RueLaLa, and
Hautelook almost universally adopt Model 2.
Model 2 was created to provide retailers like FashionSite.com with the same drop shipping
capabilities without the risks that we have described in detail here.
For more specifics about shipping & fulfillment, check out: Matthew Carroll's answer to How do
e-commerce startups like One Kings Lane, Manpacks, and Dollar Shave Club handle the
inventory fulfillment side of their business?
=========

What is the next evolution of group buying?

There are hundred of Groupon clones in North America alone. What is the natural evolution of
the space? What can we expect in the next couple of years
I realize that this answer is super long - you can check out a link to the PDF for offline viewing /
Notes: https://docs.google.com/viewer?a...
ALSO: I made some edits & added a final paragraph that hopefully will serve as the impetus for
a youngster to rock and roll on this
A Startup Model NEEDED in Private Sales / Group Buying

There has been an explosion of private sales sites like Groupon & Gilt that are all targeting the
new trend of social commerce with over 200 Groupon or Gilt Clones emerging in the last 2
years. After hearing pitches for close to 30 startups in social commerce that are all over the
map - there are two characteristics that jumped out at me.
1. That social commerce is the new social network of 2007 with how many people and
bad ideas there are coming out to make some quick cash
2. I have spoken to a lot of people who have no idea what the hell social commerce is and
where the opportunity really exists in this industry.
After getting frustrated with how dumb most of the ideas I have heard are, I realized that I
needed to put my money where my mouth is and step up to come up with something unique.
This is something that I have thought out but am simply focused on another project - I recently
closed a seed round for $4.1m to build a new Mens Outdoor Brand. However, this doesnt
mean that my ideas stop, so I am offering this to you as a means to hopefully present a
compelling case for creating value in this space
I believe that Quora is the only place that a start up idea & business model can be effectively
disseminated that will actually position it to be acted upon - simply Quora is one of the most
skilled, technically inclined, startup passionate communities on the interwebs. On that note,
HERE WE GO - if you want the idea, take it, run with it, and build a great company! When you
make a bajillion dollars - buy me a pint and tell me all about!
Sourceable.com
[NOTE: Sourceable is not a company that currently exists - it is merely an idea that I flushed
out on Quora on my way back to SF from Holiday with my family. It's the idea that I hope that I
laid out sufficiently to hopefully grab some driven entrepreneur to champion. If you think it
sucks - dope! Let's chat about why. If you think it rocks - dope! Then what's stopping you
from making it yours?]
Elevator Pitch: Alibaba for Private Sales & Social Commerce.
Sourceable is a marketplace where group-buying/private sales sites can discover new vendors
& competitively bid on products to sell on their group-buying or private sales site.
Prospective Members:
1. Private Sales / Group-buying Sites (the Outlets): Services like Gilt.com, RueLaLa,
FashionStake, SFgate Deals, etc who are offering products via private sales or deals for
their subscribers. I am going to refer to these members are the Outlets as they
represent the sales outlet that the product will be retailed to the consumers through.

1. Brands / Consumer Products Companies (the Brands): Consumer products companies

with excess inventory that needs to be sold at a discount to finance operations or make
room for the new season. I am going to refer to these members as the Brands because
its the brand name of the products that are the primary aspect of the purchase and what
will be marketed by the Private-Sales / Group-Buying Sites (or the Outlets as referenced
above)

Problem:
1. The Outlets are Marketing Companies not Product Companies
The heart of the Outlets service model is that they are marketing organizations whose
business model is enabled by scaling their subscribers to achieve the value of their service.
Groupon, LivingSocial, and Gilt (collectively referred to as the Outlet per the model above) are
valuable because they enable the products/services featured on them to:
1. Reach a large number of population of
2. New demographically curated potential customers, who are actively undergoing
3. Purchase-focused decision criteria on a scale that is
4. Otherwise prohibitively expensive to achieve on their own
These are marketing organizations whose product is the subscriber, at least from the Brand /
Vendors perspective. The embodiment of this is Groupon as they have been purchasing
nearly every Doubleclick Display opportunity on the bloody internet (an exaggeration I know,
but you get the picture - Honestly, I have been floored by how many times I see a Groupon ad
these days). Groupon, Gilt, and LivingSocial have secured the critical mass in their subscriber
base that enables businesses to sell their goods and services in a localized fashion to a high #
of purchase focused customers. The reference to "purchase-focused" refers to the operant
conditioning by the social commerce sites explicitly detailing action-driven buying products.
Thereby when a consumer sees a Groupon email and opens it they are inherently gearing
themselves up for a decision based on the following internal dialogue - "I am going to open
and evaluate this deal whether I am going to purchase or not". Regardless of whether they
purchase or not, they are engaging in a purchasing decision by virtue of opening an email by
Groupon as the email is the product that Groupon is selling (this also applies to all other Flash
Sales / Private Sales / Group-Buying Site).
2. Sourcing Product for Private Sales is disjointed, individualized, and not scalable
With the explosion of various social commerce companies finding a steady source of
new goods to sell to the community is difficult to find and labor intensive to continue
finding great deals
Finding new product and keeping track of all the vendors is a disjointed process that
requires a lot of manual labor to process and keep track of everying

3. Sourcing Sales Channels for Excess Inventory is not a core competency for Brands
In early 2009, I was just brought in to run operations for an exciting mens footwear
company. Since we were a small brand, we had factory minimums that left us carrying
unsold inventory at the end of the season, but we didnt have any relationships with cutout shops (think Loehmann's plaza or Daffys in NYC) to sell our goods. We were frantic
trying to tap our social and professional networks for potential vendors - this was a very
relationship driven process with huge time investments
As a new brand, it difficult to get in touch with all of the various private sales sites.
Sourceable will make this process much easier

4. Information Asymmetry regarding the quality and brand alignment for the Outlets
Solution: Selection Framework & Outlet Profile
Value Proposition:
1. Central Location to Source Deals & Execute Transactions

One of the most difficult aspects of beginning to new Private Sale / Group-buying site (the
Outlet) is sourcing the products / services to be featured on the site. By virtue of having
physical products, every brand has the problem of selling excess inventory and therefore
needs a central place to discover the available options for selling their product. Sourceable is
the marketplace that enables Brands to discover the various channels for distribution to sell
their excess inventory at discounted prices. The aggregation of buyers means that you win in
bank compete over you to borrow the Lending Tree slogan.
2. Return Pricing Power to Brands (Recognizing Barriers to Entry)
Prior to Gilt, RueLaLa, PLNDR, and Reverse coming into the marketplace, the market for cutout merchandise (Cut-out is the industry term used for the inventory remaining at the end of a
season that a brand is willing to sell at a discount (eg cut-out) to free up cash and make room
for new inventory for the upcomin season) was characterized by lack of information about who
the buyers of the merchandise were, lack of connections to be able to even enter into a
discussion about who would/could be interested, and lack of knowledge about impact that the
cut-out sales channel will have on the brands reputation. This meant that brands, especially
small brands, were left scrambling to find someone to even talk to about taking the cut-out
merchandise, which inherently destroyed any negotiating power that a brand would have had we needed to sell the goods immediately and they had their choice and the pricing power to
hammer us for discounts.
However, in the last 2 years the entire industry has changed with a huge influx of competition of
cut-out shops (READ the Outlets, Gilt, RueLaLa, PLNDR, REVERSE, or any of the fashion
deal sites that have emerged over the past several years). This vast emergence of new
players has dropped the barriers to entry for competitors in the Outlet space - for very little
cost, a startup can begin a deal site for selling cut-out / excess merchandise from a Brand.
This means that Brands are in a position of power as we can now choose who to sell out
products to and provides the foundation for why Sourceable should exist - the central location
to have the 100s of Outlets sourcing and bidding on merchandise for their sites.
As we have discussed, the barriers to entry for the Outlets are relatively low and are dropped
even further by virtue of the Angel and Venture dollars chasing numerous players in this hot
market. The efficient portfolio frontier thesis for most institutional capital in the US prevents
most of the angel boom dollars from investing in fashion, restaurants, and non-Apple related
consumer products companies (e.g, 1 to 3X Rev multiples don't compensate investors for the
risk inherent to these types of startups) - (collectively referred to as the related industries). The
barriers to entry to these types of company are inherently higher due to the dearth of capital
available for emerging ventures. In addition, the current Angel Boom is "different" this time
because there are programs Y-Combinator (YC) and intelligent investors pushing the business
model/revenue model to help push startups on the path towards profitability via sustainable
business models. However the most interesting part about fashion is that the organization is
as complex as the code-base needed to power the web apps produced out of programs like yc.
When is comes fashion startups the only people with the experience necessary to offer
guidance like Mark Suster and Fred Wilson come from highly specialized areas of domain
expertise (eg logistics, accounting, sales, marketing ). Furthermore these specialized
individuals are accustomed to large budgets and a lot "bodies" to process the work for their
department. Very few people have actually run a company and can actually put all the pieces
together for how it works. Therefore, there is a decided lack of authoritative, experiential
knowledge being disseminated to aspiring fashion entrepreneurs, thus informing the high
barriers to entry for this industry.
Sourceable is the vehicle to harness the fact that there are a huge number of competitors
fighting over products for their Outlet. This is the marketplace to more effectively realize the

pricing power that high barriers to entry provide for Brands.

3. Select the Correct Channel that Aligns with Distribution Strategy (See Selection Framework
below)
Selection Framework
Traditional Off-Price / Excess Inventory Sales Channels Can Erode an Brands Value.
Historically, brands have been price takers when dealing with their cut out goods. When you
look at the market for selling cutout goods, there was not a convenient avenue to sell you
goods.
There are four questions that a brand must consider when choosing to cut-out goods:
1. What are the forecasted cash outlays for the next 8 weeks?
2. Have all current retail channels been contacted for fill-ins and reorders?
3. What are the prices and quantities of the prospective order?
4. Will this cutout sale be in existing retail channels that are the same market of this retail
channel? If so, how many customers will see this and will this present significant degradation
to the brand identity and image in the consumers eyes (I.e. Are we going to have a creative rec
at Nordies Rack situation here).
The distribution is going to be one of the most important issues for a Brand to consider as
where you sell your product can significantly impact the Brand image that consumers are
ostensibly purchasing. For example, one of the most successful mens footwear brands to
emerge over the last 4 years was Creative Recreation (http://cr8rec.com/). Over the course of
four years they experience stratospheric growth with revenues reaching an est. $80m. As
quickly as trends emerge, they crash and burn equally as fast. Following the company moving
their production from China to Vietnam, for strategic reasons not at all relating to the behavior
of members of the development team, the brand shipped a huge season - something like 500k
pairs. The brand crashed at retail during Nordstroms largest buy and ended up at Nordstrom
Rack. I cannot tell you how many times I heard Creative Rec being mentioned could be found
at Nordstrom Rack - meaning that the perceived value of the brand diminishes because it cant
be hot or valuable if it is found at a discount chain. If it can be found at Nordstrom Rack (ie a
cut-out / off-price channel), then I am not going to pay full retail as the perceived value to my
peer group will be diminished - thereby decreasing the value of the brand.
When it comes to luxury, the consumer is acutely aware of the intangible factors for how the
channel of distribution connotes a defining sense of Brand value. Therefore, it is imperative for
a brand to select the distribution for off-price goods that:
1. Is not part of the same physical shopping path for you target consumer (i.e. not across
the street from the mall that you have retailers in)
2. Is located in a non-core geographic market (eg if your brand is performing well in Miami
dont sell to a cut-out store in Kansas City as they have correlated consumers -> sell in
Colorado)
3. Sell a greater # of units versus focusing on $/unit because you do get a tax benefit for
selling at less than cost.
4. Receive pre-pay or Net 10 payment terms for the Deal -> Net 30/60 terms should never
apply to a cut-out / off-price site as these types of people are deal makers and you can
never assume that they are an acceptable credit risk. The Discount (ie 50% off
Wholesale) is compensating them for the risk of taking the inventory and paying quickly.
Where Gilt excelled was that there was not a "good" cutout venue because the market pretty
much sucked. Gilt was an anonomly in this market - a place to cutout your inventory to a highly
desirable demographic that would actually help build the brand penetration of brand. Read How
does Gilt's business model work? to read more about this.

Outlet Profile on Sourceable.com

One of the main goals of Sourceable.com should be to provide clarity as to whom is going to
be retailing the merchandise and the details for the target market. The goal is to provide a
detailed view of the demographic and traffic volumes that are integral factors for the bid
selection process. The profile items such as:
The Profile will contain the secure banking information for each Outlet & Brand as controlling
the transaction process is an integral part of driving long term value for Sourceable.com.
Probably in Phase 2 of the products development, the introduction of an analytics module to
track how visitors and conversions are occuring to provide more weight to the Outlets. By
virtue of selling more goods, the Outlets can weight their Bids higher and provide them with
negotiating power with the brands.
4. International Distribution
Historically, the main avenue that a brand had to cut-out excess inventory was to sell the goods
to another country (i.e. cut it out to South Africa). This alleviates most of the risks for disrupting
the distribution channels. Over the course of running several brands, you accumulate emails
and contact details from 5 - 10 various international cut-out stores. With the massive success
of Gilt.com / RueLaLa, we are seeing that many startups are trying to replicate the model
internationally. Therefore, there is value to aggregating the physical cut-out distribution
channels for online & physical stores.
In addition, there is considerable risk in Brands working with these international parties on their
own as there is very little information regarding their credit worthiness or payment history.
Sourceable.com is geared to provide more information and make sure transactions.
5. Logistics is expensive, difficult, and time consuming to do correctly.
One of the huge market opportunities for online retail is logistics & fulfillment. Aside from
Amazon, Diapers.com (now a wholly-owned subsidiary of Amazon, but one of true market
leaders for lean logistics & efficient fulfillment), and Zappos - there isn't an established
methodology for logistics and fulfillment that drives operational performance. As Sourceable
will be the marketplace for securing these goods there is value in utilizing the shipping
methodologies that only scale can provide. It is more cost effective for Sourceable to
consolidate shipments from multiple brands, consolidate them into one container and manage
the fulfillment to the Outlets warehouse than it is for them to go at it alone.
In addition, the most efficient practices revolve around scale. Thereby the more Brands &
Outlets that source deals through Sourceable means that Sourceable can drive more cost
savings with a revenue model that enables Sourceable to realize the profitability benefit for
these efficiency gains (ie shipping revenue is set to be fixed at 7.5% of the Deals value,
therefore Sourceable benefits from the cost savings of consolidating shipments & more efficient
logistics practices.
The Deal
It all begins with the deal - a Brand creates a new Deal on Sourceable for their excess
inventory that they are looking to sell. There are 5 items that every deal consists of:
1. Available to Sell Inventory Report - An ATS is a common term for the # of goods in inventory
that a brand has available to sell for purposes of a discount. Not all inventory is available
because there maybe orders with future ship dates or goods that Timberland may not want to
sell.
2. High Resolution Images of Products on ATS
3. Price Floor per Item
4. Minimum # of Total Units
Bid Model:
1. Straight-Bid:

A Brand Creates a new

the Private Sales / Group-Buying sites (the Outlets) bid based on the following criteria:
Products selected in Bid
% Above Price Floor for Bid
# of Total Units (must be at least # set as minimum on the Deal posting
The rationale behind the % is that there can be multiple prices for goods in the ATS (eg a pair
of shoes can cost $50, while a pair of boots can cost $70). The % gives a level playing field for
the various prices levels on a given ATS
Brands receive bids from interested Outlets and selects the bid that they want.

2. Multi-Channel:
Brands can choose to allow multiple Outlets to host a sale during a specified period of
time.
Price will be set by the brand and accepted by the Outlet. The higher price is offset by
the zero inventory risk held by the Outlet (eg No Minimums).
When an Outlet is hosting the sale, the outlet will make an API call to the Sourceable
deal manager for the inventories availability when its added to the shopping cart.

Service Model - Straight Bid:

Example case will be based on fashion because I run two brands in fashion and its the
industry that is most applicable to this service offering - however, any consumer products
company that have excess inventory that needs to be sold at a discount is applicable
1. A Brand creates a new Deal Opportunity on Sourceable for their excess inventory. For
example, Timberland would post of new Deal Opportunity for selling their winter boots
that are unlikely to be sold prior to the end of the season.
2. The Outlets receive a notification of the new Deal and are prompted to respond.
3. An Outlet places a Bid with the Products, Bid %, and Units they are interested in
4. The Brand that is hosting the Deal selects the Outlets bid that achieves the unit,
revenue, and distribution channel balance that is best for them (See Selection
Framework below)
5. The winning Outlet executes payment for the bid goods upon the closing of the bidding
process via ACH.
6. Sourceable.com manages the logistics for getting the freight from the Brand to the Outlets
specified distribution center.
Service Model - Multi-Channel:
The second type of Service Model is when a Brand selects the Multi-Channel Route for
handling their potential deal. This strategy is where the minimums are either too large for the
Outlet to secure on it's own.
1. A Brand posts a deal with the Multi-Channel option selected.
2. The Oulet signs up that they want to host a Deal with the strategy
3. Sourceable manages fulfillment directly to each of the Outlets successful transactions

Revenue Model
Transaction Fee: 5% of Deal amount
Shipping & Fulfillment Fee: 7.5% Charged to the Buyer

Here are some of my earlier notes:

Round 1:

Round 2

========

What inventory management software is

good for small online retailers?

Our business is growing and making inventory projections "by hand" is pretty hard... in 6
months, it'll be impossible.
What do people use? Home-grown systems? Open source software with tweaks? Software
that can plug in to a wide variety of shopping carts?
NOTE: I have completely reworked this post because Inventory Management is starting to
really become an issue for the startup community - with so many new entrants into fashion & ecommerce in general.
The new piece will be as complex as - Matthew Carroll's answer to Where can web startups
learn about financial modeling that accounts for the important metrics and costs?.
To make this easy, I have built Google Spreadsheet integrations to:
- Magento: Gets your historical data out
- Google Analytics: Gets your demand signals out
- Mailchimp: Gets your Email Data out (most likely, one of your main rev. channels)
As examples - I am going to build this off of two case study companies:
1. Photojojo.com (Amit Gupta) - It's a blind read since I don't have any relationship with them
outside of being a customer
2. Manpacks.com (Ken Johnson & Andrew Draper) - I help them occasionally - less and less
considering they are now fucking about with the big boys of San Francisco these days.
Stay tuned -> it should be going up this weekend. This is intended to really blow the socks off
==========================================================
My Background with PhotoJoJo
No offense mate, but I had not heard of you before - so I jumped in, purchased the fisheye lens
and said "WTF, let's figure out how to help this cat". Considering the # of questions that Amit is
following regarding the inventory management subject, this is obviously something important
and the perfect opportunity for Quora to ride to the rescue [Note: I have no affiliation with
Quora - just a user who like knowledge dissemination]
HEY -> who would have thought that posting a question on Quora could have turned into a
Revenue generating experience?
Cool... Now we have a baseline. Let's start rocking & rolling on the Inventory management
Equation.
Stupid Quote: Best predictor of future behavior is past behavior
[General rule of thumb for dissecting your store:
Geography* -> Volume (High/low)** -> Department (Mens, womens, home furnishing) -> SubCat (Men's - Suits vs Men's - Young Mens) -> Brand Composition (Weighting popularity &
Profitability of each brand component) -> Category Mix (Shirts,pants,sweaters) -> Style Mix ->
Size.]
From a retailers perspective, here is my suggestion for employing your GA e-commerce data
to inform better forecasting. There are 4 main toggle variables to analyze and attribute to your
sales data.

1. AverageSize = Weighted Avg. Sizing Matrix by Style (SumProduct in Excel of the unit
composition i.e. s,m,l,xl or for footwear 8, 8.5, 9.0 etc)
2. AverageStyle = Weighted Avg. Styles/category (SumProduct again here based on your
composition)
3. CategoryWeight = Weighted Avg for the categories (i.e. Shirts or Pants)
4. Overbuy = 1+X% that you are going to allocate for fill ins. Be careful here because this can
get a retailer & a brand in a LOT of trouble.
DoorsWeight = [optional] if you are a multi-door chain take a simple revenue % for each door
and then sum
The Demand Build:
1. Find your historical seasonally adjusted growth rate in units sold & dollars per category (A in
your regression analysis)
i.e. Men's Sport Shirts = +3%, Men's Pants = +4% (The seasonal adjustment is key here as
obviously you will sell more pants since FW10 just dropped).
2. Marketing Factor - This is where you can allocate a seasonal weighting factor to your
investments in promoting the brand. For example, you can say that we will throw a party at the
store to promote the brand, when we have done this in the past we will see X # increase in
sales. If you are using the interwebs are your primary medium of promotion, use your google
analytics annotation feature to note traffic & in-store demand correlations.
3. Blog Hits - Whose going to post stuff about what you are retailing this month? How much
are they retweeted.
Take the product of the 4 toggle variables above & add in Seasonal Factor and Marketing
factor and you have your demand curve.
________ How does this work for PhotoJojo _____________
GREAT! That was fucking complex -> let's make it more relevant to you.
1. Are you setting up your GA correctly to track by the category level? Product? Variation?
For example, your store super-designy (which I like), but doesn't give you the navigation data
to make actionable decisions. You have 69 Products (4 items/row * 16 rows + 1 solo)
2. Find your trend as to what is performing well for you and then you can decide what to build
moving forward.
Data you need to aggregate & source:
1. Google Ecommerce data Export
2. Shopping Cart Data Export for Products Sold
3. Sales Order Data - the SO you placed to vendors
4. Email marketing Data - Did a newsletter mention a product in the store?
5. FedEx/UPS Flatfile export of ship-to & cost. I am assuming that you are marking up
shipping by at least 15% (considering the size of the your items, I would push for 25%)
6. Cost of Fulfillment - Total outgoing shipping costs from your 3PL. If your doing it yourself,
then put a $ value of your time/hr and weight by the # of hrs that you spend on
picking/packing/fulfillment

Apps/Tools:
- GA - Obviously
- Mixpanel - Funneling - Quickbooks Manufacturing & Wholesale (if your Google Apps, you can try myERP.com, but
it's WAY more than what you need for this).
- Microsoft Excel
- Time - Honestly, the best thing that you can do for your shop is to INTIMATELY understand
the data.
Metrics that you should be considering:
1. Avg Days in Inventory - the # of days from when you purchase the goods
2. Category Performance - What categories are performing the best for you?
3. Shopping Cart Abandonment - Why are they leaving?
4. Shipping Profitability - Does the amount of $$ you charge for shipping cover fulfillment
5. Gross Margin/Shipment - Load all your costs (WHSL, Inbound freight, PPC, Email
Marketing, Fulfillment, & Shipping costs into the model)
6. Rev/Category & GM/category
7. # of Units/Category
8. Click-Through Rates & Sell-through Rates/Conversion Rates
Once you have the data build a really big excel - I'll show you how to automate the import via
VB in a little bit [I am fully prepared to get hammered for the Excel reference, I start every data
set analysis by hand in excel. It helps me visually see what's going on in the data]
So you need the historical data to build the bayesian curve - Take a look at the link below the
image for some more complex applications.

https://www.box.net/shared/j6ix4...
Additional Resources:
Andrew Chen

- http://andrewchenblog.com/list-o...
- He's a bloody legend
- He is really nice & probably the God on the subject
Jamie Quint
- Local Legend (remember those t-shirts from when we were kids)
- Probably one of the best resources in the city for constructively understanding the qualifying
factors of what your funnels & metrics are telling you.
- Highly recommended
Background - Introduction to Logistics - YES a TEXTBOOK!!!
https://www.box.net/shared/ef4p0...
I built you a QUICK [emphasis on the QUICK - I'll refine later] Financial Model for framing how
this can all impact your purchasing decisions.
https://www.box.net/shared/4myp0...
[Note: I spent like 2 hrs on this and it needs like 4 more... but I gotta get back to work...]
Other Good Quora-ish that have good stats and figures:
How does Gilt's business model work?
What are pros and cons to expanding an e-commerce business outside the US?
Updated 23 Jul, 2011. 2,959 views.
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Daisy Tran
2 upvotes by Quang Hiu Phm and Bobey Pham.
For Magento, our Inventory management may be your right choice. It helps minimize your
inventory cost and improve inventory management effectiveness with Magento Inventory
Management Extension
Find out more details here Magento Inventory Management | Best Magento Extension |
Magestore
Written 17 Feb, 2014. 352 views.
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Comment1
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Jodie Pride

2 upvotes by Matt Warren and Rep Reptile.

Veeqo Multi-Channel Order & Inventory Management Software is a great solution which is
integrated with Shpoify, Amazon, eBay and a few more ecommerce channels.
Written 11 Feb. 37 views.
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Warren Mills, Developed a cloud based inventory app... (more)

2 upvotes by Michelle Lee Lamoreaux and Harris Li.
Depends on what you are selling and what online store front you are using. CloudLink ERP
offers a low cost, cloud based inventory application that work with Infusionsoft's e-commerce
platform and Volusion. Learn more at http://cloudlinkerp.com/apps/inv...
Written 21 Feb, 2014. 337 views.
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Aakash Desai, Co-Founder @ Shopseen.com

Might be worth trying http://www.shopseen.com/ for its free service and it does a great job of
helping you grow your business by helping you sell, promote, and manage your products.
Updated 29 Jan, 2014. 321 views.
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Nikunj Agarwal, Business Consultant, ERP and WMS (e-C... (more)

3 upvotes by Praveer Moharikar, Deepak Kumar N, and Niraj Satnalika.
There are many inventory management systems available in the market. Some of them are
open source systems, some of them are upcoming products on SaaS specially for online
retailers and others are the biggies like Oracle, SAP, Microsoft, etc.
Considering that your business is at initial stage of growth, which will be quite exponential, you
would definitely required a system, not only for managing inventory but also for managing your
warehouse operations. Being an ERP consultant myself, I have seen many growing online
retailers who first implement order and inventory management system and later on they have
to move to an order fulfillment system, i.e., your back-end operation system.

Although most of the web-stores provide a basic inventory management system, it will be tough
to maintain the accuracy of the warehouse inventory with that of the web-store inventory unless
you don't integrate the two. Open Source systems such as Openbravo, OpenERP, etc. do
provide you with the functionality of Inventory management as a part of their ERP suite. Other
than than, you have various specific inventory management apps however sooner or later you
will have to go for a back-end operation systems to support the scalability of your business.
However, if your business is growing, I would suggest you to check out other established
products in the market such as eRetail, which is specifically built to address the needs of an
online retailer's business. This product is highly customizable and have 24x7 support and is
already serving many eCommerce players.
Written 29 Oct, 2012. 495 views.
====================================

What are pros and cons to expanding an ecommerce business outside the US?
Customers from 120 countries coming to StyleTrek. However, we just launched to US &
Canada
There are LOTS of cons and very little pros - not an easy thing to extend retailing
internationally. Look at what happened to American Rag & American Rag Japan - Shibuya
store kills it and had the DOPEST buyers.

For illustration purposes let's assume that you wanted to open Styletrek.co.jp to attack the high
fashion scene. Most of what we see coming to market in US today is drafting out of the
Sendagaya scene so it makes sense that if you are providing an e-commerce platform for small
designers creates a relevant target market for this model.
[Note: The framework below works for most major markets like UK, Sweden, France, Japan,
Tokyo, Australia, Seoul]
[Second Note: I did see that Gap.com recently announced international shipping - I pinged a
couple of mates in Gap.com here in San Fran. Let me figure out what the hell they are doing
and then I will update here]
1. UX Patterns Require Localization - localizations of your product model matter.
Amazon.co.jp is a completely different animal than what we know here - how users surf, the
transaction process, even your engagement metrics are completely different. Although they
are beginning to homogenize to the McClure magic 8 - if you're core service offering is the UX
and fulfillment then deep endemic knowledge of the market is a critical success factor.
The way that brands get built in Japan, Hong Kong, Seoul, and Shanghai is systemically
different than what we do here in the US. Building your site's popularity, establishing your initial
user base is different. I have worked with tons of distributors trying to establish a framework for

how this works, but the consumers are so different - when framing it as an outsider it's very
difficult to make sense of how to effectively market grassroots brands.
Blogging is still big in Japan - but if you don't know the bloggers or guys at Milk & Honey for
Japan, you're kinda pissed. Then again it's even more difficult when an e-commerce site is
trying to drive press and it's not coming from official representative or distributor.
2. Currency Risk & Cash Management - I started my career trading EUR/JPY and love the
currency markets. Let's say you are shipping to Japan and you are receiving in JPY - you can
use PayPal, but that can be 9.0% processing rate (base of like 3.5% + International Fee 2% +
currency exchange fee of another 3.5%). Now you have a cash drain on resources as you
cannot effectively manage dual currencies on a small scale.
You can do it, but it's a lot of work that creates a time resource drain on an organization's
resources. Direct sales for a brand is great, a nice cash flow boost with margins that can help
you achieve the standard financing covenants that we all are subject to - but with foreign
markets you have cash tied up and relatively illiquid.
Profit Distribution: There is a reason that US corporations are holding ABSURD amounts of
cash oversees (Cisco is holding something like $18b alone) - You get taxed again at something
like 15% on the repatriation of earnings - That's a lot of money.
You could change your entire corp structure, set up a Hong Kong/Singapore Holding Company
& issue debt so you can remit profits to the holding company with a tax deduction in US and
receive tax free in Hong Kong/Singapore. This gets complicated REAL quick with a lot liability
if you screw it up. For example, even what entity holds your IP can create enormous legal &
financial obligations for the organization.
3. Tax & Duty - Let's assume that you centralize fulfillment here. I noticed that you are
sourcing designers from around the world & I am assuming that you are buying wholesale and
not taking on a drop ship model. ( Let's just say in my younger years, I may or may not have
put online stores towards the back of the list that i drop shipped for).
Drop Ship as in the customer does fulfillment for your online orders.
Tax and duty was already calculated for you into the whls price - easy peezy.
But now you got a % that will be charged to you for the import of goods into that country (i.e.
japan for women's shoes can easily be 40% depending on where the product came from) at
WHLS or approximately 2.4x FOB.
Your customer paid US duty on 50% of what you paid, you now have an entirely different
complicated structure that will be be subject to duty rates of XXX
You have 50% margin (assuming keystone on WHLS) and Tax & Duty is added when the
goods reach Japan. Even if you put the commercial invoice for WHLS, which naturally you
should never defraud any Gov't Agency of Customs Duty (sarcasm because Karmaloop,
Revolve, they all do it). But you just added 40% to the cost of the goods that the customer
didn't know about nor has any finite idea of what it is going to be.
Risks:
- What happens when the customer doesn't accept the shipment and FedEx ships it back to
you? Then notifies their CC company that the transaction was fraud? PayPal will 90% of the
time reserve the charge even when you show them FedEx shipment, orders, etc.

- You can't actually tell your customer what this number is going to be as there is no
harmonized tariff code. Have you tried to read the harmonized tariff code or other countries,
it's bloody insane.
- You are ultimately liable for these duties. If your customer bails, UPS/FedEx charge it to your
account. The Customs for most countries will eat you alive if you screw them on Customs
Duty. I once screwed up my Duty to US Customs and my $20 payment had like a 5%/day that
cost me something like $400.
4. Shipping & Fulfillment Costs - Probably one of the guys who made my life in the early
days was Peter Williams from HighSnob. For example, just getting him a pair of kicks LA to
Canada was something like $140 for FedEx (even with the 25% discount off posted rates on bc
we were doing more than $800k/yr in business with FedEx specifically).
I say this because the economics of shipping to Japan (parcel or LTL) don't work. You won't be
able to consolidate shipments to drive any sort of economies of scale. You can takes the Asos
approach and just ship it so it arrives 4-weeks later, but then you aren't really doing anything
differently than here in US to substantively commit to an international strategy.
The general industry average for brands is 3.5% of wholesale for warehousing & fulfillment but we have volume that generate economies of scale (i.e. pre-packs) 99.9% of e-commerce
is pick-n-pack. Sites like Revolve & Tobi own their own fulfillment facilities while Karmaloop &
Gilt use 3rd Party Solutions (read - Logistics: Do private sale sites like Gilt Groupe and
RueLaLa handle fulfillment in-house or do they outsource it?).
Most 3PLs try and target about 7% of Sales Price to boost their margins because of the BS
time that they say it takes to grab 1 item or they charge you a min charge of $3.50 or $4.00.
Whether you own the facility and add up salaries, rent, utilities, etc or use a 3PL the high end is
10%.
___________________ A Possible Solution __________________
Leverage Distributors Through US Relationships
90% of startup brands in there first 4 years have a completely pissed international strategy that
essentially relies on their distributors building the brand for them internationally. Although their
are some great distributors for small brands, it doesn't make sense for these foreign partners to
invest heavily in the beginning considering the incredibly high attrition rate. They generally wait
until the brands starts to catch fire and then begin placing the buys, but (generally speaking)
very little marketing/brand development is done.
[Note: This idea is still not completely flushed out, but it is intended for illustration purposes.]
Problem:
Brands rely heavily on their international distribution agreements to build their presence in
international markets.
Building the international presence provides crucial cash during the low of the cash conversion
cycle, so it is in the brand's best interest to build a substantive presence in a foreign market as
quickly as possible.
Most small distributors are pretty JV and don't really have a "strategy" and websites for
Distributors are simple, much less present any e-commerce capability.

Most US brands will bind foreign distributors to purchase minimums for the first 3-4 seasons.
Solution:
[Note: the model is reversible to bring foreign brands to the US. However, considering the
diffusion of foreign brands in US and the fact that most EU programmers can code in English
that is less likely of an attractive revenue stream.]
Partner with your brands that have existing distribution agreements with factories in one core
market (i.e. Japan).
Purchase the domain name ".jp" for the brand that you want to represent.
link the brand.jp about page to the distributor & the shop.brand.jp to an ecommerce portal. (you
controlling the .jp means that when the brand ditches the little guy and moves to Itochu, the
brand controls who the site points to
You can take two approaches to the product/service model:
Most distributors, for smaller brands (ie. Less than 4 years old) don't have an order
management system, so you can provide this as a backend feature of your e-commerce
store.
Simply have the distributor upload a CSV with the ATS (Ordered - Pre-sold allocations).
This new site shop.brand.jp serves as the e-commerce presence for the brand in the foreign
country.
Most Distributors have killer warehouses that can upload inventories online.
Opportunity:
Generally distributors are not selling online directly to consumers
They have minimum guarantees that they have to meet and you give distributors another
avenue to do it.
Japanese consumers have the ability to purchase online via grey market (where the brand sells
to a buyer her in US who takes it back to Japan) at 5 or 6x USD WHLS
Distributors are always looking for more money and the direct sales strategy can definitely
boost revenues in the near term.
You have the relationship through StyleTrek with the brand here in the US.
Common PR source (get it here, get it there - you have a common avenue with aligned goals)
Ability to develop domain knowledge in each market (domain knowledge = monetizable)
Revenue Model:
Assume that the brand charges FOB + XX % as their distro pricing model.
For the online pricing, you charge 3.7(FOB + XX% + Freight + Landing + Duty + Drayage +
Inbound + Amortized Warehousing + Outbound Fee + Royalty Fee) = Pricing. (could be as

high as 4.4).
Price your fee at 11% of Gross (you don't want to piss about with returns & exchanges)
the commission style pricing means that you are rewarded as the brand scales.
Season 3 you being charging an international strategy fee for all other new brands. Most "VP
International Sales" get $7,5k/mo consulting + incur something like $7,5k/mo in travel - you
offer the ability to avoid that & invest in strategic markets.
3 seasons means that you have 18-months to figure out how marketing in Japan is done, the
best shops, and the best blogs.
Repatriation:
Set up the company as a Pvt Ltd out of Singapore, you could do BVI, but I like SGD as a
currency.
Issue debt to finance the Japan operation.
Singapore gives you the ability to hit all APAC (i.e Sydney, Melbourne, Hong Kong, Japan,
Seoul, etc).
Pay interest on Debt, when cash is available to finance each brand, and repatriate interest
back to Singapore Tax without being subject to taxation.
============================================

How do pay-to-bid startups like

Bigdeal.com sustain themselves over time?
Here sustaining means the following:
Generating investor interest
Increasing user base and the amount of time they spend
As this one is pretty evident that an item worth 500$ is given out at 10% of its price, but still by
the bidding process, BigDeal makes more than $5000. Are investors looking for huge profits in
a small time frame and quick exits? Are the founders looking at this in the same sense?
Also, the duration of each auction gets too trivial as the user base increases and eventually
bidder bids too much money and have more probability of losing the auction than winning it.
How will this translate to long term growth and expansion. Users will gradually get tired one
final day.
This is an incredibly interesting topic that has pushed me on a crazy pursuit racking my brain
for a solution. Since the market emerged in the US 2 years ago, we have not seen any of the
penny-auction sites emerge with a coherent strategy for driving long-term value.
Sustainability of the business model revolves more around the concept of generating a

qualifiedly value proposition to the consumer that solves a perceived problem for them. With
all due respect, generating investor interest doesn't necessarily create a sustainable business
(how many stories do you know of startups blowing seed/Series A financing) - it enables to
company with the resources (monetarily & operational experience) to refine the market strategy
to their "right fit" for driving long term value.
The Market
Let's start by establishing the market that we are talking about. Below is solid overview of the
estimation of the aggregate US Revenues for the Pay-Bid Market (includes
Swoop/BigDeal.com/QuiBids/Bidcactus)

There are three demographics that these sites can attack:

1. The time rich, Cash poor = High-School/University Male
2. Time poor, Cash Rich = Professionals
3. Thrill-seekers / Winning Addicts
The Time Rich/Cash Poor segment doesn't create long-term value because the company is
defining it's business in Tom Friedman's "Race to the Bottom". By focusing purely on the
perceived "Deal", you are driving the implicit message that price is all that matters. Therefore,
your strategic target market posses allegiance to deal itself and not the provider, as there are
relatively low switching (transportation costs) associated with moving to other providers in this
highly competitive market (I.e. Groupon/living social)
The Time Poor/Cash Rich segment appears to be the right fit on the surface as they have the
means and the "escapist" need that this "entertainment" site can provide, but not the time to
engage in the war of attrition. In addition, you are now confronted with the opportunity cost of
this population investing their time for the fleeting opportunity of the win. After losing an
auction or two, you are faced with the comparison of "Screw it, I'll just buy it" and you have
alienated any long-term value in addition to the cohort gains.
The thrill-seekers are in it for the win. But the real revenue drivers (i.e. the iPads, LCD TVs) all
have an inherent limit. How many iPad's can you win and then go through the process of
selling it on eBay?
The answer is that the long-term value for using these services is not readily available to define
it in the long-run.
Product Mix
For the past 2 years, the most profitable auctions are the iPads and TVs that drive the revenue
growth for the month. However, how does a company evolve this current unsustainable, 1-trick

pony business model?

My favorite company in the space is BigDeal.com that secured $4.5m from Mayfield in July '09.
As an example of this, see the attached chart to show how BigDeal snapped up market share
from the once leader in the space:

.
I manually parsed nearly every auction from BigDeal.com in 2010 and what jumped out at me
was their auction composition in July '10 was the 200+ auctions for luxury jewelry (diamond
bracelets, gold earrings, etc).
Take a look at the attached BigDeal Analysis - They may not be there yet, but they are sure as
hell working damn hard on getting there.

To see Revenue Analysis & Market Share Charts, see Why have the month and daily active
users of Swoopo.com fallen by about 70% over the last year?.
This focus on the product mix demonstrates the that they are intelligently working to find their
right mix that drives long term growth and value to the consumer. They lost a PISS ton of
money on this product decision, but they also probably earned some loyal female consumers in
the process.
The product mix must solve the following framework on a reliable basis:
I can go to Penny-Site.com that historically has X to have the opportunity to source X at a huge
discount. This discount must represent the investment of my time, cognitive abilities, risk of not
winning, and cash to attain X. AND Penny-Site.com must have secured the brand position in
the consumer's mind to be the provider of X.
Cohort-Leverage
There is an incredible market opportunity for leveraging the social-graphs of the users. The
ability for Matt to bid against his friend, Tom, for an Apple iPhone creates a fun
competition/entertainment. Lets say that Matt won the auction for an Apple iPhone. This
means that everytime Matt calls Tom from the phone or they are hanging out, Matt has a
physical trophy that he beat Tom and is implicitly better than him. The competition will compel
Tom to hit another auction and spend more money to compete against Matt to win.
When you evaluate all of these auctions, the majority of the "winning" strategies revolve around
aggression. The big winners on these sites foster reputations for being crazy to outbid
everyone in effort to build a reputation where other bidders are intimidated about being here.
The right long term value should be driven from friends engaging in social buying competition.
Not generic social buying of Groupon/Gilt, but real social value. By virtue of focusing on the
cohort-value, you have taken the focus off of the "deal" and structured it into the product
offering.
I am playing against my friend, Tom, I am less likely to be focused on quantifiable interaction
and involved in the fun/entertainment/game. It's a perfect example how a tangible strategy for
delivering value & driving value that creates a core competency in the interaction.

This informs a secondary reason that I think BigDeal.com is the strongest competitor in the
space - they have the foundation for cultivating a social interaction that would compel people to
entertain themselves why they shop. Here are some of the factors that constitute how BigDeal
is positioning themselves to evolve into this:
1. The UX "feels" nicer
2. Open history - they aren't trying to hide anything. The concept makes me implicitly trust
them
3. They aren't brand BBB all over the place like BidCactus. If you have to post BBB at the top
of the page, your doing something wrong.

4. They give you co-op dollars to use the $ value of the bids you place as a discount to
purchase that good:
Implicitly they are telling the customer, Good Game and we are going to give you
something back. Law of reciprocity rules here - you "think" wow! that's cool & I got this
product with the help of BigDeal.com.

This is how you transition away from the deal being the center of the product offering lowest cost <> any tangible source of an exit strategy
5. You can see the social game evolving that means exit strategy. Of all the market
participants they are they only ones that will have a tangible exit strategy. For example, let's
assume that the fulfillment is handled by Amazon (as is the case for a lot of these services).
BigDeal builds the entertainment, the brand, and the growth strategy. This future loyal user
base intuitively creates synergies for Bezos at Amazon.
[Note: I really hate it when people focus on the exit strategy. If you build a good company that
executes your dream, delivers value, solves a problem for your customer, then you have a
value proposition for acquisition. The exit is only relevant if you solve the product/service that
executes the dream, delivers the value, and solves the problem. The exit is only relevant then
- KICK ASS and build a bloody business.]
MOST IMPORTANTLY: Business Model is bloody EPIC!
The potential to purchase a good below the prevailing market rate represents a clear value
proposition for the bidders. In the classical/eBay model, the revenue model for the
marketplace provider benefited by virtue of millions of participants in the marketplace (more
people = more bidders = greater variety of subjective value = more revenue). However, the
participants did not have to compensate the marketplace for this value proposition. In a similar

manner to Costco, where Costco members pay a fee for access to the bulk-buying discounts at
Costco stores, the Pay-Bid market enacts a transaction fee for bidders to have access to these
deals and charges them for placing the bidding.
This is similar to Rupert Murdoch purchasing assets whose content creates the driving value
proposition that consumers will pay for access. The consumer is presented with the
opportunity to secure a physical good for a desirable price. Therefore, the consumer should
compensate the marketplace that provides this opportunity. I really love the fact that these
sites are doing this - there ain't no such thing as a free lunch.
The Revenue Model:
Bid Packs:
Bidders in the marketplace pay the bid-fee upfront to the Company A. Meaning that a bidder
must first purchase packs (generally in quantities of 30, 50, 100, 200, 300, 500). This creates a
negative working capital situation for the marketplace by virtue of Company realizing the
revenue of 30 bids when the bid-pack is purchased prior to the bidder exercising the value of
the purchase - Getting the $$ upfront
Final Cost:
Each time a bid is employed to increment and extend the auction, when the auction expires the
winner pays for the good. Meaning if the auction price for that iPad increased to $20.00, the
final winner will pay Company A $20.00.
Shipping Costs:
about 75% of the auctions that occur are for physical goods that require transportation to the
customer. This cost is illustrated prior to the start of the auction for a fixed amount. For a PayBid company in San Francisco, CA it costs a lot less to ship the iPad to Los Angeles (probably
$5.00) than to a customer in New York (probably $16.00). However, Company A earns the
revenue for the shipping costs regardless of the geographic location of the winner.
If we assume that most auctions sell for $10, then shipping margin (in the aggregate for the
month) could yield margins of 50% on shipping alone. Fixed shipping rates = Smart.
Negative Working Capital
This is probably my second favorite aspect to the business model beyond charging consumers
- negative Working Capital. Getting Customer's to finance your business, is the theme for
startups this year (Groupon/Gilt/Swoopo/BigDeal.com) - Let's dig into what this means
Purchase Bids: The first part of the revenue model is that the consumer needs to buy "bid
packs" in order to even play. For sake fo example purposes, let's say that the average user
holds onto the bids for 7 days. The auction site gets the bloody money UP FRONT without
credit risk (alright, without working for the industry let's say that fraud is 3% of the transactions
+ the 2.4% average CC fee = 5%)
Auction is completed: The auction provider get's paid again! (Final Cost + Shipping). This is a
secondary revenue CASH infusion to the company.
Amazon.com Purchase: Many customers have said that they receive their purchase as a
direct shipment from Amazon.com. Let's say that when the auction completes, BigDeal.com

logs into their amazon account and purchases an Apple iPad. Since the only substantive
medium accepted is accepted is credit cards let's assume that BigDeal.com puts each
purchase on the founder's AMEX card
- I have bridged many UGLY months for the companies that I have run on my credit cards - it's
a means to execute the dream.
Using the above example, I just secured an additional 20+ days of cash without having to take
employ any cash. This is a HUGE boom for cash management something that I suspect that
BigDeal.com is making a more concerted effort to drive for considering they hired a new CFO
recently.
The Result: We secured an initial lump sum cash payment at the purchase of the bidpack,
received an additional cash injection on the completion of the auction, fulfilled the order, and
don't have to pay for it for 30 days. Since the cost of cash = cost of equity (assume the
discount rate for the $4.5m injection was 55%, therefore this 27-day Days-to-Pay cycle
represents a 55% return on holding this cash - sounds like a strong NPV policy to me.
Other Benefits: No inventory/storage costs (held at Amazon), not supplier risk (Amazon has
like 20-fulfillment centers and Bezos is a genius), and variable shipping rates. NO RETURN
RISK either - return risk for amazon.com credit is held by Amazon.
========================================================
UPDATE: Here is something that I put together Oct '10
It's a little out of date, but should give a decent idea of what's going on with this market. I am
sorry for not putting this up on Quora sooner.
========================================================

Critical Success Factors

There are many factors that relate to the competitors in this space realizing the variables
factored into the above projections. One of the most notable factors will be if the US
government decides to regulate this industry as gambling. However, considering the self
policing track record of the competitors in this space, this is less of a concern in terms of the
long term execution strategy.
Competitive Advantage - All of the competitors in this industry sell basically the same items
and there is little to lock in customers. If a user can win more for less bids, then obviously, they
are going to switch. Historically for one market participant, 22% of the bidders comprised
nearly 77% of ALL the bids placed. Since they are bidding for physicial goods - how many
Apple iPads do you need?
Product Mix - The monthly comparative metrics for performance show huge deviation in the
trends for Revenue per Auction, Profit per Auction, Bids per Auction, and Unique Bidders per
Auction. Market particiapnts are searching for their right compositions of available items, but
they need to figure out how to evolve beyond the Apple iPad.
Cohort-Leverage - There is an incredible market opportunity for leveraging the social-graphs
of the users. The ability for Matt to bid against his friend, Tom, for an Apple iPhone creates a
fun competition. Lets say that Matt won the auction for an Apple iPhone. This means that
everytime Matt calls Tom from the phone or they are hanging out, Matt has a physical trophy
that he beat Tom and is implicitly better than him. The competition will compel Tom to hit
another auction and spend more moneyIntroduction & Overview
As the internet becomes a more pervasive aspect of lives for consumer, inherently the amount

of money consumers allocate to online purchases will increase. In 2009, online retail sales
were up 11 percent, compared to 2.5 percent for all retail sales according to Forrester
Research. The increase in e-commerce spending reflects three main trends:
1. More people spending more time online = Increased experience & trust with the
electronic commerce medium: The assimilation of the internet by US consumers as
an established tool for accessing information and entertainment will continue to fuel the
trust factor for purchasing online. As consumers spend more time online and increase
their experience with it as a commerce medium, they will inherently purchase more
goods and services online.
2. The Great Recession forced consumers to get smarter: The internet provides a flat
communication vehicle for delivering information to consumers about the best available
price. The Great Recession did not systemically change the consumer-discretionary
addiction that can characterize the consumption patterns for the past 30 years. The
Great Recession forced the consumer to cut-back purchases and get smarter about
how they employ their available dollars. Getting smarter means that the consumer
needs to get more information and the distributed nature of the internet means it is
THE means to gain perfect information on the best available price
3. Economic Recovery = Cash & Increased Consumer Credit: As the economy regains
jobs and returns to growth, lending institutions will, albeit at a snails pace, relax the vicegrip on consumer credit that has been in place for the last 2 years. This means that
consumers will increasingly have the means to execute online transactions via the
established medium of credit/debit cards.
Forrester Research recently released their 5-year forecast for US Online Retail Spending that
illustrates a 9.9% CAGR. Figure 1 illustrates Forresters estimate for online retail spending for
2011 through 2014:

What is the Pay-Bid Auction Market Business Model

Over the past 10 years, the online auction market has been dominated by essentially one
player, Ebay, employing a classic auction model. This classic model is where a good is placed
up for auction in a marketplace and bidders have the ability to place bids that progressively
increment the value of the good up to the level that represents the each bidders maximum
economic value for the good. The bidder in the marketplace that has the highest maximum

economic value for the good wins the auction. For facilitating this exchange, the marketplace,
Ebay, takes a percentage of the final price. This model is great and has worked well for Ebay.
However, there are two trends that serve as the foundation for the genesis of the Pay-Bid
Market:
1. All of the Action Takes Place Right at the End: If you have ever participated in an
online auction, you have most likely experienced a flurry of activity on the auction in
which you were participating during the last several minutes prior to the auction expiring.
This is an exciting period that can compel the bidder to react emotionally and increase
their maximum economic value for the good in order to secure it. The Pay-Bid Market
replicates this excitement at its very core.
2. A Large Market of Un-sourced Revenue: The potential to purchase a good below the
prevailing market rate represents a clear value proposition for the bidders. In the
classical model, the revenue model for the marketplace provider benefited by virtue of
millions of participants in the marketplace (more people = more bidders = greater variety
of subjective value = more revenue). However, the participants did not have to
compensate the marketplace for this value proposition. In a similar manner to Costco,
where Costco members pay a fee for access to the bulk-buying discounts at Costco
stores, the Pay-Bid market enacts a transaction fee for bidders to have access to these
deals and charges them for placing the bidding.
The Pay-Bid Auction Market is a business model generates its revenue from the bidders
compensating the company for the value proposition of purchasing a good at a huge discount.
Here is an example of the business model:
Company A is a Pay-Bid Auction marketplace that places an Apple iPad up for auction for
$0.00 with a bid increment of $0.01 and a time limit of 1hr
Participants in the marketplace (the bidders), purchase Bid Tokens from Company A for a set
fee per token (most of the time this is about $0.75).
Bidder A uses one of the previously purchased bid tokens to increase the auctions price by
$0.01.
Every time a bid is placed, the auctions time limit extends by a fixed number of seconds to
provide other bidders with the ability to respond and react to new pricing information in the
marketplace.
Should the time limit expire, Bidder A secures the auction for the accrued value of bids meaning if 1 bid was placed the value of the auction has incremented 1 time and costs the
bidder $0.01.
In many of the auctions this process of bidding occurs thousands of times generating HUGE
revenues for Company A in the process.The Revenue Model
The Pay-Bid market generates revenue from 3 sources:
1. Bid Packs: Bidders in the marketplace pay the bid-fee upfront to the Company A. Meaning
that a bidder must first purchase packs (generally in quantities of 30, 50, 100, 200, 300, 500).
This creates a negative working capital situation for the marketplace by virtue of Company
realizing the revenue of 30 bids when the bid-pack is purchased prior to the bidder exercising
the value of the purchase - Getting the $$ upfront
2. Final Cost: Each time a bid is employed to increment and extend the auction, when the
auction expires the winner pays for the good. Meaning if the auction price for that iPad
increased to $20.00, the final winner will pay Company A $20.00.

3. Shipping Costs: about 75% of the auctions that occur are for physical goods that require
transportation to the customer. This cost is illustrated prior to the start of the auction for a fixed
amount. For a Pay-Bid company in San Francisco, CA it costs a lot less to ship the iPad to Los
Angeles (probably $5.00) than to a customer in New York (probably $16.00). However,
Company A earns the revenue for the shipping costs regardless of the geographic location of
the winner.
Industry-Segment Analysis - Pay-bid Market
The pay-bid market is highly undeveloped as the majority of the firms have been operating in
the United States for less than a year. There has been an explosion of new players in the
market, all of whom are desperately searching for their niche and securing their customer base.
As this is a fledgling industry with almost ZERO information regarding the dollar value of this
industry, as such, we are limited in clearly illustrating the magnitude of this market segment.
However, the traffic of visitors serves as a means to illustrate the growth of the industry. By
sourcing the visitors compiled by Compete, an industry-leading third party website traffic
aggregator, there is a constant information resource to generate an idea of the traffic flowing to
websites that comprise this industry.
Figure 2 illustrates the monthly visitors for the Pay-Bid Auction Market.

For purposes of compiling the aggregate industry, the marketplace is compiled of the following
participants monthly visitors provided by Compete:

Assumption: The total traffic of the 16 companies that we collected traffic information on was
projected to comprise 85% of the marketplace. There has been an explosion of new
competitors in the marketplace with a very high churn rate. In effort to hold the marketplace
variable constant over time, the composition of all of these players was assummed to be 85%
of the total traffic to Pay-Bid Auction sites.
Historical Analysis & Metrics
In effort to gain deep market understanding about the driving factors for growth moving
forward, we first must acutely understand the historical evolution of this budding industry.
There are three academic pieces of work that provided the majority of the information for the
historical build. The key facts of the analysis are summarized below:

Every month was reviewed by hand to discover the qualitative factors that is often left out of the
analysis. Each company was broken out by Company and Month whereby the statistics for
each auction were summed into groups based on the unique item. In order to estimate
revenue, the following statistics were calculated for the total of each unique item.
In the historical analysis section, the data collection methodology was discussed to provide
context for gathering 43 monthly data points of company-specific auction & bid information.
Initially, the methodology for calculating the market value was as follows:
1. Estimate the # of Bids per month
# of Auctions - Each unique item (i.e. 32 auctions for a 13 Macbook Pro laptop held by
Swoopo from January 1, 2010 - January 31, 2010) was totaled into a unique row.
Average # of Bids per Auction - the weighted average of each auction for the given period for
the unique item category.
Bid Increment - This was the critical piece as as the value by which each auction increments
when a bid is placed drastically can change the # of bids that are projected into the aggregate.
For example, if an iPad sells for $34.00 and the average increment was $0.01, then the
following would occur:
$34.00 / $0.01 = 3400 X $0.75 yields bid revenue of $2,550.00
However, if this was estimated to be a $0.05, we have completely underestimated the
projection. This informs the reason that each auction was reviewed manually for a Does this
make sense analysis. One of the best tools for forecasting is a simple analysis of is this
logical, which involves spending the time to play around with the numbers. In addition, this
process has powerful implications for employing the Delphi adjustments.
2. Revenue Build

Bid Revenue - The number of bids for each month multiplied by the cost for each bid
(weighted out where discounts were applied).
Product Revenue - The total of the bids multiplied by the # the bid increment value. For
example, if there were 1,000 bids in a given month and each bid incremented the auction by
$0.05, then the Product Revenue would be $50.00 = 1,000 bids multiplied by $0.05.
Shipping Revenue - Whenever a pay-bid auction contains a physicial item, such as an Apple
iPad, the item must be shipped to the customer. These companies charge the auction-winner
for this shipping. The shipping costs were fairly consistent across product categories were
computed as a weighted average of the type of the auctions as they compromise the aggregate
for each month.
3. Market Composition - All sites were compared to the Visitor level traffic statistics as
aggregated by Compete Inc. This information formed the baseline to serve as a formative
means of comparing unlike auction providers.
Visitors - The Unique Visitors metric only counts a person once no matter how many times
they visit a site in a given month. Unique Visitors are typically used to determine how popular a
site is. The weakness of this methodology is that many of these people may leave the site
immediately. However, this is the only data that was available to serve as a representative
comparative measure.
Market Share - The total number of visitors as logged by Compete divided by the total of the
sample extrapolated into the whole.
4. Revenue per Visitor & Extrapolation - computing the market value by unitizng the value of
each visitor and then computing that into the whole.
Swoopo (Mar 09 - May 09)
Swoopo was one of the first companies to employ the pay-bid auction model in the United
States. As such, they were the market leader until major competition began emerging in the
marketplace in late-09. Swoopo began operating in the United States in October 08 and the
initial period for analysis was Mar 09 through May 09. This period was chosen as it
represents the time period where the service began gaining traction and offered the company 4
months to tweak the service offering - meaning that it was the strongest opportunity to analyze
the foundations of the markets behavior.
Figure 3 illustrates the number of visitors and market share for Swoopo.com

Swoopo (Mar 10 - May 10)

The Mar 09 to Mar 10 timeline for Swoopo is incredible. Swoopo went from championing a
new industry in the United States to losing nearly 75% of their monthly traffic volume. Basically
the world looks very different for Swoopo.

BigDeal.com

Comparables Analysis & Metrics

The Pay-Bid market is a new industry that is very immature and the limited timeline of available
data points did not offer a substantive base for forecasting this into the future. Flash Sales
immediately jumped out as a perfect comparable industry due to the young, highly
monetizable, and recent popularity of the companies in the industry. Flash sales is a
phenomemum of social commerce (group buying) that has charged into the world stage
through the market leaders such as Groupon & Gilt Groupe.
Most notably, the first and most prominent aspect that jumped out, when comparing Pay-Bid to
Flash Sales, was that the visitor & revenue model just looked right. Simply put, when you
looked at the traffic patterns for the Flash Sales companies such as Groupon & Gilt Groupe,
the industry visually looked as though they were related. The important factor that Flash Sales
appeared to be about 12-months ahead of Pay-Bid - Perfect.
This is a logical qualitative analysis as their business appeals to a much wider demographic
and requires absolutely no learning curve. In addition, there were several qualitative factors
that quickly pushed Flash Sales as the most directly related industry for the following reasons:
Transformative business models: The Flash Sales market and the Pay-Bid auction market
are heralded for monetizing new revenue sources in new manners.

The Time Crunch Deal: Time is of the essence that compels people to make emotional
purchasing decisions and leads to more $/customer. The countdown of the deal.
Inherently Social for Commerce Purposes: The nature of the marketplace revolves around
bragging and in turn marketing the service. For example, if I picked up a killer deal on Gilt.com
a member of the Flash Sales market, I could easily post the item and the discount that I
received on my social network. Thereby marketing the service to my social network and
communicating my influence to the social network. In the same manner the incredible deals
compel people to post to their networks that they purchased an Apple iPad from the following
site for a 99% discount.
Highly Correlated Growth Curves: The qualitative factors are manifested in how the growth
rates correlate or the data points between two sources is related to the trends that are
occurring in either source.

Huge influx of New Competition: Low transaction Costs mean that people can switch freely &
they do. The deal is all that matters and the customer knows that - once you have a lot of big
fish winning the auctions, they go play in a smaller/newer pond.

Market-Value Forecast

The historical information was gathered and there was a dataset to serve as a base for
forecasting where the industry was going. The foundation of the forecast revolves around the
growth of the # of visitors that market receives. The forecasted value is a combination of the
visitor traffic patterns that were studied and correlated to the patterns for Flash-Sales.
Figure 3 - Growth Rate for the Pay-Bid Auction Market

To frame this properly, we need to make some market comparisons for why we believe this is
going to grow in the same manner.

Appendix
Swoopo Vs. BigDeal.com Traffic Analysis

Swoopo Demographics

BigDeal.com Demographics

Updated 22 Oct, 2011. 3,042 views.

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Roj Niyogi, Integrating Groupon APIs

1 upvote by Kevin Li.
I've run one of these for a short time.
The problem with penny auction sites is that you have one winner sent a super strong positive
re-enforcement signal (a "wow! i won!" experience) and 99 losers saying "oh this site sucks and
stole my money!". This overwhelming negative re-enforcement signal means a model that is
not sustainable long-term. (Stating the obvious here I know.)
A penny auction that has a chance of surviving is one that makes spending money on the
entertainment aspect a less risky proposition. The idea that your funds can be used to buy
products at normal prices is actually pretty interesting and means that you have game play on
the auctions and can derive revenue from affiliate marketing (use your losses to buy
something!). The penny auction then becomes a smoke screen that allows all the losers to feel
like they've walked out with something in their pockets - not the greatest deal but not what
could have been sheer thievery.
That, I think, is what BigDeal is doing (the last time I checked): Figuring out how to change the
experience for losers so that they don't feel jipped when trying to get the iPad for $3.00.
Written 21 Oct, 2010. 273 views.
=====================

Why have the month and daily active users

of Swoopo.com fallen by about 70% over
the last year?
http://siteanalytics.compete.com...
This is a follow-up question to Is Swoopo a sustainable/defensible business?.
Competition Mate. In Dec '09 we saw a HUGE influx of competitors jumping into the market.
Take one competitor BigDeal.com - my favorite in the space.

I did a deep qualitative dive on BigDeal.com that you can find here: How do pay-to-bid startups
like Bigdeal.com sustain themselves over time?
The market saw an incredibly profitably opportunity and competition drove margins downs.
Furthermore, more competition means more companies looking to find a source of competitive
advantage (not sure if anyone has found it), but see for a 1 year timeline comparison:

Even during 2009, Swoopo was finding it hard to compete:

Compare this against 2010 - Traffic is down, Market Share is down.

========================================================
UPDATE: Here is something that I put together last year and completely forgot to post to
Quora. Sorry about that!
========================================================
The Core what you are looking for can be found:
Matthew Carroll's answer to How do startups like Bigdeal.com get into sustaining themselves
over time?

Critical Success Factors

There are many factors that relate to the competitors in this space realizing the variables
factored into the above projections. One of the most notable factors will be if the US
government decides to regulate this industry as gambling. However, considering the self
policing track record of the competitors in this space, this is less of a concern in terms of the
long term execution strategy.
Competitive Advantage - All of the competitors in this industry sell basically the same items
and there is little to lock in customers. If a user can win more for less bids, then obviously, they
are going to switch. Historically for one market participant, 22% of the bidders comprised
nearly 77% of ALL the bids placed. Since they are bidding for physicial goods - how many
Apple iPads do you need?
Product Mix - The monthly comparative metrics for performance show huge deviation in the
trends for Revenue per Auction, Profit per Auction, Bids per Auction, and Unique Bidders per
Auction. Market particiapnts are searching for their right compositions of available items, but
they need to figure out how to evolve beyond the Apple iPad.
Cohort-Leverage - There is an incredible market opportunity for leveraging the social-graphs
of the users. The ability for Matt to bid against his friend, Tom, for an Apple iPhone creates a
fun competition. Lets say that Matt won the auction for an Apple iPhone. This means that
everytime Matt calls Tom from the phone or they are hanging out, Matt has a physical trophy
that he beat Tom and is implicitly better than him. The competition will compel Tom to hit
another auction and spend more moneyIntroduction & Overview
As the internet becomes a more pervasive aspect of lives for consumer, inherently the amount

of money consumers allocate to online purchases will increase. In 2009, online retail sales
were up 11 percent, compared to 2.5 percent for all retail sales according to Forrester
Research. The increase in e-commerce spending reflects three main trends:
1. More people spending more time online = Increased experience & trust with the
electronic commerce medium: The assimilation of the internet by US consumers as
an established tool for accessing information and entertainment will continue to fuel the
trust factor for purchasing online. As consumers spend more time online and increase
their experience with it as a commerce medium, they will inherently purchase more
goods and services online.
2. The Great Recession forced consumers to get smarter: The internet provides a flat
communication vehicle for delivering information to consumers about the best available
price. The Great Recession did not systemically change the consumer-discretionary
addiction that can characterize the consumption patterns for the past 30 years. The
Great Recession forced the consumer to cut-back purchases and get smarter about
how they employ their available dollars. Getting smarter means that the consumer
needs to get more information and the distributed nature of the internet means it is
THE means to gain perfect information on the best available price
3. Economic Recovery = Cash & Increased Consumer Credit: As the economy regains
jobs and returns to growth, lending institutions will, albeit at a snails pace, relax the vicegrip on consumer credit that has been in place for the last 2 years. This means that
consumers will increasingly have the means to execute online transactions via the
established medium of credit/debit cards.
Forrester Research recently released their 5-year forecast for US Online Retail Spending that
illustrates a 9.9% CAGR. Figure 1 illustrates Forresters estimate for online retail spending for
2011 through 2014:

What is the Pay-Bid Auction Market Business Model

Over the past 10 years, the online auction market has been dominated by essentially one
player, Ebay, employing a classic auction model. This classic model is where a good is placed
up for auction in a marketplace and bidders have the ability to place bids that progressively
increment the value of the good up to the level that represents the each bidders maximum
economic value for the good. The bidder in the marketplace that has the highest maximum

economic value for the good wins the auction. For facilitating this exchange, the marketplace,
Ebay, takes a percentage of the final price. This model is great and has worked well for Ebay.
However, there are two trends that serve as the foundation for the genesis of the Pay-Bid
Market:
1. All of the Action Takes Place Right at the End: If you have ever participated in an
online auction, you have most likely experienced a flurry of activity on the auction in
which you were participating during the last several minutes prior to the auction expiring.
This is an exciting period that can compel the bidder to react emotionally and increase
their maximum economic value for the good in order to secure it. The Pay-Bid Market
replicates this excitement at its very core.
2. A Large Market of Un-sourced Revenue: The potential to purchase a good below the
prevailing market rate represents a clear value proposition for the bidders. In the
classical model, the revenue model for the marketplace provider benefited by virtue of
millions of participants in the marketplace (more people = more bidders = greater variety
of subjective value = more revenue). However, the participants did not have to
compensate the marketplace for this value proposition. In a similar manner to Costco,
where Costco members pay a fee for access to the bulk-buying discounts at Costco
stores, the Pay-Bid market enacts a transaction fee for bidders to have access to these
deals and charges them for placing the bidding.
The Pay-Bid Auction Market is a business model generates its revenue from the bidders
compensating the company for the value proposition of purchasing a good at a huge discount.
Here is an example of the business model:
Company A is a Pay-Bid Auction marketplace that places an Apple iPad up for auction for
$0.00 with a bid increment of $0.01 and a time limit of 1hr
Participants in the marketplace (the bidders), purchase Bid Tokens from Company A for a set
fee per token (most of the time this is about $0.75).
Bidder A uses one of the previously purchased bid tokens to increase the auctions price by
$0.01.
Every time a bid is placed, the auctions time limit extends by a fixed number of seconds to
provide other bidders with the ability to respond and react to new pricing information in the
marketplace.
Should the time limit expire, Bidder A secures the auction for the accrued value of bids meaning if 1 bid was placed the value of the auction has incremented 1 time and costs the
bidder $0.01.
In many of the auctions this process of bidding occurs thousands of times generating HUGE
revenues for Company A in the process.The Revenue Model
The Pay-Bid market generates revenue from 3 sources:
1. Bid Packs: Bidders in the marketplace pay the bid-fee upfront to the Company A. Meaning
that a bidder must first purchase packs (generally in quantities of 30, 50, 100, 200, 300, 500).
This creates a negative working capital situation for the marketplace by virtue of Company
realizing the revenue of 30 bids when the bid-pack is purchased prior to the bidder exercising
the value of the purchase - Getting the $$ upfront
2. Final Cost: Each time a bid is employed to increment and extend the auction, when the
auction expires the winner pays for the good. Meaning if the auction price for that iPad
increased to $20.00, the final winner will pay Company A $20.00.

3. Shipping Costs: about 75% of the auctions that occur are for physical goods that require
transportation to the customer. This cost is illustrated prior to the start of the auction for a fixed
amount. For a Pay-Bid company in San Francisco, CA it costs a lot less to ship the iPad to Los
Angeles (probably $5.00) than to a customer in New York (probably $16.00). However,
Company A earns the revenue for the shipping costs regardless of the geographic location of
the winner.
Industry-Segment Analysis - Pay-bid Market
The pay-bid market is highly undeveloped as the majority of the firms have been operating in
the United States for less than a year. There has been an explosion of new players in the
market, all of whom are desperately searching for their niche and securing their customer base.
As this is a fledgling industry with almost ZERO information regarding the dollar value of this
industry, as such, we are limited in clearly illustrating the magnitude of this market segment.
However, the traffic of visitors serves as a means to illustrate the growth of the industry. By
sourcing the visitors compiled by Compete, an industry-leading third party website traffic
aggregator, there is a constant information resource to generate an idea of the traffic flowing to
websites that comprise this industry.
Figure 2 illustrates the monthly visitors for the Pay-Bid Auction Market.

For purposes of compiling the aggregate industry, the marketplace is compiled of the following
participants monthly visitors provided by Compete:

Assumption: The total traffic of the 16 companies that we collected traffic information on was
projected to comprise 85% of the marketplace. There has been an explosion of new
competitors in the marketplace with a very high churn rate. In effort to hold the marketplace
variable constant over time, the composition of all of these players was assummed to be 85%
of the total traffic to Pay-Bid Auction sites.
Historical Analysis & Metrics
In effort to gain deep market understanding about the driving factors for growth moving
forward, we first must acutely understand the historical evolution of this budding industry.
There are three academic pieces of work that provided the majority of the information for the
historical build. The key facts of the analysis are summarized below:

Every month was reviewed by hand to discover the qualitative factors that is often left out of the
analysis. Each company was broken out by Company and Month whereby the statistics for
each auction were summed into groups based on the unique item. In order to estimate
revenue, the following statistics were calculated for the total of each unique item.
In the historical analysis section, the data collection methodology was discussed to provide
context for gathering 43 monthly data points of company-specific auction & bid information.
Initially, the methodology for calculating the market value was as follows:
1. Estimate the # of Bids per month
# of Auctions - Each unique item (i.e. 32 auctions for a 13 Macbook Pro laptop held by
Swoopo from January 1, 2010 - January 31, 2010) was totaled into a unique row.
Average # of Bids per Auction - the weighted average of each auction for the given period for
the unique item category.
Bid Increment - This was the critical piece as as the value by which each auction increments
when a bid is placed drastically can change the # of bids that are projected into the aggregate.
For example, if an iPad sells for $34.00 and the average increment was $0.01, then the
following would occur:
$34.00 / $0.01 = 3400 X $0.75 yields bid revenue of $2,550.00
However, if this was estimated to be a $0.05, we have completely underestimated the
projection. This informs the reason that each auction was reviewed manually for a Does this
make sense analysis. One of the best tools for forecasting is a simple analysis of is this
logical, which involves spending the time to play around with the numbers. In addition, this
process has powerful implications for employing the Delphi adjustments.
2. Revenue Build

Bid Revenue - The number of bids for each month multiplied by the cost for each bid
(weighted out where discounts were applied).
Product Revenue - The total of the bids multiplied by the # the bid increment value. For
example, if there were 1,000 bids in a given month and each bid incremented the auction by
$0.05, then the Product Revenue would be $50.00 = 1,000 bids multiplied by $0.05.
Shipping Revenue - Whenever a pay-bid auction contains a physicial item, such as an Apple
iPad, the item must be shipped to the customer. These companies charge the auction-winner
for this shipping. The shipping costs were fairly consistent across product categories were
computed as a weighted average of the type of the auctions as they compromise the aggregate
for each month.
3. Market Composition - All sites were compared to the Visitor level traffic statistics as
aggregated by Compete Inc. This information formed the baseline to serve as a formative
means of comparing unlike auction providers.
Visitors - The Unique Visitors metric only counts a person once no matter how many times
they visit a site in a given month. Unique Visitors are typically used to determine how popular a
site is. The weakness of this methodology is that many of these people may leave the site
immediately. However, this is the only data that was available to serve as a representative
comparative measure.
Market Share - The total number of visitors as logged by Compete divided by the total of the
sample extrapolated into the whole.
4. Revenue per Visitor & Extrapolation - computing the market value by unitizng the value of
each visitor and then computing that into the whole.
Swoopo (Mar 09 - May 09)
Swoopo was one of the first companies to employ the pay-bid auction model in the United
States. As such, they were the market leader until major competition began emerging in the
marketplace in late-09. Swoopo began operating in the United States in October 08 and the
initial period for analysis was Mar 09 through May 09. This period was chosen as it
represents the time period where the service began gaining traction and offered the company 4
months to tweak the service offering - meaning that it was the strongest opportunity to analyze
the foundations of the markets behavior.
Figure 3 illustrates the number of visitors and market share for Swoopo.com

Swoopo (Mar 10 - May 10)

The Mar 09 to Mar 10 timeline for Swoopo is incredible. Swoopo went from championing a
new industry in the United States to losing nearly 75% of their monthly traffic volume. Basically
the world looks very different for Swoopo.

BigDeal.com

Comparables Analysis & Metrics

The Pay-Bid market is a new industry that is very immature and the limited timeline of available
data points did not offer a substantive base for forecasting this into the future. Flash Sales
immediately jumped out as a perfect comparable industry due to the young, highly
monetizable, and recent popularity of the companies in the industry. Flash sales is a
phenomemum of social commerce (group buying) that has charged into the world stage
through the market leaders such as Groupon & Gilt Groupe.
Most notably, the first and most prominent aspect that jumped out, when comparing Pay-Bid to
Flash Sales, was that the visitor & revenue model just looked right. Simply put, when you
looked at the traffic patterns for the Flash Sales companies such as Groupon & Gilt Groupe,
the industry visually looked as though they were related. The important factor that Flash Sales
appeared to be about 12-months ahead of Pay-Bid - Perfect.
This is a logical qualitative analysis as their business appeals to a much wider demographic
and requires absolutely no learning curve. In addition, there were several qualitative factors
that quickly pushed Flash Sales as the most directly related industry for the following reasons:
Transformative business models: The Flash Sales market and the Pay-Bid auction market
are heralded for monetizing new revenue sources in new manners.

The Time Crunch Deal: Time is of the essence that compels people to make emotional
purchasing decisions and leads to more $/customer. The countdown of the deal.
Inherently Social for Commerce Purposes: The nature of the marketplace revolves around
bragging and in turn marketing the service. For example, if I picked up a killer deal on Gilt.com
a member of the Flash Sales market, I could easily post the item and the discount that I
received on my social network. Thereby marketing the service to my social network and
communicating my influence to the social network. In the same manner the incredible deals
compel people to post to their networks that they purchased an Apple iPad from the following
site for a 99% discount.
Highly Correlated Growth Curves: The qualitative factors are manifested in how the growth
rates correlate or the data points between two sources is related to the trends that are
occurring in either source.

Huge influx of New Competition: Low transaction Costs mean that people can switch freely &
they do. The deal is all that matters and the customer knows that - once you have a lot of big
fish winning the auctions, they go play in a smaller/newer pond.

Market-Value Forecast

The historical information was gathered and there was a dataset to serve as a base for
forecasting where the industry was going. The foundation of the forecast revolves around the
growth of the # of visitors that market receives. The forecasted value is a combination of the
visitor traffic patterns that were studied and correlated to the patterns for Flash-Sales.
Figure 3 - Growth Rate for the Pay-Bid Auction Market

To frame this properly, we need to make some market comparisons for why we believe this is
going to grow in the same manner.

Appendix
Swoopo Vs. BigDeal.com Traffic Analysis

Swoopo Demographics

BigDeal.com Demographics

===================

Logistics: Do private sale sites like Gilt

Groupe and RueLaLa handle fulfillment inhouse or do they outsource it?
There are two different approaches to take in regards to Flash Sale Fulfillment:
1. Block, Sell, Ship Model
2. Purchase & Fulfill Directly
For purposes of answering this question, I am going to recuse myself from including RueLaLa
in this explanation as I have not worked with them, don't have any mates that work there, and
have limited domain expertise in the specifics of their model.
Most Brands & online companies will outsource their fulfillment to Third-Party Logistics
Companies, as is the case for Gilt & Karmaloop.
The companies that keep fulfillment in-house, that I know for a fact, are:
Revolve Clothing's Reverse & JackThreads.com.
Generally speaking, the fulfillment method that is used depends on the ability of the privatesale purveyor to generate economies of scale and comparative advantage through
specialization.
For example, Revolve Clothing's REVERSE is a vertical extension of RevolveClothing.com's
business. The company runs their own warehouse and as such this new division for Private
Sales/Flash-Sales operates out of this facility.
In the same vein, Karmaloop's PLNDR , a new Private Sales site by the successful urban
fashion vendor, uses the fulfillment facilities of the parent company that are NOT operated by
the parent organization. PLNDR's Karmaloop is leverage the scale economy fulfillment
efficiencies of the parent to drive efficiency to the new division.
Block, Sell, & Ship Model
This is the model employed by Gilt for fulfilling their orders.
Process:
1. Prospective partner ships samples of shoes to Gilt's NYC Address
2. Gilt Buyers get together and select the models the want to move forward with and define
that optimize the product for each product segment that this Sale will be targeting.
3. Brand sends Gilt an ATS - Available to Sell Report - This report is the available
inventory that is currently not allocated to orders (i.e. Qty. of Medium Green T-Shirts Sum of all orders with a Medium Green Shirt Currently remaining to be sold = Medium
Green T-Shirts Available to Sell)
4. The brilliant buyers place their PO that creates a careful balance that ensures styles
"sell-out" - it is important that styles sell-out as it creates the value proposition for
customer's purchasing quickly & early.
5. Sale Runs, Gilt members purchase, and then Gilt Collects the Cash
6. Gilt Places the confirmed PO with the brand for what has sold.

7. If shipment is below 200 lbs, you ship with their UPS Ground Account otherwise you
palletize and ship via Yellow Freight terms being FOB Destination (if the product is
damaged or lost, the brand still owns it until it leaves the threshold of the truck)
8. Goods are shipped to a 3PL or 3rd Party Logistics company. Brand's shipment is
received, packaged in GIlt branding, and shipped out to their paying customers.
The Risk:
This model contains very little risk to Gilt. The primary risk of this model is the time required for
the brand to send the product to Gilt who in turn must receive and send it out.
If a brand is in CA & customer is in CA, the sale ends and the brand puts the order into their
warehouse this could take 3-4 days to push the order out. Most brands use a 3PL so they are
at the whim of the warehouse & logistics company's priority list and capacity constraints. The
brand then ships to Gilt (takes 4-5 days) and then Gilt consolidates (2-3 Days), and sends to
customer in CA via UPS (3 -4 Days). The risk revolves around the time it takes for the
customer to actually receive the goods.
A secondary risk in this case is inaccurate inventory. For example, if the brand tells Gilt that
there are X 3 of Medium Green Shirts available to sell. Gilt runs the sale and sell 3 Medium
Green Shirts. Gilt is relying on the accuracy of the vendor's reports and if the vendor only has 2
Medium Green Shirts, then it's Gilt that receives the blame and has to incur the expense of
refunding the customer's purchase.
Fulfillment methods of Private/Flash Sales Shops that employ this Model:
Gilt Groupe - 3PL
JackThreads - Fulfills Directly.
Purchase & Fulfill Directly:
This is one of the most common models in Private/Flash Sales business and place where the
sale site takes the most risk. It has the potential for the largest discounts & but also the risk of
holding Unsold inventory.
The Process:
1. The shop contacts the brand to request the availability of unsold inventory.
2. Brand sends ATS & sometimes samples.
3. The prospective buyer strikes a balance between volume & ability to sell the product
(i.e. Purchase 100% of inventory can lead to upwards of a 70% discount off wholesale)*.
4. The Deal is struck and the Goods are shipped to the buyer - most of the time to their
3PL.
5. Run the sale & fulfill the orders directly via their warehouse or 3PL
The Risks
First & foremost, the Private/Flash Sales site has the inventory risk of what happens to the
goods that are unsold. In this case this model increases risk for the opportunity of growing
revenue while negotiating a discount in the aggregate that will account for this.
Considering the discount, Private/Flash Sales shops can offer the unsold inventory to their
most valued customers as an inexpensive marketing program. This of your CAC or Customer

Acquisition Costs. Including shipping you are going to be hard-pressed to find a more effective
use of marketing dollars than 70% off a fixed product given to your most loyal customers.
Fulfillment methods of Private/Flash Sales Shops that use this method:
Karmaloop's PLNDR - 3PL
Revolve Clothing's REVERSE - Fulfills Directly
[UPDATE: According to Silicon Alley Insider, Gilt Groupe owns the warehouse in Brooklyn, NY.
source: http://www.businessinsider.com/g....
However, on the Gilt Routing guide this same address is "Mercedes Distribution" telling us that
this is a 3rd party operating the warehouse under a different company. After a little background
checking, this maybe a different operating entity since I can't find a website for Mercedes
Distribution.]
http://www.shmula.com/gilt-groupe-rue-la-la-fulfillment/6859/
===============================

What is Gilt's competitive edge?

Couldn't Amazon just enter the market or an uptick in the economy disrupt their business
model?
Members: When they launched, Gilt took an exclusive approach to building their member list.
Their members have the means and the desire to purchase the products in their sales. They
have a loyal member-base that have developed a certain level of trust with the weight that a
Gilt sale offers.
For example, the effectiveness of each sale would decline should the members begin to not
click-through because the product selection does not identify with their purchasing trends. The
fact that we see their business going gang-busters is a sign that their members align with the
product offering to compel them to open & purchase.
Buyers: I know a couple of their buyers from various projects. They have a keen and
insightful understanding of great products that truly align with their members. I would suggest
that their analytics & BI team play a significant role in these brand & product selection, a lot of it
comes down to the buyers.
Going on Brad's previous, they run a tight ship and always deliver. They maintain amazing
relationships because they treat brands well and don't bitch and complain about every little
thing. If you tell them that you need an extra day or two, they don't bitch or talk about taking a
discount. It's honestly a great company to work with.
Best of all, they ALWAYS bloody pay their bills no questions asked. Many times, these
discount shops will say "we need to confirm the receipt" as a means of preserving cash. Their
operation is tightly knit and all the members have the access to the needed information to
process sales & get people paid quickly.

Goal-Driven Performance: The teams at Gilt works very well together and they are all
focused on achieving some pretty damn lofty profitability and sales targets. Based on
correspondence with them, they all have an emotional connection to delivering for
management and having a product selection that serves to drive the Gilt-brand forward.
A company with a similar business model & management style was JackThreads that was
acquired by Thrillist for $7m.
============

How does Gilt's business model work?

What is their cash flow cycle? What are their margins? What happens to products that don't
sell on their site?
Today, BoF takes an in-depth look at the past, present and future of Gilt Groupes business
model and speaks with Gilt Groupe CEO Kevin Ryan on his plans to continue the companys
ascendance.
NEW YORK, United States Back in November of 2007, BoF was amongst the very first
media outlets to write about Gilt Groupe, the New York-based start-up that went on to
dramatically reshape the online retail market for fashion, building a community of high value
consumers around limited-time, members-only flash sales for designer apparel at steeply
discounted prices.
The timing of Gilts launch couldnt have been better. In the months that followed, fashion and
apparel brands began to feel the impact of a global recession that would ultimately give rise to
one of the most challenging macroeconomic environments in the history of modern retailing.
Seemingly overnight, wholesale inventories became unmovable as retailers drastically reduced
product assortments and orders.
As a consequence, many fashion brands were forced to liquidate excess inventory positions,
causing a sudden and significant supply glut for cut out goods. Prior to the Great Recession,
brands would have sold this excess inventory through off-price channels like Loehmanns, T.J.
Maxx and Century 21. But as the economy sank, these retailers were asking for discounts as
high as 90 percent, while merchandising clothes in a haphazard fashion which did nothing to
protect the high-end image brands had spent years cultivating.
Whats more, the extreme market conditions of the Great Recession created an acute financial
imperative for retailers off-price, as well as full-price to convert their own excessively
large inventory positions into cash, leaving many brands almost without any viable sales
channel, let alone one that would protect brand equity.
Gilt charged onto the scene like a knight on a white horse, providing a novel, efficient and
brand-sensitive way to liquidate excess inventory and enjoying explosive growth in the process.
Based on this momentum, Gilt Groupe raised $138 million last May in a new round of financing,
valuing the four-year-old company at $1 billion.
But fast-forward to the end of 2011 and flash sales are facing significant challenges. Here, BoF

examines the rise, stumble and future of Gilt Groupes business model.
Although impeccable timing was critical to Gilt Groupes meteoric rise, there were other
important factors behind the companys success. Firstly, Gilts member base is largely
comprised of one of the most desirable demographics in retail: urban sophisticates. The typical
Gilt customer has a bachelors degree, is in his or her mid-thirties and significantly overindexes in higher household income buckets, when compared to the general online
population, according to a spokesperson for Gilt Groupe.
To build this quality customer base, Gilt leveraged online network effects to great success,
starting with friends of the founders and early employees. This is a business that has grown
predominantly through word-of-mouth marketing, one of Gilts founders, Alexis Maybank, told
The Wall Street Journal last year. 75 percent of our membership has come from the
suggestion of a friend, using our on-site Invite Friends feature. Thats how we launched. We
sent invites to a list of about 15,000 people friends, former colleagues and classmates,
dating back to grade school!
Second, Gilts business model succeeded in driving consumer demand in a novel way: offering
designer product at significant discounts, distributed directly to email inboxes, with timing and
supply constraints to compel immediate action. Fifty percent of Gilts deal revenue is generated
in the first hour after a sale starts.
Gilts email demand generation strategy also went hand in hand with a strong product
assortment. From 2007 to 2009, the companys core team had powerful relationships with
fashion and apparel brands that, in conjunction with Gilts high value customer base, enabled
them to secure highly desirable product, delivering a unique value proposition to their
members.
And finally, Gilt managed to liquidate inventory in a way that protected the image of
participating brands. Generally, brands are careful to close out their inventory in a manner that
both optimises cash flow and ensures that their target audience doesnt see it. But, amazingly,
the quality of Gilts product offering and customer base enabled brands to sell excess inventory
at a discount, while still maintaining a positive image.
How did Gilt start to stumble?
Ironically, it was Gilts massive success and the demands this placed on securing greater and
greater volumes of desirable product that began to undermine the companys ability to deliver
on its core value proposition: great product at a great price.
From 2009 to 2010, Gilts revenue rose from $170 million to $425 million, according to
estimates published by Internet Retailer. This significant growth created the need for more and
more quality product to feed the Gilt machine, something that was difficult to fulfil in everincreasing volumes.
While Gilt Groupe itself was inspired by the French private sales behemoth Vente-Prive
(which recently launched its own a US-focused flash sales venture with American Express)
Gilts success also spurred hundreds of other competitors to enter the flash sales market, from
start-ups like Ideeli and Rue La La to strategic players like Amazons MyHabit and Nordstroms
Hautelook.
With a flood of new Gilt-like clones actively looking for supply, the glut of excess inventory from
the mid-2000s economic boom dried up even faster. Additionally, in response to the global
recession, many brands began producing at volumes that were lower than in the heady days of
2007. As a result, brands who were once price takers became price setters, increasing the cost
of securing inventory.

An anecdotal comparison of the brands and products available on Gilt today versus those
available in the companys first couple of years shows that, over time, quality level has gone
down. Back in 2009, it was possible to find prestige brands like Ralph Lauren Purple Label and
Porsche Design on Gilt, in stark contrast to the many unknown brands that populate the site
today. This meant that each time a subscriber opened an email and the product did not
communicate the excitement-to-value ratio that had originally made Gilt so successful, their
inclination to open subsequent emails from Gilt, and the brands position as a curator of style,
suffered.
To be fair, these are challenges that have impacted all flash sale players and are not unique to
Gilt. But they nonetheless present a significant threat to the companys core business model.
What is Gilt doing to address the issue?
Today because we are bigger and more well known, we get inventory that we didnt get
before, Gilt Groupe CEO Kevin Ryan told BoF. This may simply be a matter of showing
strength in the face of adversity as market sources suggest that inventory is indeed a major
issue for flash sales players.
That said, Mr. Ryan did go on to explain a number of initiatives he has put into place to try and
ensure Gilts continued ascendance. We do some things that we didnt do before, he said.
We do more cuttings and we are increasing private label, he continued. We do pack and
hold. At the beginning of a season, brands will go out and get orders from Neiman and Saks
and then well order it as well. You cant always count on this, but lets say they end up with
15,000 orders and the minimum from their Chinese producer is 20,000. Theyll come to us and
say, well produce 2,000 for you, but you have to hold it until the end of the season.
Leveraging its database of more than 5 million members, Gilt has also built a number of new
businesses, launching Jetsetter, a travel deals site; Gilt Taste, a business unit focused on
gourmet food deals; Gilt City, a Groupon-like local deals site; Gilt Home, a deals site for
furnishings, home dcor and gifts; and Park & Bond, a full-priced menswear business.
What I do is try and sell more things to my existing customers, explained Mr. Ryan. We have
new categories: hotels, restaurants, home, which have unlimited inventory, he continued.
Within our overall business, two years ago, 95 percent of what we did was end of the season
mens and womens. Today, thats probably 35 percent of what we do. Were in most of the big
categories I want to be in right now, but well add one or two over time.
Performance of their new vertical product extensions is mixed, according to annual gross
revenue estimates provided by Mr. Ryan. Compared to the size of the original mens and
womens business (over $300 million), Jetsetter and Gilt Home (each close to $100 million in
sales) have been successful. Currently less successful, though only 15 and 7 months old,
respectively, are Gilt City (in the $50 million to $100 million range) and Gilt Taste ($10 million to
$20 million). But Gilt clearly recognises the need to capture a larger share of their customers
disposable income and seize adjacent revenue opportunities.
Gilt is on track in a number of other areas, as well. The company recently launched global ecommerce, shipping to over 90 countries, and understands social marketing in a way that many
retailers do not, actively engaging with its large audience of fans and followers. Gilt has also
seized the opportunity in mobile and tablet, deriving between 17 and 30 percent of revenue,
depending on the day of the week, from mobile platforms, according to Chris Maliwat, a former
vice president of strategy at Gilt Groupe.
But the negative impacts of reductions in supply, upward pricing pressures and growing deal
fatigue are here to stay and will continue to create an increasingly challenging environment for
Gilt and its flash sales peers.

What should Gilt do now?

First of all, Gilt could reinvigorate its vendor value proposition and focus on building new
relationships with brands. Here, the most valuable asset for the company is the demand source
of their customer data, a fact with which Mr. Ryan concurs.
[Customer data] is a hugely valuable part of our business. I think we have the best
personalisation of anyone, maybe second to Amazon, he said. For example, when you get an
email in the morning, thats one of 2,000 versions that goes out. The data is run every night,
based on the sales, based on what we think [individual customers] are going to buy. When you
open up the [website] you get a different page than I do; I actually get different sales than you
do.
But Gilt is not making the most of this data or sharing its full value with vendor partners. For
example, Gilt could better quantify and harness the total value of their relationship with
customers by doing things like delivering email analytics and driving social media for brands.
Taking a page from fast fashion, Gilt Groupe would also do well to further its focus on analytics,
transforming itself from a data-rich, but insight-poor platform to a vertically aligned organisation
driven by actionable information derived from its wealth of data. Retailers like H&M and Zara
have upended the traditional seasonal approach to retail through intensive use of analytics
coupled to a modern, vertically integrated manufacturing machine. Indeed, its their ability to
transform analytic insights into demand-responsive product compositions that is their core
strategic value proposition.
Store managers communicate directly with Zara designers and feed them data on what sells
well and what doesnt, reported The Wall Street Journal in September. If managers say a
polka-dotted-black dress is flying off the racks, it is able to turn around quickly and churn out
polka-dotted dresses in other colours and have them in stores in a matter of weeks.
But Gilt has a significant competitive advantage over fast fashion retailers in the structured
nature of the demand signals (clicks, views and purchases) the company can read, meaning
that its possible for Gilt to automate the identification of trends, while retailers like Zara must
rely on store managers to proactively surface these insights.
As this game-changing start-up looks ahead to 2012, Mr. Ryan remains confident that the
initiatives he has put in place will support a potential IPO and move the business into
profitability. The overall company is not profitable yet, he said. Sometime next year well
cross over. The zone where we might go public, and I think we probably will go public, is
between fourth quarter next year and fourth quarter the year after, Mr. Ryan told BoF.
Matthew A. Carroll currently runs outdoor brand Cloven Footwear and sits on the board of
three tech start-ups in San Francisco, California.
Editors Note: This article was revised on 19 December, 2011. An earlier version of this article
misstated that Gilt Groupe was not targeting sales to specific consumers based on their shoe
size. It is. The article also misstated Chris Maliwats affiliation with Gilt Groupe. Having
previously served as vice president of strategy, Mr. Maliwat left the company in November
2011. The article also neglected to mention that new business lines Gilt City and Gilt Taste are
15 and 7 months old, respectively, at the time of writing.
I have worked with Gilt several times as a vendor. Here is their business model:
They have excellent buyers - they find the best brands with great product. Once you have
established a relationship with their buyer they purchase samples. The brand sends the ATS
(Available to Sell Report: the available inventory that is currently not allocated to orders) to the

buyer and then Gilt requires the vendor to block out the inventory for the sale
Gilt promotes the sale & implicitly the brand. After the Sale ends, Gilt places their firm PO
against the orders that they have received payment for and based on the available inventory
that the brand allocated or "blocked out". Credit terms are normally Net 10 or Net 15.
Gilt Groupe Metrics & Statistics:

Shopper Profile
Male: 39%
Female: 61%

Ages
<24: 19%
25 - 34: 30%
35 - 44: 22%
45 - 54: 17%
55+:
13%
Margin:
Brands can expect to take a 55% to 60% discount on Wholesale (can be more depending on
the deal you craft). Brands should always try to craft a deal that prices the deal at Landed &
Stored Cost (i.e. FOB + Duty + Shipping + Landing + Allocated Storage Costs).
[Author's Note: I guess I didnt realize how piss poor of a job I did defining the Margin Analysis
in this answer, so in answer to the 15 messages in my Quora Inbox - here is a deeper dive into
the context of Margin.]
Background Definitions to better understand:
Since there are not many people familiar with how the #s work for Retail, lets breakdown some
terms to serve as the foundation for further analysis.
FOB: Most footwear and apparel firms purchase FOB [Free On Board], commonly referred to
also as First Cost, which is the price paid to the factory for the fully assembled, boxed, and
cartonized shoe at the Port of Hong Kong.
Landing Costs and Tax & Duty: FOB is the cost to get it to Port of Hong Kong, which you
hoepfully strategically planned to hit on a Thursday so you can catch the 11-day Maersk Fast
Boats to Port of LA. Landing Costs include expenses like freight insurance, bonds, transport
from the port to your warehouse, the warehouse inbound fee (eg the fee to unload the
container and put your inventory on the shelves of the warehouse).
Landed Cost: This is FOB + Shipping + Landing Costs + Tax & Duty. This represents the
baseline figure that you use to set your pricing as a brand.
Pricing:
Wholesale Price: This is the price that the brand (Me) charges to retailers like Urban Outfitters,
Finish Line, Journeys, or Amazon. Generally speaking there is a golden rule called "keystone"
where fashion companies establish their pricing by multiplying everything times 2. Here is an
example:
Landed Cost: $25.00
Wholesale Price: $50.00
[Note: Landed Cost can get FAR more complicated when we start discussing issues like IRS
263a for capitalization of expenses. However, for purposes of this example we are going to
assume that ALL Warehousing, Fulfillment (pick the order and ship it to the retailers, and
Inventory Costs will be accounted for in the Operating Expenses (more specifically, Selling
Expenses - commonly referred to as SG&A).]
Easy Peasy! Now that we have the price that the traditional retailers pay, we need to define
the customers price that you see at the stores, more commonly referred to as Retail Price.
Retail Price: This is the price that the ultimate consumer of the product pays when you
purchase a product from Urban Outfitters, Bloomingdales, Finish Line, etc. This price is also

generally keystone or Wholesale Price times 2. For Example:

Landed Cost:
$25.00
Wholesale Price:
$50.00 (Landed Cost X 2)
Retail Price:
$100.00 (Wholesale Price X 2)
[NOTE: Keystone is the general rule, but certainly Wholesale Price can be 2.1x Landed or
Retail could be 2.2x Wholesale. This all depends on the retailer's pricing power, brand
positioning, and market position to be able to make these tweaks.]
For purposes of moving forward, I am going to assume that you understand what Gross Margin
is (Gross Profit / Revenue) or the % of each $ of Revenue that drops down to fund OpEx. Lets
run through a quick example, from the Retailers Perspective:
Retail Price: $100.00
Wholesale: $50.00
Gross: $50.00
Gross Margin: 50%
[Remember: This is from the Retailers Perspective, so the Wholesale Price is a COST to the
Retailer as it represents the cost of the retailer to get the goods to sell]
Now that we have a baseline defined, lets begin to apply it to Gilt Groupe. Gilt is a Private
Sales site that sells items for a huge discount. Gilt Groupe is what we call a "cut-out shop"
meaning that they look to purchase unsold inventory from brands at a discount. The logic is
that production is based on the stupidly difficult art of inventory forecasting of multiple sizes per
style. Therefore at the end of the season, you dont sell all of your inventory - you may have
sold all of your size 10 shoes in color x but have 100 pairs of 10.5s remaining in inventory.
This is what makes footwear so hard: every color needs to be forecast to a 10-variable
equation - if you screw up the sizing on 2 or 3 sizes, you can kill the profitability for the entire
style.
Since I have 100 pairs of the 10.5s and numerous other sizes still in inventory, Gilt comes to
the brand and says hey, we like your stuff. We are going to host a sale. Because they agree
to retail inventory that is slow moving or in odd sizes (eg you only have 8.5s, 9.5s, 10.5s, 11.5s
remaining because you screwed up the half size variable), Gilt looks for a 50% discount off of
Wholesale. For example:
Wholesale Price: $50.00
Gilt-Offer Price: $25.00 (50% off Wholesale)
If Gilt acquires the product for 50% less they can mark it up 2x and sell it for the original
Wholesale Price. For Example:
Gilt-Offer: $25.00
Gilt-Customer-Price: $50.00 (2x Markup yielding a 50% margin to Gilt).
Also Note: If the Original Retail (from above was $100) and Gilts Customer Price is $50.00
then the customer who purchases the product on Gilt received a net savings of 50%.
Now, you maybe saying Matt, Gilt says on their site that this is 60% off retail. The answer is
that we adjust the price comps. If retail is $100.00 (a keystone markup), I might tell Gilt that
retail is $125. Therefore, the discount that the customer sees is 60% ( use % change ((endbeginning)/beginning)-1).

Logistics:
There is a caveat to the Gilt offer is that you have to use their logistics company to send the
product to them (i.e., ship inventory to Gilt, who then fulfills it to the customer). This is a
standard plug of 5%-off. You can fight with Gilt, but its a pretty safe figure at 5%.
Therefore, when you add this layer of complexity:
Wholesale Price: $50.00
Gilt-Offer-Price:
$22.50 (55%-off Wholesale - 50% for inventory, 5% for logistics)
Gilt Customer Price: $50.00 (2x Gilt Wholesale Price)
Gross Margin: 55%
Cash Conversion:
It's a brilliant model, they run the sale and collect cash immediately on purchase. Based on
Sales, they purchase only what was sold, nearly eliminating their inventory risk. Additionally
because of their credit terms, they are holding cash at the market rate of equity for the 15-20
days (assume 5 days for shipping) - a killer benefit for them.
[Note: If you are building a model on this don't forget that they are taking an average of 1.75%
of Gross Sales in credit card fees]
One interesting aspect of Gilt is that they pay via WIRE - probably one of the most interesting
aspects of the cash cycle. Let's take the Groupon Model where the company mails the vendor
a check. In addition, Groupon could implement an accounting control whereby ALL checks are
issued on a Thursday. This means that Groupon effectively has somewhere between 3-10
days of cash that it's holding at the market rate of equity [think about how big of a number that
is when you are talking about the discount rate applied to a $1.35B valuation on $400m in Rev
- It's a ridiculous model].
This little policy of paying vendors via Wire is incredibly interesting because it is something that
would go unnoticed by 99% of people. Per my detailed explanation below of the cyclical nature
of fashion, this is critical money and having a vendor tell a brand that the check is in the mail is
almost as good a saying "we haven't sent it." Although the wire reduces the return on holding
cash, it is implicitly investing in your product by maintaining killer relationships with the coolest
brands. We all bounce around from company to company, so keeping these relationships is
critical.
Example:
Wholesale Price: $100.00
Gilt.com Discount Price: $45.00 (55% discount on $100.00)
Total Units: 1,000 pieces
Total Revenue for Gilt.com: $100,000.00
Total Cost of Goods: $45,000.00 (Vendor (me!) Revenue)
Other Costs
Credit Card Fee: 2.00%
Fulfillment: 7.5% from Vendor (me) to Gilt & back out to Customer (Gilt's Customer)

Remaining Inventory & Exchanges:

As I said, they only purchase what they have already sold. However, there is risk for
chargebacks, fraud (can be a surprisingly high number), and product exchanges/returns. I am
not sure of their return policy and cannot speak authoritatively on how returns and exchanges
are managed on their end or affect the profitability of the sale.
[UPDATE: What is the return policy for Gilt Groupe? - Explains this directly.]
Fulfillment: Logistics: Do private sale sites like Gilt Groupe and RueLaLa handle fulfillment inhouse or do they outsource it?
Additionally, there is a lot of interest in Drop Shipping. I give a FULL breakdown on the pros &
cons of drop shipping: Matthew Carroll's answer to Dropshipping: Is drop-shipping the best way
to bootstrap an e-commerce company?
Benefits to Brands:
For the past 2 years, it's been nasty for brands & cutout shops. Literally, we were at the will of
these folks who were in many cases being completely unreasonable (sometimes asking for
90% discounts). Gilt is a great company that is honest, efficient, and nice to work with - they
don't get greedy trying to shake you for an extra couple of points.
In addition, brands get rid of inventory, boost cash, and basically sell the inventory for about
their cost. This is killer because by the time we are getting rid of the cutout for the season, we
have a huge cash requirement for the next season's production. Although these sales hurt
overall profitability, it's a trade off based on the upcoming cash requirements and holding costs
associated with the inventory.
Furthermore, Gilt generally becomes a large source of inbound traffic to the brand's site
(forecast a 5x increase in traffic during the sale with a decreasing 25% daily following the sale)
with conversion rates of 1-1.75% vs industry average of .50% conversion rates). Meaning that
brands can offset some the Gilt losses with the 75% margins that we make on direct sales for
products not in the sale or items that were sold out. Although the volume will be decidedly
smaller than the Gilt PO at least their are ancillary benefits associated with working with Gilt.
Additionally, there is a level of marketing to exposing the brand to the historically high-end

member of the Gilt community. We have also seen that customers who really love the brand
will actually purchase the goods directly from the brand to support us - proactively paying more
because they missed the sale or just want to support.
Alternative Business Models
The business models for other discounters like Karmaloop's PLNDR or Revolve Clothings
Reverse/Rewind (whatever they are calling it now) are different. PLNDR purchases the
inventory then holds the stuff (higher risk, but they want a larger discount - 60-70% off
wholesale.) Revolve Clothing's Reverse actually takes delivery of the blocked out PO and then
sends back to the brand what doesn't sell, so they can fulfill quicker. The interesting part of the
Revolve Clothing model is that they pay 50% of the received PO PRIOR to the sale. They put
their own $$ on the line and trust the brand to issue them a check if the brand doesn't perform
well during the sale. In a strange twist of fate, you have a vendor who now possesses the
credit risk from a brand, versus the other way round [credit is still effectively dead for fashion,
so we all became credit analysts]. Different business models that have their benefits & risks.
Similar Business Model & Comp:
Considering the nature of your question, I am assuming that another example would be helpful.
Another company that was very similar to Gilt was JackThreads.com.
They were acquired by Thrillist in May for $7m.
[Source: http://techcrunch.com/2010/05/13...

Subscriber Growth:
Q4 07: 15,000 (http://on.wsj.com/umlnIe)
Q1 08: 75,000 (http://onforb.es/v5ykz3)
Q4 08: 500,000 (http://cnnmon.ie/vXJ9Af)
Q3 09: 1,500,000 (http://onforb.es/spCXUW)
Q2 10: 2,500,000 (http://on.wsj.com/vnhQAc )
Q2 11: 3,500,000 (http://read.bi/vAKOXw)
Why does this model work?
I have kept the above fairly objective and a matter of fact/experience. However, there has
been this constant nagging about addressing the factors that led to Gilt's success in the
market, and I figured that I provided enough unique context above to dive into this here.
They were actually exclusive:
65% less than 35 years old

67% greater than $150k in Annual Income

87% bachelor degrees
In 2007/2008, you really had to be someone to get an invite. It took me having to step up and
run a pretty damn cool footwear brand before I got my login. It was not like the bandwagon
camps that say "members only" and there is an automatic approval system. Gilt had a highly
sophisticated (aesthetically and culturally) audience that had the ability, the means, and the
inclination to purchase your product at full retail (more often than not, Gilt purchases are from
people purchasing additional items for brands that they had paid full price for at the beginning
of the season and were really stoked on the purchase - the opportunity and the exclusivity
compelling them to purchase again).
This is a business that has grown predominantly through word-of-mouth
marketing. Seventy-five percent of our membership has come from the
suggestion of a friend, using our onsite 'Invite Friends' feature [in exchange for a
$25 credit.] That's how we launched. We sent invites to a list of about 15,000
peoplefriends, former colleagues and classmates, dating back to grade school!
I'm surprised you didn't get one.
Susan Lyne, Former CEO Gilt Groupe,
http://on.wsj.com/r5DQiN - Wall Street Journal Interview on Oct, 29th 2010
A Sense of Urgency:
Not really in the sense of time of the sale. But in the sense that the customer FEELS like s/he
will never be able to find this brand producing this model ever again at this price. You HAVE to
get it before everyone else snakes it.
The most exciting challenge we've faced is how 50% of all revenue from Gilt
sales come in less than an hour [after the sales start online]
Alexis Maybank, Co-Founder Gilt Groupe, http://tech.fortune.cnn.com/2010...
In addition, these are incredible deals that simply are not available during an end of the season
"half-yearly" sale. Due to the inventory risk of carrying product, retailers could not take in the
inventory, ESPECIALLY in the last two years. CIT died so boutiques didn't have credit (READ
"limited size & product variations available as lost sales were better than sitting on product in
their eyes") and the transportation costs of moving these units between stores would KILL
margins.
Gilt enables their target demographic to have the ability to access the aggregated excess
inventory from across the country in one central location with guaranteed availability. This is a
value proposition that represents a critical risk to their members as the chance of finding it (the
featured product) at a major's half-yearly sale poses significant transportation (they are a lot of
bloody people, it takes a lot of time) and high opportunity costs (there is no guarantee that this
style in this color in this size is at the accessible location to, its a lot of bloody effort to get there,
and suffer through the lines without finite expectations of tangible results). These push factors
instill a sense of urgency for executing the transaction with a "screw it, I'll get them both"
mindset.
Optimized Product & Pricing:
Gilt maintains a tight locus of control over their product selection with highly informed statistics

about their target audience. Humans are inherently very poor when it comes to wide product
selection as the more options there are the more that they experience significant cognitive
dissonance after the execution of their purchase. When you evaluate the product selection,
notice that each sale/opportunity segments their target demographic into purchase categories
that increase vertical associations (i.e. shirts & pants) and reduces horizontal choice (i.e. do I
want the blue shirt or the green shirt). These segments focus on the guy who would rock a
grey-plaid shirt, is a blue t-shirt guy, and these pants go with both. I have an insane amount of
respect for their analytics/data mining team, but also for their buyers who manifest these data
points into purchasing decisions that they are held accountable for.
If we have 50 sales a day, we can't fit all 50 in one email, she explains. With
SAS (http://www.sas.com/technologies/...), we can figure out the top sales to put
in front of you based on your preferences.
In addition to cross-shopping, the company witnessed a 10-20% lift for customers
browsing in new merchandise categories who had not purchased in those
categories (percentages vary depending on the category). It also saw a 20%
increase in new member conversion rates.
Tamara Gruzbarg, senior director of customer analytics and research at private
sale site Gilt Groupe (http://www.dmnews.com/gilt-group...)
Since a large portion of you folks are web app folks, think of this as moving from a 5-step signup process to a 2-step (I log in, the product is arranged so my "style", draws me to grab x, y,
and z and bam I am checking out - not stuck sorting between color A or color B. The potential
to miss my size being available is too great (i.e. opportunity cost) - I have to just do it.
A Symbiotic Ecosystem Compelling Vendors
Gilt has some of the best buyers in the industry who are bloody cool. Not 'uber-trendy' or
'holier-than-thou fashionista' cool, but down to earth people who fundamentally understand, are
passionate about what they do, and have a DAMN good eye. More importantly, selling your
excess inventory to Gilt was like receiving a nod of approval (not so much now as they are
facing insane competition and expanded their reach). Generally speaking, a brand studies
very closely who & where they close their inventory out to in a manner that optimizes cash flow
and ensures that the target audience DOESN'T see it. For fashion (emphasis on small, higherfashion brands - the Theory's/Bloomies/Saks staple brands of the world do not necessary
apply), once your customer knows you are at Nordstrom Rack/Barney's CoOp, it means you
are mass market and your brand is trending down. As I alluded to above, Gilt could actually
carry as much, and in some cases even more, weight than retailing at the best boutiques in the
country (i.e. Fred Segal, Atrium, American Rag, CNCPTS, or Bodega).
I am referencing the above to illustrate the critical link in the symbiotic ecosystem required for a
model like this to function effectively. The confluence of about 30 different factors all boil down
to a systemic value proposition for ALL parties (Gilt, its members, and the brand). This is the
clear differentiator as the core nature of Gilt compels great brands to work with them and
provide them with the best styles, in a manner that serves to benefit Gilt & its members.
As a brand, you could sell your excess inventory to your target demographic through a venue
that actually serves to augment your core intangible asset (i.e. the brand). OH YA... Keep in
mind that these sales occur at a CRITICAL juncture in your seasonal cash flow cycle as the
brand has plowed every dollar back/drawn down on ALL of their revolving credit facilities to
finance next season's production hitting their ex-factory dates. International distributors have

just paid and this partnership with Gilt bridges your cash flow through landing the goods and
collecting on your CODs and net 30 term accounts - well, at least until you can coerce your
Factor into accepting the accounts that achieve your minimum receivables factor rate.
[Definition: Minimum Receivables Factor Rate = the % of your credit accounts that a company
NEEDS to sell to be able to meet obligations for the next 30-45 days or uphold the required
cash reserves of your financing covenants.]
A Unique Approach to Pricing Power:
This update is in response to an answer that I found to What is so special about Gilt Groupe?
One of the answers there stated that the special-sauce was their pricing power that gives them
some sort of advantage. If we think about pricing power in the classical sense of the word, we
think of the Walmart model. The more powerful you are the more you can drive your cost
down, a concept called "Economies of Scale" & "Opportunity Cost."
After digging into this deeper, Gilt in fact does leverage its brand and pricing ability in a form of
pricing power, however in a very different manner than would be classically defined. The Gilt
model is NOT, as Tom Friedman would say, in a race to the bottom. A lower price for Gilt does
not create long term value for their business. As you are drive down prices, your
brands/vendors get pissed off that we are getting screwed, and we stop selling to you. If they
are trying to force down prices for discounts in the near term they are destroying their long term
shareholder wealth by alienating the vendors that enable them to have a product-focused value
proposition.
In addition, considering the level of the SES (Socioeconomic Status http://en.wikipedia.org/wiki/Soc...) of the members of Gilt, the product will not sell any better at
65% versus 55% off wholesale. As I explained above in the Urgency section, these are
emotional purchases with very limited quantity available. Meaning that if there is a 10%
difference in discount, the product's scarcity supports the higher price. Furthermore, since Gilt
maintains no inventory risk of slow moving product there is no incentive for them to drive down
the prices to the vendors.
In stark contrast to the classical sense of Pricing Power, Gilt actually employs its brand position
to secure a fair market rate for cut-out-inventory. They have effectively established a marketrate for cut-out at 55% of wholesale, for an industry that was in a bloody free-fall.
Gilt's Business Units:

Gilt Competitor Analysis:

==========

How can you optimize for fast production

cycles and low production cost?
What are the key trade offs made for manufacturing goods quickly? For instance, if you
produce in China, it will be cheaper than the US but there is a time lag for shipping. What are
the key levers and drivers for minimizing production time while minimizing costs? Let's assume
a design has been determined.
Let's focus on the following variables for production cost & time: location of manufacturer,
volume, methods of shipping, value chain/logistics integration, etc.. (Are there any other key
ones I am missing?)
Ceterus paribus for all other variables including: design time (assume design is determined) ,
organizational bureaucracy, materials availability, materials costs, workforce availability,
political turmoil/strikes,etc...(Are there any ones that I have inappropriately discounted?)
Cheers Lizzie - One thing that you are not taking into account is paramount in dealing with low
cost manufacturing in emerging manufacturing. I'll add more to this later, but one of the things
that you are drastically underestimating the value of is relationships.
Fast Fashion is systemically rooted in Relationships:
For the better part of the past 15 years (when outsourcing truly began gaining critical mass and
everyone had to develop their "China Plans" as they were referred to in Fashion), the
relationship with brands (Fashion Companies) has been adversarial to say the least. You see
successful US (and many UK and other EU countries) come to China (and other low cost
countries) with a holier than though attitude and pushing around manufacturers.
There was little to no loyalty (save the case study of Nike and their "Taiwanese" saviors
expounded upon in your Harvard Case Studies ** Lizzie studied Economics at Harvard) that
compelled brands to any individual factory in low cost countries. For the better part of the last
15 years, we had the luxury of dynamically moving among the seemingly infinite sea of
factories producing low cost goods in Asia. However, given a fully employed China (some
factories that I work with had 50% - 75% of their workers NOT return following Chinese New
Year at the end of Feb - the why is interesting is another question entirely) and 20% YoY wage
inflation in China (For example, min wages in rural Zhouhai realized went from 800 RMB to
1200 RMB in 2011 - a standard wage is 2500 rmb, but exemplifies my point). This is not the
case anymore.
However, what did these market forces (the past 15 years characterized by Western
Companies holding all the cards) imbue in the relationship between Chinese Factories & their
customers? Distrust. This point is exemplified by most factories not even talking to new
companies because there is too much risk in new business until the relationship is subtantively
cultivated - hence why I spend so much time in China.
My previous PP stated that the good factories are at full capacity. Relationships with western
brands have pivoted (to use your industry lingo ** Lizzie used to be a Boston VC & then Biz
Dev at the controversial Second Market) to being strategic rather than disposable considering
the market develops (again in my previous).
So to get into a good factory - you need a relationship (thus embodying why I raised a $4.1m A

round in China) to get into a factory capable to delivering the schedules that you are looking
for.
Some things to consider (before I head to my thinking spot to ponder your question in greater
detail even though you are in Boston and won't get this until the AM):
1. Sourcing: Have fun! You saw cotton prices on a TEAR for the last 9 months of 2010
(although they retreated). You are going to be purchasing FOB - meaning that the factory is
absorbing the sourcing costs & these costs will need to managed by the factory.
2. Labor: Where are you going to produce? China? Well, let's say that you found this KILLER
relationship in Bali ( I am helping a company that rocks 7k dresses from a factory in Bali) for
Urban. You know what? The only reason that this is a viable option is because its Urban and
target ANSP is $50 USD. The pattern maker sucks & there is no consistency in the produced
good.
3. Shipping: FOB Hong LCL is now at $62 per CBM - that is what i was paying for air freight in
'09. Airlines have dropped freight capacity in the wake of the financial crisis and won't add
capacity until at least 2012 (considering the price increases that are going to be passed along
in May).
- I am also seeing Maersk 12-day fast boats quoted for the same price as "standard" 24day voyages out of Hong Kong.
- Oil: You generally find that at $110/barrel oil - there is cost neutrality for producing
garments in the US. The main garment district left is LA (& parts of SF, but they are
correspondingly raising prices - umm... because they can).
4. Mins: Given the "new normals" of the marketplace - style mins (1 style of shirt in an array of
variations or colours) are rising (drastically). I am seeing mins go from 1,200 at certain
factories to 1,500 - thus decidedly limiting your fast fashion options as there is simply a lot
more product that you are financially obligated to buy.
Written 10 Apr, 2011. 523 views.
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Kathleen Fasanella, With 3 decades of apparel engineering... (more)

1 upvote by Daniel Evans.
I had to look up "Ceterus paribus" (all other things remaining the same) but given the context,
do not agree these variables can be summarily addressed. If you're looking for some sort of
equation to come up with a clear answer, I suggest inventing it because you'd become a
millionaire by selling it to the biggest and smallest brands in the business.
A useful analogy to consider is this: let's pretend that labor in mythical country is free. You may
find the variables of cost may make the COGS prohibitive. I'm a fan of Birnbaum's books; you
might try reading some of his insights for clarity in assisting you to make these sorts of
decisions.
=============

What's the average profit margin earned by

apparel distributors, brick & mortar
retailers, and e-commerce/online retailers?
Since this answer has reach 250 up-votes & is over 28-pages - It's available for purchase on
Fail-Harder.com - Average Profit Margin in Apparel Retail & E-Commerce ==> for $10 you
can have super-cool pdf to print and read at your leisure. Think about it like buying a beer for
good ol' Carroll to chat about e-commerce!
-------------------------------------------------------------------------------------------

Lets get some definitions dialed in prior to launching into a deeper investigation of your
question.
Background & Overview: This section will give you a quick background how Distributors,
Retailers, and Brand Direct E-Commerce work as businesses and their corresponding
relationship to the brand who makes the products available for retail.
Distributor:
A distributor is an entity that engages into a formal business relationship with a brand for the
rights to serve as local representation and (most of the time) to be the exclusive purveyor for
the brands products. In fashion, distributors are generally the international partners lending
their relationships, understanding of the intricacies of the local market, and financial resources
to effectively capitalize on a brands market opportunity. Therefore, distributors are primarily
involved in B2B relationships - they purchase a large quantity of goods (a min. # set by the
brand in order to grant distributor status pricing discounts) and primarily sell to retailers in the
local market. However, distributors are increasingly capitalizing on the e-commerce by
managing the local e-commerce presence for the brand in that territory.
An example of one of best international distributors in the world for fashion startups is Jack of
all Trades (JOAT) Co for Japan. I have worked with JOAT over the years with several
companies and one clear value propositions for their organization is Lloyd Seino. Lloyd is a Biz
Dev / Brand Manager (as we would call it in the US) and truly has one of the best eyes for a

fledgling brands market potential in the crowded Japanese fashion industry. JOAT is also
regarded as one of the leading companies for identifying and building a brand into a Japanese
powerhouse (as Lloyd has done with dozens of brands).
[ Note: You can generally find any brands distributor by going to brandxyz.com -> Contact &
look for International. This section will have the names of the international companies that
distribute the brands products. ]
In other industries there are domestic local distributors that have regional territories - a two
good examples are food and alcohol. Due to the large geography of the US, food was most
commonly broken down into regional distribution because of the large number of customers per
region and difficulty in coordinating the logistics of food delivery. Lets take the example of a
buddys health bar company that he purchase 2009:
1. In 2009, Ryan, my buddy, purchased the rights for Southern California to distribute energy
bars to local and national chains in that region.
2. By purchasing the rights to Southern California, Ryan could purchase the energy bars at a
special distributor price
3. Ryan could focus on building deep market insight into Southern California, developing great
relationships with retailers, and maximizing the effectiveness of his advertising spend in based
on whats going on there (i.e. He could setup a booth at a local music festival to sell his energy
bars while the kids are dancing in the perpetual summer sun of Los Angeles - where this
festival would fall under the radar of the national marketing goals of this company)
Retailer:
[ Note: I have written an extremely in-depth analysis of the relationship between Retailers &
Brands and how this dichotomy drives retail prices that you see online and in-store - How do
designers set prices for dresses and why do dresses often cost more on a designer's website
than on purchase through an online retailer? ]
This is a vendor, generally within the home market for the brand, who purchases goods at
wholesale (about 52 - 55% below what you see at retail for). The retailer issues a purchase
order (a legally binding document to purchase X # of goods at Y price to be delivered at a
specified time frame) to a brand. The brand takes all of the POs and goes to production for
deliveries roughly about 4 - 6 months after the PO was issued. Upon completion the brand
ships the goods from their warehouse or factory (depending on the size of the retailer).
This is what the stages look like from the Brands perspective:

The Retailer's job is to focus:

Building brand equity with the customer to be a shopping resource.

Create a customer experience that derives long term value from investments in
customer mindshare (i.e. I think that I am going to stop by Bloomingdales after work,
said the proverbial customer)

Develop extensive local customer insights that enables the retailer to optimize their
merchandising assortment to reflect the local trends, fashion, and personality of a
stores retail presence

Understand local advertising mediums & methods to maximize the effectiveness of

Advertising dollars based on how local trends (i.e. San Francisco may work extremely
well with clever Facebook (product) Posts while West Texas can do well sponsoring a
High School Football team)
Lets take a look at how this process looks for a single retail store or a simple model:

When we are talking about a major retailer like Nordstrom, this model gets a little more
complex. Since the retailer has to manage inventory between multiple stores, the retailer will
often have a brands shipments delivered to their warehouse. At the warehouse, the shipment
will be broken down and allocated to each store based on demand forecast. Additionally, you
will see that a certain allotment will be held back in the warehouse to cost effectively manage
fill-in orders.*
This is what the retail logistics / retail distribution process looks like:

* The San Jose store runs out of a medium green t-shirt, its more cost effective for
Nordstrom's to combine that medium green t-shirt in addition to all the other orders routing
through the regional distribution center. This is in contrast to the San Francisco store pulling
the out of stock size & shipping the one unit to the San Jose store.
E-Commerce:

There is little difference fundamental difference between a Retailer & an E-Commerce

relationship. Both are responsible for creating an engaging Retail Experience, building
defensible customer relationships, gathering customer insights to guide merchandising
decisions, and manage demand generation & advertising investments. However they differ in
three main ways:
Digital Medium: Obviously the biggest difference is the fact that retailers sell products
via a website while retailers deal with physical stores.

Zero Transportation Costs: Purchasing online is a much easier experience due to the
fact that you dont need to get in a car, drive to the store, fight for parking, deal with
sales staff that hates their jobs, wait in a checkout line, and then get home.

Deeper Customer Insights: Shopping online enables retailers with much deeper
customer insights on purchasing patterns & products at the individual customer level where brick & mortar retailers must make a concerted effort at checkout to gather billing
zip code at checkout.
E-Commerce retailers leverage two huge advantages:
Massive Population: Obviously the biggest difference is the fact that retailers sell
products via internet to the entire country (technically the world, but thats another whole
can of worms) while brick & mortar retailers are limited by the customers geographically
in a given stores territory. As of 2012 there is an estimated 154.6 million people that will
purchase something online in 2012.

Targeted Demand Generation: If an online retailer have slow moving inventory that
you need to sell (commonly referred to as turn), then they can send a target email to
your customer base of highly targeted people that have purchased a complimentary
product (i.e. a jacket that would go great with that shirt). Alternatively, an online retailer
can level the power of Google to increase their keyword spend to drive up their paid
position on the brands keywords to generate sales.
--------------------------------------------------------------------------------------------Section 2
Understanding the Cost Basis
--------------------------------------------------------------------------------------------Brands traditionally employ a Cost X model that takes the loaded costs for producing, landing,
and fulfilling their goods & services by a multiple - commonly referred to as a Keystone markup.
One of the biggest mistakes you can make in pricing is not having an educated idea of what
your cost basis will be. If you dont have an idea - then its easy to misprice an item and kill
your business because youre not making enough money on each unit to finance your
operating expenses.
Keystone Markup is a pricing methodology that multiples the cost basis by a factor of two
(sometimes can be up to 5x in the case of jewelry) to dictate the price for next rung in the value
chain. Keystone markup arose as the simplest way to universally markup goods across the
retailer to a profitable level. Generally speaking, it is logistically impossible to uniquely price
each product (from 100s or even 1,000s in a given retail location) to reflect market conditions
and retail demographics. The theory being that retailer profitability was more of a function of
units sold versus maximizing each products price. Subsequently, this approach normalized
prices across the marketplace (i.e. everyone is pricing a shirt at $100).
What does the costing build look like for a typical brand:

Landed Cost: The represents the total cost of paying for the item, shipping to the US, tax &
Import Duties, receiving in the warehouse, and getting on the shelves ready to sell.

Fulfilled Cost: This is the cost basis that I generally like to always keep in my head because it
represents the fully-loaded cost basis of selling an item & gives me a better idea of how much
cash I will have at the end of the day.

Wholesale Price: The Wholesale Price of a product is the revenue in one channel for the
brand, but its the cost basis for the retailer who purchased it from the brand. For retailers like
Urban Outfitters (retail brand), Finish Line, Journeys, or Amazon (company) the Wholesale
Price is the baseline inventory cost for them.
This is quick graphic to show you how this relationship works:

To put this all together into a graphic of a real product with real world pricing, lets take a look at
the pricing of one of the old boots from one of my old brands, VL Project:

--------------------------------------------------------------------------------------------Section 3
Distributor Margin Analysis
--------------------------------------------------------------------------------------------A distributor is an entity that enters into a legal relationship with a brand to provide
This explanation (obviously) gets more complicated as the company grows - but lets keep it
simple. There are two models than create the pricing landscape (once we know what the
distributor is charged product, we can more acutely understand how they charge for it). There
are two predominate pricing models:
Cost + Model
Distributor Price = FOB + x%
Wholesale - Model
Distributor Price = Wholesale - x%
Cost + Model
FOB is the cost to the Brand to produce the good or service. This represents the baseline cost
to the brand to produce good and is the starting point for analyzing the revenue model to the
brand and thus do Margin analysis. When you are growing a fashion brand, the typical range
for the markup % or the + in the model is anywhere from 25% - 40%. After working a lot of
brands and speaking with loads distributors, you end up starting at FOB + 35% and
progressively this % gets smaller as the brand does more business. The logic is as follows:
Volume of units to the distributor will be small in the beginning and the brand needs to
35% to boost contribution Margin to OpEx as the burn rate is particularly high for startup
brands (you just need a lot of people to do all of the stuff required to build a brand
properly).

As the brand grows the cost/unit (FOB) is driven down. Therefore, the margin $ value of
the contribution margin is driven down also.

The realization of scale is good for the brand and good for the distributor so this model

incentives the distributor to help grow the brand in the particular country in a responsible
manner.

The logic is that you demonstrate transparency by showing your Cost Basis in efforts to
build a partnership where the distributor & the brand benefit by realizing scale
economies. However - BE CAREFUL - if you dont choose the right partner they can
screw you over by virtue of your honesty.
Important qualifications about this perspective:
1. FOB means that the distributor is responsible for coordinating logistics from FOB
Destination (most likely Hong Kong) to their host country. FOB is an old legal term for Free
On Board meaning that ownership of the product changes once the product is delivered to the
shipping carrier - make sure that you get paid T/T Advance (a fancy way of say a wire) prior
to shipping. If you dont get paid first, they legally own the goods and have fun trying to collect
from a company in Japan or UK.
2. Tax, Duty, and Quota is a very tricky art that should be the responsibility of the distributor.
Japan has horrendously high tariffs and their Quota system requires intimate understanding of
the inner workings of the system along with the experience to account for the screw ups.

This is why you want to work closely with your Distributor to figure out the right pricing for the
brand for that particular market. This will require the brand to spend time over there and figure
out the market (what products are priced where & whats the market feeling). However, this
doesnt mean that you dont need a distributor to enter a country - there are an insane amount

of factors that require you have someone with relationships to the retailers and their pulse on
the culture to nail down properly.
Wholesale - Model
The Wholesale - Model is more common with larger brands like K2 or Patagonia (I reference
these two brands specifically because I have worked with them in the past). Elements of the
Wholesale - Model:
Pricing for the product is indexed to US Wholesale (which is the largest revenue source
for most brands) thereby obfuscating the true cost basis (think Apple & COGS).

You generally see a range of Wholesale - 30% to start with. As the distributor achieves
the performance hurdles of the distribution agreement they will realize greater
discounts (duh!).

If you have the clout to be able to employ this model - you should do it. But most likely
you will get beaten up so badly in the beginning that this model is prohibitively
challenging for most new brands (anything younger than 3 years).
This a real world example of a pair of shoes & the margin from one of my old distributor
relationships from VL Project.

Distributor Revenue & Margin Analysis

Margin from the distributors perspective is rather complicated. For small brands, you want to
allow the distributor to set pricing - however, you need to make sure that their distribution

timeline is both aggressive, yet prudent. You wont build any staying power in a foreign
countrys fashion scene if you dont have clean & controlled distribution. Many of you can
relate to Ed Hardy from the early-00s when it was moderately cool - now it is literally trash.
Distributors negotiate exclusive rights to sell a brand in a country because it creates an
exclusive value proposition that ensures the highest possible price that they can charge for this
cool American Brand. When you have exclusivity you reduce the ability to price check for
comparable goods and thereby stronger positioned to be a price setter rather than a price taker
(ie empower consumers).
In the beginning, you will see that prices are fairly inelastic for cool brands (however, these
barriers are falling rather quickly in the globalization of fashion) - pricing models trend on 2.7x
to 3.5x Landed Cost.
Distributor Pricing Model for Men's Shoes in Japan under Wholesale - Model

Check - If a standard 2x markup on Wholesale in a foreign country is employed a $100 Shoe

US can be as high as $300 in Japan. Remember a 63% duty rate for imported goods from
China.
This pricing can vary immensely by the deal & by the country - what are the tariffs that the
distributor is responsible for? What does the market command? There are brands here that
are meh! but are gold overseas - this can often float a brand in between fashion cycles.
--------------------------------------------------------------------------------------------Section 4
Retail Margin Analysis
---------------------------------------------------------------------------------------------

Retail Price: This is the price that the ultimate consumer of the product pays when you
purchase a product from Urban Outfitters (retail brand), Bloomingdales, Finish Line, or Amazon
(company). This price is also generally keystone or Wholesale Distribution Price times 2. For
Example:

[NOTE: Keystone is the general rule, but certainly Wholesale Price can be 2.1x Landed or
Retail could be 2.2x Wholesale. This all depends on the retailers pricing power, brand
positioning, and market position to be able to make these tweaks.]
For purposes of moving forward, I am going to assume that you understand what Gross Margin
is (Gross Profit / Revenue) or the % of each $ of Revenue that drops down to fund OpEx. Lets
run through a quick example, from the Retailers Perspective:

This is an oversimplified margin analysis. Lets take it one step further to account for the
realities of life. Two items that can be used to better exemplify try margins are the Credit Card
Fees (you can push CC fees into OpEx under Bank Fees, but we wont go there) & Shipping &
Fulfillment costing.
CC Fees: Credit Card Processing Fees are pretty straight forward as they are a % of Gross
Sales that the CC processor charges to the Retailer for use of a CC or Debit Card. They range
from roughly 1.65% - 5.4% (for a small retailer processing an American Express or Discover
Card - now you know why a lot of bars / convenience stores in SF & NYC dont accept cards?)

*** This may not seem like a big deal, but a 2% reduction in Gross Sales is a BIG Deal.
Assume that a retailer sells 1,000 units/week & there are 52 weeks/year.
One of the more interesting aspects that you should take into account is the shipping &
fulfillment analysis for this margin analysis.
Shipping + Credit Card Fees: One of the more interesting aspects that you should take into
account is the shipping & fulfillment analysis for this margin analysis.
Assumptions:
1. The shipment will be sent FedEx Ground from Zone 1 to Zone 5 (CA to NYC) @ a rate
of $24/carton or $2/unit (footwear is the unit - shoes take up a lot of space). (Remember
this shipment is going directly from the brands warehouse to the individual Retail
Location)
2. 2.0% Credit Card Fee for easy math
(Remember this shipment is going directly from the brands warehouse to the individual Retail
Location)

*** This may not seem like a big deal, but a 2% reduction in Gross Sales is a BIG Deal.
Assume that a retailer sells 1,000 units/week & there are 52 weeks/year.
Shipping truly is an industry of scale economies and this new world of lean inventories requires
major retailers (like Nordstrom) to leverage these cost efficiencies by having brand shipments
routed to their hub & then ship individual stores (driving costs down by having one bulk
shipment to each individual store, of demand forecasted product compositions).
Detailed Breakdown of Retail Margins
This is a breakdown of the components of a simple brick & mortar store structure where the
products are purchased from a brand and fulfilled directly to the store.

In the example illustrated above, the costs in the Costs of Goods Sold section are broken
down sequentially as they are incurred in the products sales cycle. This is what each
component means:
Wholesale Price: This is the price for the product paid to the brand for the product (cost to
retailer is revenue to the brand). Generally speaking the retail price is about 40 50% of the
retail price (if we look at this as based on how this looks from the consumers point of view).

The logic is that the retailer receives this price because they are purchasing in volume think
kind of like buying from Costco except selling for B2B.
Inbound Freight / Shipping Fee: This is price to pull together all the items in a retailers
order, put it all into cartons, and ship it via FedEx or UPS. When working with independent
boutiques, the shipping is generally handled by the brand since convenience for the brand
outweighs the retailers. However, when it comes to working with majors like Nordstrom or
Urban Outfitters they have strict shipping instructions with stiff financial penalties for breaking
them. In the case of the major retailers, they are shipping so much volume that it makes sense
for them to manage the logistics themselves which means that this costs becomes more
complicated in those cases.
Inbound Fee: Once United Parcel Service (UPS) has delivered the product to the store, the
shipment needs to be received, which means unpacking the shipping cartons, checking each
item against the shipping manifest, reconciling the shipment with the invoice (to ensure proper
payment), and stocking the product in the warehouse, store room, or sales floor for selling.
This fee is the same as the receiving charge for a Third-Party Logistics / 3PL for simplicity
sake, but can be calculated by taking the workers monthly salaries who are involved in
receiving divided by the time spent receiving and then dividing that number by the # of units.
Storage Fee: This is the cost holding the product by the retailer until the product can be sold.
Since we are looking at this from the perspective of a Brick and Mortar Retailer, I kicked up the
cost to $1.50 because of the much higher costs of retail real estate.
Credit Card Fee: This is the fee charged by the credit card company for processing the
transaction for the customer.
Why no sales tax? We are not including sales tax in this analysis because its not a profit
contributor. Although the line item appears on a receipt, it is a balance sheet item that
increases a special withholding account that you are supposed to keep for your customers
transactions and pay quarterly to the state. Since this is a null transaction where the money
goes in and cannot be spent - we dont include it in this analysis.
Active Margin Management:
One of the more interesting things that I began to do was implement a proactive management
strategy for retail distribution in the US. Generally, a brand lets its sales reps control most of
the communication with the people that the brand is selling to. This really didnt make a whole
lot of sense because if I am running the bloody company - I need to actively know how the
product is performing at retail for small boutiques. Boutiques are your leading indicator for
pricing & sizing (two hugely important aspects).
Every two weeks, I would call every independent boutique that I worked with - that was
about 117 doors in the US. I focused primarily on the top 30% that I found were the
most interesting.

After chatting with all of them, I would build maps of what I was seeing. I would hear
that a certain product was not performing well in Baton Rouge, LA at $210 retail but was
absolutely killing it at $240 retail in Colombus, OH. In addition, retailers would actively
express their frustrations with heavy product positions on say Nike Dunks in that same
Baton Rouge, LA shop - but the shop in Orlando, FL was drying to get some but
http://Nike.net (nikes wholesale management system wouldnt hook them up with an

allocation).

Based on this feedback, I would build full pricing analyses for each of the biggest bellweather retailers - generally 10 - 12 every 2 weeks (Generally, I did this at night from 12
- 2:30am which is my last conference call of the day 2:30am PST is 5:30pm in China
end of work day).

In the above example, I would have the Baton Rouge, LA retailer reduce price of $195
from $210 but structure increases in other products to compensate for Margin
Reductions. Basically testing price sensitivity to create an optimal margin structure for
the retailer.

In addition, I would use the credit that I extended Baton Rouge, LA store & the different
Orlando, FL (My relationship with them is the only common factor between these two
guys and they both owed me $$) and shift Baton Rouge stores Nike Dunks (that he was
long on) and get them to the Orlando guy.

What did I gain:

Boosted Cash Conversion (If I spent that much time caring about their business, who
the hell do you think that they are going to pay first?)

Increased Rev/Account (I have multiple touch points with my customer and I gave them
something that no one else really could give them - they are of course going to give me
a larger merchandise location at their store)

Deep market insight ( simply just knew more than anyone else about market dynamics
and could apply that knowledge throughout all aspects of the organization - thereby
building the human capital endemic to the organization).

--------------------------------------------------------------------------------------------Section 5
E-Commerce Margin Analysis
--------------------------------------------------------------------------------------------Now lets get to the fun part - online retail is near & dear to my heart and this is the part that I
really wanted to answer. E-Commerce is an incredible channel because you have the ability
to:
Create the Retail Environment: Being online means that retailers have the power to
design the retail narrative that visually communicates the retailers story. Think about it -

a brick and mortar retailer will maybe remodel the story once every five to seven years.
With an online store - you can dynamically change the homepage, create a new theme
for the season, add sub-shops for designs/styles, or with a little html & CSS you can
tell a totally different story.
For a more in-depth version of this story, check out: How Retailers Can Replicate the 'Magic'
of the Apple Store... Online (I am really proud of that piece)
Tell the Story: Being online provides the retailer with the ability to tell the products
story to bring the customer in the world of the retailer. Online Retailers can add looks
to augment the retail experience - the story enables online retailers to tell a story that
would be challenging for a brick & mortar. Did the sales associate get busy and forget
the brands background? Were they too busy and didnt get a chance to connect with
the customer? Online gives the retailer to tell the story that gives the customer a reason
to buy stuff.

Deeper Customer Insight: The luxury of E-Commerce is that we have an incredible

number of tools to track & analyze user behavior in ways that brick & mortar would only
dream of. Although its challenging to nail down your e-commerce analytics - its
extremely powerful to have a detailed customer profile to tweak your merchandising &
promotion strategies.

Regular Engagement: The era of using Facebook & Twitter to simply promote your
products is dead. Modern E-Commerce social strategies involve crafting a narrative that
makes your fans want to engage by NOT talking about yourself. For example, a music
blog will use a new mix to engage fans & readers & then subsequently sell tickets to the
show after they are on the page.

This all leads up to the point of analyzing the costs of the costs of E-Commerce and gather
some insight on the associated margins of online retailers. We are going to look at the margin
for e-commerce from two different perspectives:
1. Traditional E-Commerce: A traditional online retailer is a store that purchases products
from brands at wholesale and then sells the product to customers at retail. Online retailers that
employ this model are Nordstrom, Urban Outfitters, Huckberry, and Tobi. The foundation of
this business is based on the retailer choosing selecting the best pieces from brands to put
together the right assortment of pieces that will most strongly resonate with their audience.
The additional benefit of this model is that the retailer can use Paid Search to bring in new
customers searching for the brands they retail so the popularity of the brands they retail
become a source of customer acquisition.
2. Brand Direct E-Commerce: This is the uber-popular model championed by Bonobos
and Warby Parker that exploded onto the e-commerce landscape in 2011. This model was
enabled primarily by the major foundational trends that I outlined in - What is the next wave of
innovation in e-commerce after flash sales and private sales? Based on the massive
assimilation of Facebook (product) as a daily tool for navigating the web, brands were finally
able to gain access to an audience that enabled them to gain a critical mass of fans in order to
build a stable customer base. By designing and producing the products themselves, these

vertically integrated E-Commerce startups are able to earn significantly more money per item
than traditional online retailers (remember in the traditional approach two different companies
need to make enough margin to support operations & growth).
Traditional E-Commerce Margin Analysis
We are going to look at this first from the perspective of a typical online retailer like Nordstrom
or Urban Outfitters (retail brand).

We are going to look at this first from the perspective of a typical online retailer like Nordstrom
or Urban Outfitters (retail brand).

This is a breakdown of what each line item expense is:

Wholesale Price: This is the price of the product paid by the retailer to the brand for the
product the product is purchased at Wholesale Price which can be thought of as a 50%
discount from the retail price in exchange for volume (i.e. 500 units per style).

Inbound Warehouse Fee: This is the cost of receiving the goods from the UPS carrier at the
warehouse, checking the items against the shipping manifest, and putting them on the
warehouse shelves for quick fulfillment. As warehouses adjust to working with more ECommerce retailers, they are quickly adopting unit pricing for receiving these items. This fee
was taken from actual fees that I paid in 2009 for my old bran VL Project.
Storage Fee: When an item is received, it is not immediately fulfilled to the customer (like is
the case for a Private Sale site when an order is immediately burned & turned, it is received
and immediately packaged for fulfillment to the customer), the product is shelved until an order
is placed. This number is calculated by a daily rate multiplied by the average days in inventory
or the average of the storage expense divided by the number of items in inventory.
Outbound Warehouse Fee: When an order comes in, the items in the order must be picked
from the warehouse shelves and packed in shipping cartons (hence the term Pick & Pack).
This fee is usually a per order charge + a fee per unit of the order, which covers the cost of
having a person pick the order and the packaging requirements of the order.
Outbound Shipping Fee: This is the fee paid to the shipping carrier to transport the item from
the retailers warehouse to the customer. For purposes of this explanation, we are assuming
that the retailer is using U.S. Postal Service Flat Rate boxes that cover nationwide
transportation of the product for a set price. The carrier of choice for E-Commerce is usually
UPS where something like 6% of the US Gross Domestic Product is moving through their
system on any given day.
You might be wondering why the costs of shipping & fulfillment must be included in the Cost of
Goods Sold - well thats a good question. Most retailers have to offer free Shipping as a
normal course of competing online today. The IRS says that when a promotional expense is a
standard practice (i.e. free shipping on all orders) it must be calculated as a Cost of Goods
Sold expense. Here is a little graph that shows you the prevalence of free shipping as a norm
in online retail:

Therefore, when an online retailer utilizes free shipping it must be allocated to COGS.
In Financial Modeling: Where can web startups learn about financial modeling that accounts for
the important metrics and costs? I take you through the costing build of Customer Acquisition
costs. But here is a quick summary:

Customer Acquisition Costs: This is the price paid to Google for Paid Search when using
this as a demand generation technique. In the summary of this methodology, we said that the
value of using the traditional e-commerce model is that you can capture the search traffic from
customers looking for a particular brand. For purposes of this analysis we assumed that the
most that we would pay for a customer is 7.5% of the retail price:

CC Fees: Credit Card Fees are pretty straight forward as they are a % of Gross Sales that the
CC processor charges to the Retailer for use of a CC or Debit Card. They range from roughly
1.65% - 5.4% (for a small retailer processing an AMEX or Discover card).
Brand Direct E-Commerce Profit Margin Analysis

With all of the advantages of selling to major e-commerce retailers, you might be wondering
why would a brand want to sell consumer direct the answer is that it is a far more profitable
transaction for the brand:

As the iPhone integrated itself into the daily lives of the US population and Facebook (product)
drove the majority of Americans to interact with the web, e-commerce was primed for
explosion. In late-2010, we saw that new startups were bursting onto the scene to change the
world.
Two of the most significant consumer direct e-commerce startups from the boom cycle are
Bonobos & Warby Parker. This e-commerce boom period can pretty much be traced back to
the $18.5m investment by Lightspeed Venture Partners & Accel Partners in Bonobos in Nov
10. This is what they saw in the deal:

Here are the definitions as to what each term means:

First Cost: This is the price paid to the factory in China for the product. This term refers to the
final, fully assembled number for the product that will be delivered to the brand at the Port of
Hong Kong. First Cost means that ownership of the product changes once the shipper picks
up the product so the brand owns the product while its on the ocean.

Ocean Freight: All of the products will need to be containerized which means put into
those big shipping containers in one of 3 sizes: 20 ft, 40 ft, or 45ft. If you dont have enough
product to fill a full container, you will work with a freight consolidator that takes your shipment
& puts it together with another shipment to make one large shipment thats more cost effective
to transport. Generally, you logistics firm will include insurance, bond, and other fees here.
Tax & Duty: The US has an incredibly complex set of taxes called the US Harmonized Tariff
Schedule that calculates the tax rate that your products are subject to based on your
investment in lobbying. This fee is paid directly to the treasury.
Drayage: This is the cost of transporting your shipment from the Port of Los angeles to your
warehouse. This fee can be very small if your warehouse is in Los Angeles and you have only
a single container. However, if your warehouse is in Massachusetts, like Bonobos, then this
will need to be routed by train or semi to the appropriate destination.
Warehouses Inbound: These are the costs to receive your shipment at the warehouse,
physically count the product, and putting them on the warehouse shelves for quick fulfillment.
As warehouses adjust to working with more E-Commerce retailers, they are quickly adopting
unit pricing for receiving these items.
Storage Fee: This is the cost holding the product by the retailer until the product can be sold.
Outbound Shipping Fee: This is the fee paid to the shipping carrier to transport the item from
the retailers warehouse to the customer. For purposes of this explanation, we are assuming
that the retailer is using USPS Flat Rate boxes that cover nationwide transportation of the
product for a set price. The carrier of choice for e-commerce is usually UPS where something
like 6% of the US GDP is moving through their system on any given day.
Customer Acquisition Costs: This is the price paid to Google for Paid Search when using
this as a demand generation technique. In the summary of this methodology, we said that the
value of using the traditional e-commerce model is that you can capture the search traffic from
customers looking for a particular brand. For purposes of this analysis we assumed that the
most that we would pay for a customer is 7.5% of the retail price:

CC Fees: Credit Card Fees are pretty straight forward as they are a % of Gross Sales that the
CC processor charges to the Retailer for use of a CC or Debit Card. They range from roughly
1.65% - 5.4% (for a small retailer processing an AMEX or Discover card).
For Google Search Matt Carroll - Google+
Updated 10 Jan, 2013. 135,588 views.
Downvote
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Garrick Saito, former Corp. Controller, large public... (more)

26 upvotes by Phillip Yip, Matthew Carroll, Partha Chakraborty, (more)
Great answers so far, especially the one written by Matthew Carroll.
I'll just add a few additional points that have not yet been mentioned.
There is a sub-set of the full priced retail channel; the off-price channel. This market focuses
on the disposal of slow-moving and excess inventory. The apparel business is volatile.
Fashion items (i.e. styles that have a limited shelf life) are sometimes designed for a "season."
When the season ends, new designs are brought in to replace older ones, giving consumers
something "new" to look forward to. Imagine if you went into your favorite clothing shop only to
find the same old stuff over and over again, year after year. Both the retail and manufacturer
would surely suffocate, as the apparel is much like the movie business; once you've seen it, the
appeal drops dramatically the next time.
As a result, new styles are constantly being designed, so that when you walk into your favorite
store, there is an element of "discovery" and hopefully, appealing choices.
The problem is that tastes are not black and white and there is no "formula" for coming up with
a good design. A design of any kind could take off like wildfire or flop miserably. There is
simply no way to know. So, you throw darts at the dart board hoping that most of them "stick."
With all this uncertainty comes the inevitable volatility and predictable nature of apparel. But,
you have to take an educated guess and produce X amount of units to satisfy what you believe
will be the expected demand. Most of the time you will hopefully guess right, but some of the
time you will guess wrong. Styles that you expect will sell will sit there on the shelves with
everybody thinking "That's the ugliest thing I've ever seen." It happens.
That's the back-story.
The aftermath is slow-moving and excessive inventory. Of course, everyone knows that the full
priced retailer's solution is something called a "sale," or when those efforts have failed, a
"clearance sale."
But what is a manufacturer to do?
They liquidate through one of two sub-sets of the full-priced retail channels. This market is
called the off price market or sometimes, you'll know them as "factory stores."
1. The Marshalls' and Ross' of the world and pure off-price retailers. They buy all the "junk"
manufacturers are trying to unload. Items include factory seconds [1] or first-quality excess, or
fashion items that have passed their "season" (as described above). There is nothing wrong
with them per se. These off-price retailers buy at a price that is somewhere around the
manufacturer's and do a normal market. The manufacturer will make a very modest profit
(usually in the single digits), but more importantly, they are just super happy to get the money
invested back (rather than to let the inventory just sit there collecting dust). The retailer is
happy because they get to compete in a relatively uncrowded playing field and able to make
respectable margins. You don't usually find a liquidation mechanism at off-price retailers,
because the price is already lower than you can find anywhere else, thus, they don't need to.

2. The second off-price channel is typically found with retail stores that are owned and
operated by the manufacturers themselves. These are names you'll recognize like, Guess,
Tommy Hilfiger, Donna Karan, etc. They'll all collect in geographical areas which do not
compete with the full priced stores (for obvious reasons). Factory Outlet malls are what most
people know them as. It takes quite a bit of capital resources to build and operate a chain of
factory stores, which is the reason smaller manufacturers are unable to compete in the off-price
retail market. Internally, when a company is both the wholesaler/manufacturer and off-price
retailer, it becomes much more lucrative for the company, as the company now receives the
profits on retailing (as opposed to only the modest single-digit profit achieved on liquidating at
the manufacturing level). Call it "double profit" if you will.
In closing, I'll just mention the last revenue channel very briefly, as there is not too much magic
to it. When a company established prominent brand name recognition within the marketplace,
they are then uniquely positioned to capitalize on that name through licensing activities. This
has got to be, by far, the most lucrative and low risk part of retailing. At my former company,
we had more than 50 companies licensed to use our name. We easily generated $50 million in
revenue, with only $1 million in related operating expenses. That's a 98% margin. Some
would call if free money. Most manufacturers and retailers would give their left nut for margins
like that. But only a select few companies can do it. Nobody in their right mind would give me
any money to license "Garrick Saito" brand tennis shoes. You brand name needs command
immediate and wide spread recognition.
Licensing involves the payment of royalties, generally in mid to high single digit range. You
license your name for areas that you do not compete with product-wise or geographically. So if
your company was well known for men's and women's tops and bottoms, examples of possible
licensing businesses would be related products such as watches, jewelry, belts, shoes, etc.
This has some strategic brand-building advantages, creating a sense of a "lifestyle" brand, with
zero capital investment. No intention of operating in Russia? Haven't a clue about the culture
or what it takes to successfully market your product there? Fine. Grant a license to a
strategically decided company that does. They sell $100 million? Great pay me $7 million.
Strict control must be demanded and maintained by licensees, as to not risk or jeopardize
tarnishing your valuable intellectual property (i.e. brand name). It's a fabulous way to create a
"global" brand, providing you have a strong one to behind with (domestically).
In closing there is no "typical" margin for a retailer. Each have their own strategy and way of
doing business. The closest I'll say what might be "typical" is that retailer's will generally aim
for double plus $2. It cost you $50, so double + $2 (to cover transportation) = $102. These
rates are rarely achieved, due to liquidation issues. Additionally, store occupancy costs (rent,
depreciation, etc.) are sometimes counted as cost of sales (depending on the company) so that
can widely affect margins. Buying ineptness (the inability to predict sales) can grossly affect
margins. Shrinkage (insufficient security measures) or consumer theft as you might know it,
can adversely affect margins. Every retailer is different. As a result, every retailer's margin is
different, for those reasons.
This was supposed to be a short post. I apologize for the length.
[1] imperfect or non first-quality items. usually a button or two missing, poor stitching, a little
dirty, etc.
============

Where can web startups learn about

financial modeling that accounts for the
important metrics and costs?
Cheers Quora After a year of this article being available free to the public, I have turned this answer into a 70page book that you can purchase to support your favorite Quora guy - http://failharder.com/products/.... The model has been shared with over 300 different startuppers and
has been extremely influential in dozens of e-commerce startups raise their rounds and jump
into the startup game.

Support Matt producing great quality content by purchasing a copy of the model here:
http://fail-harder.com/products/...
A little feedback on the model from:

--------------------------------------------------------------------------------------------Section 1
INTRODUCTION
--------------------------------------------------------------------------------------------More than almost any other year previously, 2013 will be an exceedingly challenging year for
startups, as Fred Wilson discusses in Advice for 2013: Deliver On Your Promises. In such an
uncertain funding environment it is critical that startups of all sizes intimately understand their
actual performance. This means that startups need to pull together all of their parts into a fully
integrated picture that tells the full story of the next 18-months of your startup and adjust for
your successive performance. The deep insight enables startups:
Flexibility: A clearly defined and well-understood financial hurdle brings everyone
together for a shared sacrifice. For example, maybe VPs defer 50% of salary for next 3
months to save a team members job during a tight cash flow period.

Alignment: the knowledge of challenging periods in the next year creates a definite
enemy to rally the company and team around and unifies the entire team around sinking
or swimming together

Accountability: Communicating clearly defined metrics holds leaders accountable for

the performance of the company to the team and to its board.
This article illustrates the framework for how to build a fully integrated financial model from the
ground up, make monthly adjustments, and utilize it to clearly communicate the three goals
above. This article is a refined version of the 400+ Quora Answer: Financial Modeling: Where
can web startups learn about financial modeling that accounts for the important metrics and
costs? that I wrote last year because this does not exists really anywhere else on the
interwebs.
--------------------------------------------------------------------------------------------Section 2
BACKGROUND & OVERVIEW
--------------------------------------------------------------------------------------------This article is going to give you a broad framework for how a fully integrated financial forecasts
is built out for an e-commerce Startups producing their own products a la Bonobos or Warby
Parker. It was built to clearly illustrate the process for methodically analyzing a startup, crafting
a detailed strategic narrative of the 24-mo growth cycle (the qualitative aspect), and
quantitatively applying this story in an integrated product.
The foundation of the model of this model is rock solid surviving several battles at 500
Startups, a couple of AngelList financings, and has been used to raise nearly $11.0 million in
venture financing for E-Commerce Startups over the last 24-months. When it comes to the
amount of analysis and strategic narrative imbued in this process, the most important thing
about this model is that its designed to transition into an operational model that I have used to
run three different e-commerce startups.
The company these financial forecasts are based on is my last Mens Outdoor brand, VL
Project. After launching the footwear line, we expanded the product offering by building a full

bag division of super-durable leather and weatherproof waxed canvas bags and accessories:
There are three main categories in this company:

The company has completed product development at a factory in China

The first month of the model is the first selling month - meaning that the first
purchase order (PO) was placed with the Chinese factory 90-days prior and will
be delivered in Month-0 for selling in Month-1
We are going to systematically break down every step of this process broken out over several
posts to keep the explanation focused:

--------------------------------------------------------------------------------------------Section 3
SALES BUILD
---------------------------------------------------------------------------------------------

Support Matt producing great quality content by purchasing a copy of the model here:
http://fail-harder.com/products/...
The process begins by putting the foundational elements together in the Sales Build sheet.
The Sales Build methodically breaks down store visitors based on the unique factors of each
marketing channel driving them to your store. Each channel has its own unique behavior in
terms of the number of visitors it creates, inbound traffic from click-throughs, engagement rate,
and conversion rate. Although each channel's behavior can differ dramatically, over time you
will notice that a given channels metrics average to fairly reliable numbers.
The foundational unit of this model is the visitor everything is based on her behavior in each
of the channels. The logic is that a visitor represents an opportunity for converting a visitor into
a customer during that session. The model treats returning visitors the same as new visitors
for the sake of simplicity in the forecasting model. Additionally, the model automatically makes
some assumptions that visitor behavior from the sales build will be responsible for the
segmenting and metric performance increases in the Email Build so this all works together.
At the core though, we are always talking about the visitor on site.

Steps for the Traffic Build

--------------------------------------------------------------------------------------------Section 3a
Traffic Build
--------------------------------------------------------------------------------------------Revenue for an online retailer is a function of the number of visitors coming to your site and the
rate of conversion of those visitors into paying customers. The relationships that retailers
cultivate with consumers are extremely interesting in the consumption based culture of the US
the retailer sells highly desirable products that ignite the pleasure centers of the brain (i.e.
retail therapy as my sister commonly refers to Fridays releases dopamine to make people feel
good) when a purchase takes place. Retailers are focused on using the dopamine release to
cultivate deep relationships with customers that can insulate the retailer from competition for
huge chunks of time and annual spending dollars.

Organic traffic refers to traffic that comes to a website via unpaid links from other sites such as
search engines, directories, and third party websites. Organic traffic tends to build over time in
direct correlation to the amount of topical content on the website and its number other sites that
link to yours (backlinks) based on how they are scored for authority by search algorithms
(authority). For purposes of this model, we lump search, SEO, SEM, and Direct traffic into
organic because it essentially means that the traffic came by virtue of the user conducting an
action (i.e. typing in the domain direct or searching for the brand SEO).
The term "organic traffic" is often used to refer to all traffic that is not directly paid for (as
opposed to PPC, CPM, CPA, or other paid models). A website will tend to receive organic
traffic as a natural result of its quality as viewed by search engines and regular Internet users.
It is considered the most valuable form otraffic not only because it is free, but also because
visitors who arrive naturally are a self-selecting group, more likely to have a real interest in the
website's subject.
Because organic traffic is supposed to be natural, it generally cannot be built extremely quickly.
While it is certainly possible to obtain a large number of backlinks for a website in a short
amount of time, this is not necessarily advisable, as it may appear to the search engines that
the website is attempting to artificially inflate its rankings. This perception on the part of the
search engines, even if inaccurate, will often trigger rankings penalties that can be severe and
long lasting.
Organic traffic is:
Free
Natural
High-Quality
Reliable
Slow Building
Sustainable
As a store operates over a period of time, gains customers, and promotes itself - the number of
visitors will increase over time. Organic traffic relates to visitors that:
Directly navigated to your online store by typing the address directly into their browser

Search engine traffic for direct brand keywords (i.e. an organic traffic would be Fail
Harder's E-Commerce Financial Model for Startups for this document where ECommerce Financial Model would be different because the user is not explicitly
searching for this document)

Directories are like the phonebook of days of yore that provide a quick overview of your
site and allow the user to make an informed decision on navigating to your site
Organic traffic is a fundamental driver that encapsulates all of the growth drivers associated
with the store since it covers such a wide breadth of underlying drivers a simple monthly
growth rate is a reliable way to forecast visitors from this channel.

1. Organic Growth Rate

This is % change from one month to the next that you are forecasting to grow based upon your
company organically growing from people randomly searching for something related to your
product on Google (this is why SEO is important), users talking about your company with their
friends, or stumbling across previous marketing campaigns. This is a variable figure that you
can toggle in this model based on what you see fit.
2. Organic Visitors
The number of monthly organic visitors to your site is stored in Google Analytics a monthly
export from Google Analytics will give you this number. You need to start somewhere and this
row calculates the compounded impacts of the previous months Unique visitors * (1 + Organic
Growth Rate). In the example template, the baseline figure is 2,000 unique visitors (a figure
that I pulled from one of my old companys VL Project - a mens footwear line - analytics).
Therefore in Mo-2, we had 2,000 unique visitors from last month and we grew 5% organically so 2,000 * (1 + 5%) = 2,100 forecasted unique visitors.
--------------------------------------------------------------------------------------------Section 3b
Inbound Marketing & Promotion
--------------------------------------------------------------------------------------------Businesses need to market their products in order to let potential customers know that they
exist and how their product/service solves a problem or a customers want/need. In online
retail, the most common way to get the word out and market/promote your store is to contact
blogs & publications that your target audience reads. The goal is to get the blog to write about
your product/service retailed by your store in front of the correct target audience that will want
to purchase the products. There are two examples that demonstrate how this works:
1. TechCrunch Covering a Startups Product Launch: TechCrunch has a highly
educated, tech-focused audience that makes it the premiere platform to talk about a
new tech startup's launch. TechCrunch writes an article about the launch to inform their
readers and the Startup gets the word out about their company driving a ton of signups.
2. Tumblr Style Bloggers Showcasing Looks: In terms of fashion, one of the largest
promotional channels for retailers is the Tumblr. Due to the incredible network effects of
the platform, a small independent Tumblr blogger can build an audience of tens of
thousands of followers in a matter of months. In this case, a retailer would contact a
cool blogger with a large audience to add their products to a couple of images & write a
story about the products.
All of these different blogs & publications will send different amounts of visitors to your site
following a promotional article. The industry heavyweight, TechCrunch, prided itself in the early
days with being able to crash startups applications with the volume of traffic a single article
could generate. Every month there will be new blogs promoting different products and sending
traffic to your store after a couple of months, you will see that there are 3 generic profiles that
construct the traffic being driven to your site. Meaning that all of different blogs with widely
disparate numbers of readers, followers, subscribers, and fans will break down into three
general segments.
Note: Dont waste your time in getting super analytical about this metric - after 10 marketing
pieces are posted about your site take a look at when the marketing piece was posted &
annotate your Google Analytics with the event. You will notice a general trend in # of visitors to

your site.
For the purposes of this financial model, I averaged three traffic categories (Premium,
Moderate, Niche) from four fashion brands for which I had access to their Google Analytics
data. The three categories that promotional traffic breaks down into:
Premium
These are the marketing pieces that have the highest viewership bases of the source
breakdown. They are comprised of highly engaged readers who admire / respect the content
creator.

Moderate
This channel is characterized by second tier blogs and publications that are not as popular as
premium and have a more superficial relationship with the reader. For example, VentureBeat
would be a moderate-type blog relative to TechCrunch the writing is good, it has decent
distribution, and talks about the same type of issues as TechCrunch but has not engendered
the same scale loyalty & engagement. Blogs and publications that are Moderate would:
Send less referral traffic to for any given post or article
Posts have a lower viral coefficient of k (see: Quora, Wikipedia, and ForEntrepreneurs)
The weaker the bond between reader & publication translates down into conversion
rates on this referral source
Niche
Niche channels are probably the most fun, engaging, and valuable channels to work on
although the audience maybe small, very high signal to noise ratio means that you can learn a
ton about the customer in relatively short order. A niche channel refers to an audience that is:
Highly valuable customers that will promote your product & are open and amenable to
changes / delays (compared to Walmart-style, price-focused customers that complain,
constantly about slight deviations in the retail experience)

FailHarder on Quora is a Niche Channel

The model breaks out these channels into two different sections:
1. Monthly Channel Posts: As you revise your marketing strategy create a list of
blogs, contacts, and estimated reach of each prospective blogger. Lay out each
of those prospects based the month you think this is going to drop.
2. Traffic by Source: This is the estimate number of visitors that you can
reasonably expect to come to the site following a marketing post over the course
of a month. Youll notice how the number increases by the Organic Growth
Rate based on the logic that people will hear about you from other channels or
friends and be more inclined to check out the site. This number compounds over
a couple of months a people who saw article 1 will end up clicking through on
article 3 in month 3 - you dont know when its exactly going to happen so its just
an average.
Below is the traffic build that illustrates how to pull this all together in the model:

Retailers constantly need to be working with blogs and promotional channels to get the
word out that
---------------------------------------------------------------------------------------------

Section 3c
Conversion Rates
--------------------------------------------------------------------------------------------A conversion is a customer that purchases from the site or, in other words, converts from a
visitor into a customer. We want to break out the conversions by source because each source
has unique behavior and converts at different rates.
Definition
The conversion rate is a metric that measures the number of positive outcomes for a specific
event out of a total possible number of occurrences. For examples, last week Fail-Harder.com
received 88 visitors & 4 orders here is the conversion rate:

The conversion rates for 4 orders out of a total possible of 88 visitors (its not possible to
generate a sales when the visitor does not go to the site) is 4.54%. IBMs Coremetrics
analytics suite is a tracking tool for major sites to track user behavior online they release a
report covering tens of millions of US consumers on e-commerce metrics for holiday buying:

Organic
Organic visitors are people casually have become aware of your site and have landed on your
page through search. As with any store, there are a certain percentage of people who will
arrive at your store, discover a product, and purchase it without any on-going effort by you. In
general, your organic conversion rate (the number of visitors that place an order and convert
into paying customers) will hover around 0.50% - 2.0% for a typical e-commerce startup.
To see why this happens, lets take an a person who just learned about your site from a friend,
Googled your brand, and arrived on your site is simply discovering and learning about your
brand and products. In our case, lets say they Googled for Canvas & leather, shoulder duffel
with 15 laptop sleeve. Sounds like a perfect fit for our, VL Shoulder Duffel:

Just by virtue of the product details optimized for Google this bag will sell a certain
percentage of visitors simply by them seeing it. This traffic was organically developed (i.e.
without direct investments by you to generate this demand) and converts at typical rate of
0.50% - 2.0%.
Marketing & Promotional
Marketing & Promotional traffic is driven to your site via direct links on another site. This
happens when a fashion blogger writes a review or creates a post rocking your gear. Here is a
sample post of a dope LOOKBOOK.nu. (a hip fashion social network) of a guy rocking the VL
Rucksack:

The differentiating factors of this segment are that another party creating content online and
linking back to your product to generate inbound traffic. This traffic is landing on your site
primed on the value of your product / brand based on the explicit or implied endorsement of
the referrer talking about you and linking to you. If you are cool enough to be written about on
the referrers blog then you are cool enough for the reader to pay attention to evaluating.
Thus traffic from these types of sources generally stratifies into three different segments
Premium, Moderate, and Niche (as explained above). Likewise, their conversion rates reflect
the qualitative and quantitative aspects of the referral source. As you work with more
Email
Email is hands down the most valuable marketing channel that you have because its a direct
workflow interjection into your customers daily lives if you deliver an engaging communication
experience, your brand and products will proactively be in front of your customer. The
brilliance of email is that you have a blank canvas to dynamically craft personalized marketing
messages to the exact person that you should speak to at the exact time.
For sites with hyper-engaged customers like customers like Huckberry & Gilt Groupe (in the 08
early 10 period), the conversion rate can reach as high as 15%. The point of breaking this
segment out is that it behaves substantively different from other channels based on the direct
line of communication & customizable medium.
Social
In March 2010, when Facebook launched Fan pages, they were going to revolutionize ecommerce by integrating the shopping experience directly into the social experience of
Facebook. After a year or so of lackluster performance most major retailers like GAP and
Macys pulled their Facebook stores because people just werent buying.
You need to think of your social channel as a conversation you get your brand in the
information stream of your customers and building mindshare to set yourself up for a sale in the
future (i.e. open the email or be the site they think of when they get their paycheck). However
on any given day, your followers will click through a link and purchase from your site. This
traffic converts into orders at a pretty poor rate anywhere from (0.15% - 0.65% or about 1 sale
on 1,000 visitors).
Here are some stats from the IBM Coremetrics Holiday report:

Paid
Google has built a massive business on paid search because it delivers results. Your most
valuable customers will come from organic conversions, but it is possible to drive revenue
growth through paid search. As with most things, there is inordinate value in understanding
this channel as a company. Keeping a small budget for you and your team to play with, test
out strategies and learn how to drive revenue is a powerful learning experience that will benefit
your company in the long run.
Paid search lands visitors in a different frame of mind on your store and, as such, they behave
differently from a conversion perspective. For visitors who have clicked on Canvas & leather,
shoulder duffel with 15 laptop sleeve as a search term is evaluating if they can trust you as a
business and learning about your brand. Contrast this with people who searched for VL
Project, they will arrive on your site with previous knowledge of your brand and are probably
more likely to make a purchase.
This rate will increase over time as you get better at communicating your brand message,
refining your keywords, and building your company.

One of the most important things to know about building a financial model - is that you don't
want to look like an ass - so saying that you have a 15% conversion rate is cause for someone
to completely discredit your model. I ran into this problem when I was at a Bulge iBank training

for new bankers - basically serving as the entrepreneur for the youngsters to argue against. In
the Saturday session, I used Salesforce as a comp & screwed up the EV calculation because
of the shares outstanding calculation from that super complex convertible note that they
brilliantly issued in Jan '10. Basically, the rest of the session the banker (smartly and to my
dismay/irritation) a comment about the mistake to drastically reduce any clout in the argument
that I was making.
So the most important thing is to present yourself and your calculations as reasonable, logical,
and prudent. To do that, you are going to need some comparable statistics to demonstrate that
you know what you are talking about & that your build is sound.

We pull all these different categories down into a special conversion rate section. For each of
the sections, there are two rows to help tweak the performance of your store:
Optimization
As you start running your store, you will notice aspects of your site that could be better,
creating different landing pages, and simply get better at online retail. This optimization toggle
is a variable that accounts for this by steadily incrementing your performance over time. For
example, your organic conversion rate will steadily increase over time as the market gains
more experience with your site, more customer reviews of products offering social proof, and
you widen your customer base. This is why we increase the conversion rate by 5% every
month that is 5% of the existing conversion rate, not 5% increase.
However, you will notice that there are certain segments that increased at intervals like Inbound
Marketing & Promotion, Email Conversions, and Social. This accounts for site elements that
require investments like landing pages (items that need to be designed, coded, and
implemented). There are a couple of examples here to show you how to do it & you should
customize them based on how they fit in your narrative.
Conversion Rate

The first value is a blue variable or a fixed variable that has been added based on the low end
of what I have seen for each of these channels. This is a calculated row based on the
optimization rates from above.
Weighted Average Conversion Rate
Keeping track of each channel individually is super complicated and makes the model prone to
errors as you use it while running your business. This metric:
Sums the orders by channels defined by their respective conversion rates (the weighted
part)

Divides the orders by total possible selling outcomes or total visitors (each visitor is a
shot on goal or an opportunity to sell).
--------------------------------------------------------------------------------------------Section 3d
Sales Mix & Pricing
--------------------------------------------------------------------------------------------Sales Mix is the weighting average order value for your company's sales. A simple average is
misleading because smaller $ value items will compromise a higher proportion of sales #s than
the larger ticket items (most likely).

Shipping Analysis

Purchases by Segment

Leading up to this section, we forecasted two important variables:

Segment Traffic
In the first section of the Sales Build, we forecasted the estimated traffic for each given
channel. This traffic represents a potential sale so its our total population of people that we
could realistically generate sales from.
Segment Conversion Rate
In the Conversion Rate section, we broke out the conversion rate for each channel based on
the behavioral factors that make each channel unique.

Revenue Build
For the purchases by segment, we multiple the traffic by conversion rate for each channel to
arrive at the orders by channel.

--------------------------------------------------------------------------------------------Section 3e
Long Term Value per Customer

--------------------------------------------------------------------------------------------*** A more advanced version of this article and Excel Version of the model can be
purchased at: http://f4il.co/RgOA9s ***
Some of you have noted in messages that there is this huge portion of the Sales Build that I
omitted from explaining in the Long Term Value per Customer. It is a contentious issue that is
very difficult to quantify, but I will explain it in more detail here.
LTV Logic
Building brands is an intensely emotional process of connecting with your customers
and creating an ongoing dialogue that makes your customers feel like you are really
friends IRL.

Customers want to feel like they are close to small brands almost to the point where
they can say "Oh this shirt? It's my buddy's brand.." For small brands, the first
customers are going to be ideologically similar to the founders and the branding/external
communication will support this. In fact, some people who I would qualify as good
friends began as customers of one of my old brands, VL Project.

As such, there are a certain portion of customers that will love the product so much that
they will look to purchase additional products from you to fill out their collections /
purchase complementary goods (Dopp Kit with Overnight or Category C when the
original purchase was Category A).
Long Term Revenue is reflective of two main segments - Secondary / Complimentary
purchases & Replacement Purchases.

Secondary Purchases are purchases based on super satisfied customers & those strongly
connected to the brand. Most likely they are purchasing downstream so if they purchased the
big bag (Cat. A) then they would purchase a Dopp Kit for the overnight bag. Most likely, this
purchase will take place after the initial purchase because they will have the opportunity to feel
& use the product & have a time to experience it (like a trip).
So to calculate the Secondary Purchases, we need:
Repurchase Rate
The % of customers in each cohort that will purchase another item. I set this rate at 10%
because that is a good baseline forecast. For apparel companies this is way different, but for a
leather goods company like the one I built in the model - it's kind of all that we have.
Secondary Purchase Value
This is a modifier from the Average Order Value that will be used to calculate LTV rev. Above I
mentioned that customers will most likely be purchasing complementary goods, so category C
is a safe bet as to what they will be buying next. OR if they are a Category B who purchased
the backpack, they most likely will purchase the messenger for different occasions. Either way
a forecasted secondary purchase value of $220 (or 75% of Average Order Value (AOV) for the
monthly of the cohort) is pretty safe assumption.
Secondary Purchase Timeframe
The timeline when the vast majority of purchases will be taking place. This is an arbitrary #
based on experience, but I think that 6-months is going to cover the vast majority of the cases.
Since we can't really forecast a distribution - we should assume that the secondary purchases
are evenly distributed throughout this 6-month window. For example:

Now we know that the timeframe is 6-months. In this simple example, the incremental monthly
from Cohort 1 is $220/mo for periods (Mo-2 through Mo-7).
Now that we have the 2ndary purchases calculated, there is going to be a lifetime customer.
This is essentially the same calculation as a secondary purchase just the logic is different.
Replacement Timeframe:
The lifecycle of the product when the customer will most likely be in the market for a
replacement. I arbitrarily set this as 18-months so that it fits on my 24-month forecast. But this
is the time when you start to see people returning to the site to pick up the same good or more.
Replacement %
This is the # of customers that were stoked on the product that want to get another. This # is
going to be different than the secondary purchase rate so it has it's own toggle.

--------------------------------------------------------------------------------------------Section 3f

Sales Build Overview

---------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------Section 4
Email Build
---------------------------------------------------------------------------------------------

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One of the most important things to do as a young startup is to communicate & engage with
your consumer. At least today, the primary & most valuable way of doing this is through email.
The goal is to build a direct & engaging dialogue between you and your fans in a private format
with the visual and content freedom (READ branding) that most effectively communicates your
story & builds the relationship. This section is where you work to systemically build out how
this list will generate revenue for your startup.

Newsletter Reach is the total # of people that are subscribed to your email list. If you
previously worked at a brand, have a personal blog/email list, or had a bad ass pre-launch
strategy that got a ton of emails (a la hipster.com) - 4,500 is a decent # to start. As we go
down this build there will be additions & subtractions to this # reflected in the changes shown
for the following month.
Campaigns are the # of emails that you are sending to each member of the newsletter. This
number grows fairly slowly (1 1.3 1.5) due to the fact that you are going to invest more
time, cash, and energy on capitalizing on this opportunity as it becomes a more substantive
revenue source. In addition, over the course of two years you will learn what your subscribers
want to read and customize the content & message to deliver on their expectations
Segments are the qualitative differentiating factors that compromise your subscriber list. All
customers fall into broad customer segments that you will learn more and more about as you
gain experiential knowledge from working with them. For purposes of this model, I arbitrarily
put the numbers to 1, 2, 3, 4. You can get as complex as you want, but keep in mind that this
takes a lot of time building custom content in a way that delivers positive ROI for the time
invested - dont go nuts here.
Click Through Rate (Engagement)

Definition:
An email click-through rate is defined as the number of recipients who clicked
one or more links in an email and landed on the sender's website, blog, or other
desired destination. More simply, email click-through rates represent the number
of clicks that your email generated.
Click Throughs are newsletter recipients that opened the email & clicked on something within
the link (performed an action), thereby placing them within the medium to purchase something
from your site. If you create more engaging emails & more clear about what actions you want
the recipient to take, then you will have more people clicking & coming to your site. To get
better at something relies on experience, knowledge, and trial & error - hence why in the 6th
month, the model adds a second customer segment (meaning you have learned what you did
well & poorly over the last 5 months and are positioned to capitalize on those mistakes in
month 6)

1. Optimization Gains from Segmentation

CTR Optimization Gains (2.5%)
X # of Monthly Segments (Segments = Optimizing Emails)
Total Optimization Gain (2.5% * 2 Segments = 5.00%)
2. Total Click Through Rate
Base Rate (15.00%)
+ Optimization Gains (5.00% = 2.5% * 2 Segments)
Monthly CTR Rate ( Mo-6 = 20.00% = Base Rate 15.00% + 5.00% Optimization Gains
In order to effectively forecast the Click-Through Rates for your startup, we need some
comparable stats to benchmark your performance against:

--------------------------------------------------------------------------------------------Email Benchmarks - Apparel Retail

---------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------Email Benchmarks - General Retail

---------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------Email Benchmarks - Specialty Retail

---------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------Campaign Performance
How different types of emails performed in Q3 '12 based on the type of content in each email
and the goal of the campaign.
---------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------Campaign Performance - Editorial Emails

Editorial emails are messages that include content that provides value to the reader without a
purchase (may and should also include some marketing calls to action).
---------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------Campaign Performance - Marketing Emails

Straight promotional email: sole purpose of the message is to drive a purchase (or in some
cases, generate a lead that can drive to the purchase)
---------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------Campaign Performance - Editorial & Marketing Email - Open & Click Rates
---------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------CTOR - Click to Open Rate:

The aggregate # of clicks / # of Opens. This number is a reflection of the effectiveness of
emails based on "engaged parties". If the subscriber doesn't open the email it's not really fair
to include them in the analysis of the effectiveness of the email.
---------------------------------------------------------------------------------------------

Just found this little neato article on Click to Open Rates... Obviously the metric is not perfect,
but it does give you a pretty sweet quick view of the company (versus using <div> show/hide
for open rate tracking) - Measuring Click-to-open Rate (CTOR) for Email Marketing Campaigns
Forward Rate
This is an area that I was hesitate to initially build into the model, but it was something that I
saw very often in myself and a behavior that is systemically different from the open &
engagement rates of other asks of the forecast. The logic is that the email marketing will excite
to a certain % of your subscribers that they will want to forward the message onto to their
friends - something maybe more applicable to someone else or simply to show off something
cool. Think of it like sharing on Facebook & tagging a friend in the post.
Forward Rate: The % of readers that will forward the campaign to someone else (they could
be a subscriber but most likely not). Based on the campaigns that I have run & the campaigns
of companies that I work with, I set this # at 4.5% - this # could trend up over time, but for
illustrative purposes lets keep this constant since its a more difficult variable to conceptually
quantify.
Forward Rate is based on Open Rate because conceptually the original recipicient may see it
and think Wow, this is perfect for John and subsequently forward the email to John. It doesnt
necessarily rely on that recipient engaging with the email or clicking through him/herself - only
that they saw it.
Forward Click Through Rate ( FWD CTR): The % of users that will click on the email and go to
your site. In the model, the CTR rate is 75% - this may appear high, but odds are that this
person is close friends with the recipient as implicitly the sender has some understanding of the
forwarded persons personality that this email will appeal to them. Hence why they will open it.
Email Traffic to Site (Calculated Summary)This is a calculation summary section to provide
explicit #s of visitors going to your site.

Net Additions to Email List (Newsletter Reach Growth)The goal is obviously to build your
email marketing channel and more effectively generate revenue from your customers serve
as a controlled demand source for your business.
Site Signups: When a visitor comes to your site and enters her email into the Newsletter
Signup box & successfully signs up for your list.
Signup Optimization Rate: A toggle metric that reflects that you will get better at signing up
visitors to your site as you gain more experience & deeper understanding of what they are
doing & how you can effectively capture their email.
Signup Rate: The conversion rate of visitors to your site that signup for the newsletter. This
number can be found in your KissMetrics or setup as a Goal in Google Analytics.
Purchase Signups:
Think about when you enter your billing information on a standard shopping cart, there is
generally a check box selected by default to sign up for the sites newsletter list. Since this
enabled by default, there is a strong possibility (i.e. 75% of the time, which is what I have in the
model & my average experience of successful cart goal completions in my analytics for
Purchase Conversions + Email Signup) This becomes important for Long Term Value per
customer.

Unsubscribes: As easily as users signup to follow your company - they can likewise
unsubscribe. One guiding principle to govern your strategic decisions about your email
marketing initiatives - every email is a touch point with your consumer that you give them the
power to say do I really like this? Do these guys get me? Do I really care about receiving
these emails? This is why I add the segmentation & the campaigns to the main section to
reflect that you will learn how to better target your customer. However, prudence is your friend
- often times it is better to not say anything at all, if you arent sure that you will say the right
thing to grab the email subscribers attention & bring them closer to the brand.
Saturation Rate: As you send more emails, you are increasing the natural churn rate in email
subscribers. This # increases based on the fact that a certain % of users will simply just get
tired of getting your emails. This is okay - dont be upset, its normal. But its your job to learn
from this to understand why and how to better tailor your emails to reduce this risk
Unsubscribe Rate: The % of the your email list that unsubscribe on a monthly basis. The
number that I used here .25% begins low because you are a small brand (read: cool, new, you
are cool because you are new). So you have a low # in the beginning - this sample variable is
the average from 4 companies in fashion that I have run or been a part of for the last 5 years.

--------------------------------------------------------------------------------------------Section 5
Social Build
---------------------------------------------------------------------------------------------

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This is fairly rudimentary approach to calculating the impact of social virality as a traffic source.

The foundation is approach this:

1. An article is written about your company ( # of articles from the Marketing & Promotions
section from the Sales Build Sheet)
2. The assumption is that of those who click through (i.e. Premium: 1,500) to your site a
certain % will share it on Facebook or Twitter (illustrated below by Rebroadcast rate by Source)
3. Do a Twitter search / SocialMention.com / Klout search for a good idea for the distribution of
average # of followers.
4. Take the sumproduct to establish the total potential # of people that could become aware of
your company by virtue of their followers
5. There is a fairly low engagement rate these days from social sources. Hence the 0.5%
traffic inbound to your site.
Rebroadcast Build
A rebroadcast is essentially a "Tweet" based on the original content marketing piece that
references your company. Considering the tech-focused community on Quora, I will use a
TechCrunch example:
1. TechCrunch posts an article about your company.
2. 000,000s of people see this article and think it's cool, so they Tweet a link to the article - this
is what I refer to as the "Rebroadcast Rate", meaning that readers of the article promote the
content piece to their followers.
3. Followers of the "Rebroadcaster" (readers of the TechCrunch article who tweeted/shared on
Facebook) - then come to the site.
4. In order to get a proxy for how many users could, we have to calculate the average # of
followers by source. Obviously, the premium source (TechCrunch) has techie users who are
more inclined to have lots of followers.
[Note: Don't get bogged down in a super detailed data analysis of average twitter followers by
source - just look at like 20 or 30 profiles (this will take all of 5 mins I know) and get a general
picture - then use that #. This number changes over time & as the more followers build on
Twitter or Facebook, hence why this Figure reoccurs monthly]
5. We calculate Rebroadcast rate by the following: TC Reader Tweets, then one of the
followers of the Rebroadcaster clicks on the shared link & goes to TechCrunch. In turn a
certain % (in this cast we forecast it at 0.50%) will click through from the TC article to your site.
I know this is a little confusing but it's important to begin to format the framework for
understanding how traffic & subsequently sales will grow as references diffuse through the
social-sphere.

Sphere of Influence Build

In the same way that we built the newsletter reach, we are going to quantify the net gains of
Facebook/Twitter followers of your site.
We start at the Organic Follow-Rate - or users who just came to your site & started following
you. This rate is generally very low because although their are 100m Twitter users only a small
% of those users are "active" - hence social is not within their workflows.

We can see that a connecting with brands & companies via social is "catching on" so let's take
a look at some research that was just research about demographics of users that are following
brands.
--------------------------------------------------------------------------------------------Section 6
PAID SEARCH BUILD
---------------------------------------------------------------------------------------------

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Pay Per Click (PPC) (also called Cost Per Click (CPC) is an Internet Advertising model used
to direct traffic to websites, where advertisers pay the publisher (typically a website owner)
when the ad is clicked. With search engines, advertisers typically bid on keyword phrases
relevant to their target market market. Websites that utilize PPC ads will display an
advertisement when a keyword query matches an advertiser's keyword list, or when a content
site displays relevant content. Such advertisements are called sponsored links or sponsored
ads, and appear adjacent to, above, or beneath organic results on search engine results
pages, or anywhere a web developer chooses on a content site
Google AdWords is hands down one of the biggest strategic advantages to online retailers
because you have access to basically an unlimited market of new customer. This section will
primarily be focused on using the tools in your Google AdWords account for analyzing how this
will drive revenue for your startup.
To explain this section, we are going to use the VL Project Travel Duffel that we have used in
several examples previously:

The essence of Google Paid Search is based on using keywords to provide context to the
search algorithms for users. The first step is to log in to Google AdWords and go to their
Google Keyword Tool that will give you traffic estimates for the volume of monthly searches
for the keyword that you select for the product. For this product, here are the search terms that
were input into the Google Keyword Tool:
Canvas Travel Duffel
Travel Duffel Bag
Mens Shoulder Bag
Mens Outdoor Luggage
Here were the results from these keyword:

Now these are not very large numbers, but the power of the Google Keywords tool is that it
gives you tons of ideas on search terms. Here were all of the different categories that Google
recommended to me based on those four search terms:

After looking at some of the suggested search terms, here were the additional keywords that
quite aptly refer to this item the yellow highlighted sections are the terms that I selected to
include in the search:

After you generate a list of keyword ideas, you move on to the Google Traffic Estimator Tool
here were the results from the Google Traffic Estimator:

This process will give you a general idea for how much you will need to spend based on your
budgetary restrictions and revenue goals. After you input your data for your keyword results,
you will have your averages for your product.
In order to forecast how this channel will perform, we need to aggregate all the information
from the Google Traffic Estimator tool
Here are the relevant definitions:
Ad Impressions
The total number of times your ad was seen by a user conducting a search. An
impression is counted each time your ad is shown on a search results page.
Click-Through Rates (CTR)
The ratio of the number of clicks that your ad receives divided by the number of
times your ad is shown (Ad Impressions).

Clicks
The traffic generated by Click-Through Rates generated on each ad groups
impressions. Clicks on a Paid Search ad become a visitor to your site.
Cost Per Click (CPC)
The average cost that you will pay for each click generated by Google on one of
your ads. This is calculated by taking your total budget ($150 in above graphic)
divided by the number of clicks that money generated. Here is an example:

Cost
As the name Pay Per Click (PPC) implies you only pay for the clicks that are
generated by Google. This is in contrast to CPM (cost per impression) (CPM)
advertising model that Facebook (product) uses and charges you based on the
number of times that your advert shows up on the screen regardless if any action
is taken. Additionally, there is a third model called Cost Per Action (CPA). CPA
places the highest risk on the advertiser because they only pay when an action
occurs, which is generally an order is placed.
Monthly
Google AdWords provides you with daily figures that are helpful to understand

simply how Google AdWords will function as a valuable tool for your startup.
However, we have to project that daily figure into a monthly number to get a high
level view of this channel. There are on average 20.92 working days per month,
so we assume that we are only going to be aggressively using paid search when
there is someone in the office (i.e. someone to watch the program).
Historically, e-commerce traffic plummeted on the weekends as people didnt
have the same quality of Internet connection at home as they did at work.
However, since the iPad zoomed to mass popularity this trend is reversing.
Weekend traffic to retailers is progressively rising as the iPad is an incredible
shopping tool for those lazy Saturdays on the couch or, while watching the Food
Network, you can pick up a tool from Amazon (company) for the kitchen.
You can toggle this figure to anything you want, but 20 is a good round figure that
you can control and learn from. The most important aspect of Paid Search is
learning once you know it, you can hire someone else to do it for you. Maybe
those additional 10 days can be spent reviewing and analyzing your performance
to create an even better strategy for next round.
Cost of Customer Acquisition (CPA)
The most important number that you want to base your analysis on is your cost
per acquisition or the average cost it takes to acquire an order. CPC represents
the cost to get a user on your site, but it does not account for performance of this
paid channel. The Cost per Acquisition takes the amount spent on clicks and
divides it by the number of orders (i.e. the performance aspect of the metric).
Here is what the CPA formula looks like:

Weighted Average Metrics - CTR, CPC, CR, & CPA

When analyzing a group of metrics that do not all equally contribute to the metric,
the weighted average method provides on of the best ways to simply analyze a
metric. Think about this logically in the case of the Average CPC rate for the
month if you did a simple average, each value ($2.74, $2.79, $2.37, $2.27)
would be totaled and divided by four. That means that the average is equally
based on each of these 4 values.
This approach does not take into account the fact that these CPC rates
performed very differently in terms of number of clicks (i.e. visitors). When
thinking about a metric that depends on various weights of factors we use the
weighted average method to get a more informed view of the metric. The
weighted average takes the amount each value contributes to the whole and then
totals those contributions up. Here is how this looks visually:

Here is the overview for all the different aspects of the Paid Search:

Now that we have the build metrics added to the model, we can now begin to flush out the
budget to this model.

In order to forecast the Paid Search Model, we need to break down this section into four main
components:
Budget: The monthly amount of money allocated to be spent on Paid Search Monthly
CTR Build: The improvements in click-throughs on ad impressions that will be made
overtime
Conversion (marketing) Build: The progressive improvements to the site, checkout
process, and customer experience that will increase conversions from Paid Search
CPC Build: Your weighted average CPC cost will get progressively higher over time
based on the constant improvement & targeting new segments we call it optimization
because the metric refers to getting better.

Budgets & Budget Growth

This represents the increase in budget that you will allocate based on your success with the
channel. The Budget Growth variable is a fixed value that you can adjust monthly based on
the story that you are telling in your startups vision narrative. For example, leading up to the
holiday season, you will be increasing your spend to generate new sales for the end of the
year. Additionally, as you have a new shipment approaching, you can increase your budget to
drive sales to drive down inventory levels in preparation for the new stock coming into the
warehouse.
This is a blue section because you can change each of these numbers based on your budget.
It might be worth having a negative month to drive through some extra inventory in preparation
for a major shipment. This situation can be risky but you have the ability to toggle this as you
see fit.
CTR Optimization
Its incredibly important that this activity be managed form inside the company and preferably
by each person on your team play a role in driving revenue through paid search. After each
campaign, review the analytics, content, and demographics to build a drivers list what were
the magic components of this particular text copy with demographics of the audience that make
this successful or not. Every month, you will be making tweaks to the terms, headline, copy,
and pricing based on whats working for your products.

The model increments the conversion rate monthly based on a percentage because of these

tweaks that you will be making. To understand what you should increment this number by
monthly lets go back to out Google Traffic Estimator tool and plugin two sets of numbers that
demonstrate the possible range for the quality improvement.

After you have a good idea of what the market looks like at various levels, we need to bring it
home to our model:

Now although our Click-Through Rates (CTR) increases way more than the rate on the Google
Traffic Estimator tool, we see that the ending CTR metric of 4.43% is more inline with the CTRs
Google estimates that we should be seeing. Well-done Paid Search should yield between
2.50% - 5.00% CTR so this range would be fairly average for a startup.
Conversion (marketing) Optimization
One of the most difficult aspects for most new founders to understand is that the rules are
completely different for a new startup than they are for everyone else. Most founders think
that their experience running marketing for a previous employers means that their old
conversion rate benchmarks should connect the answer is No! The fight to convert the
customer is completely different for a brand/startup that no one has ever heard of than it is
simply for a company that has been around for a couple of years.

As such your conversion rates will start relatively low for a new e-commerce startup and rise
fairly quickly over the first couple of years. In this analysis, we estimated that we would
generate a 50% improvement from the month when we start. These numbers are on the
conservative side, but give you a good look at how the range performs over time.
Cost Per Click (CPC) Optimization (CPC)
As your budget expands, gain more experience with Google, and build your brand presence
you will progressively be able to move up the CPC budget world and fight bigger fights in more
expensive keyword groups. In this forecast we stay fairly conservative for the sake of building
a highly engaged customer-base.

--------------------------------------------------------------------------------------------Section 7
Production & Expense Build
---------------------------------------------------------------------------------------------

Support Matt producing great quality content by purchasing a copy of the model here:
http://fail-harder.com/products/...
The Production & Expense Build is where the we breakdown the demand estimates (from the
Sales Build) into their cost pieces and forecast how these expenses will connect with pricing &
margins. The main aspect of this model is that all goods are purchased FOB Hong Kong. This
means that the factory assumes all aspects of the production process (sourcing materials,
labor, cartonizing, containerizing, and transport to Hong Kong as the port of export).

Production Costing
The foundation of any model is the cost to produce the product that you are actually selling
because the selling price is determined as a markup on the cost on the cost of the product.
This makes logical sense because simply selling a product by your competition without taking
into account the cost can lead to selling products at a loss (i.e. not making enough profit to run

the company).

This model is an e-commerce consumer direct brand that produces product in China and sells
directly to consumers here in the US. Here is a quick overview of all the steps in the product
costing build:

Each of these steps contains a direct cost for the product that we need to understand in order
to properly account for the profitability of the company.
Demand Forecast
In each of the four previous sections, the model lays out the strategic narrative of the company
it tells the story for how its going to go and what the results are going to be. This is all
necessary because they create our demand forecast or the amount of units that are forecasted
to be needed to meet our sales goals. The Sales Build pulls together all of the order forecasts
from each marketing channel and creates a simple table telling us how many units in each
category we are going to sell.

We need to breakdown the forecasted orders by category and by unit to properly account for
how each category will be distributed for production. For this demand forecast, we look at our
Sales Build to find the sales distribution by category (on the Sales Build Sheet Rows 67 73),
the Total Orders (from the Sales Build Sheet Rows 82 -90), and the average units per order
(Sales Build Row 73) for all the data needed to calculate each categorys unit forecast. This is
how the calculation is done:

Fill this formula down for each category and across for each month and you have a breakdown
of the unit sales by month.

Forecasting Future POs

This model simply breaks down the production volumes into purchase orders placed every six
months. However, our model only forecasts 24-months of the growth cycle meaning that in
Month 24, the 5th production will be landing at your warehouse. The model accounts for this
by using a simple regression forecast for the 6-months not covered by the in-depth Sales Build.
There are far more complicated ways to calculate this production run, but its so far off in the
future that using these more complicated forecasting. For methodologies creates unnecessary

complications.
A simple Regression Forecasting is used to create a best-fit trend line based on our in-depth
demand forecast. The primary reason that this cost is included in the model is to demonstrate
that we at least know its coming and have allocated resources for the expense. Additionally,
this model is built to be an Operational Model that is constantly updated and tweaked as the
company launches. Thus as you input actual sales data and performance metrics, the model
will adjust to fit the unique criteria of your firm.
This is how each of the 6 future periods for PO-5 are calculated:

This calculation will give you a simple regression forecast for each unit in periods 25 30:

To create the final purchase order, simply total up the units for each category and for each
month and bring it all together in a simple table that breaks out each purchase order by
category and production:

Additional Production Requirements

Our production forecast is based explicitly on our forecasts that represent the most logical case
for the realistic development of the firm. If everything goes exactly according to this forecast,
we are going to be running pretty lean by most standards of inventory. In order to account for
the fudge factor (a technical term), we need to add a couple of arbitrary toggles to account for
two additional factors:
Overbuy
Overbuy simply means the number of units that you buy over and above the demand
forecast. An overbuy represents a pro-growth, riskier managerial strategy that places more
value on gaining customers and sales over the financial constraints of allocating additional

capital to inventory. This places considerably more value on the opportunity cost of a stock-out
causing a customer to leave versus the inventory sitting on the store shelves.
This is also why Paid Search is designed to be an in-house managed process to ensure that
the firm can drive sales should inventory turn slow down (i.e. you increase your AdWords
budget to drive sales directed at the products that you need to sell to generate cash or reduce
inventory positions for a new production order getting ready to hit your warehouse).

Samples, Promo, & Marketing

When you have a brand, the oldest marketing method is to give the product away for free to get
the buzz started. In order to get the Inbound Marketing & Promotion blog hits rolling on your
brand, you have to give them gear if they like it, they will snap some photos, write a post, and
promote it to start getting the word out.
I will never forget this quote that my old business partner M Coleman Horn told me about
something Phil Knight, the founder of Nike, told him while he was heading up Womens
Technical, never underestimate the value of a free pair of shoes.
You get people to fall in love by getting the product in their hands, connecting with the brand,
and now you have an audience to bring into your story and fall in love with you!

Final Purchase Order Breakdown

Now we bring everything together to create our final purchase orders that we will use to
calculate the rest of our expenses.

This is how it all comes together:

Shipping & Landing Expense

Coordinating logistics for a production is one of the most frustrating aspects of running a brand
because of the dearth of information regarding the exact stage of production makes this
process a headache. The majority of production in China is still managed by paper with some
of the better factories using Excel as their MRP (Manufacturing Resource Planning System
an industrial enterprise software system that plans all aspects of production this is an Oracletype platform/application that is 100% of the time the most miserable piece of shit to use).
This section is to serve two goals:
1. Provide a rough framework for coordinating number of containers with your logistics partner
2. Forecast the cost of shipping these containers.
Here is an overview of the Shipping & Landing Expense section:

There are three main aspects of this build:

Cartonization
Cartonization is the process by which finished units are packed into cartons for shipping. For
this model, I took the actual shipping details from the VL bag launch to give you an idea of
how this all stacks out:
Category 1: 5 Units per Carton
Category 2: 10 Units per Carton
Category 3: 50 Units per Carton

Containerization
Containerization is the process of packing the cartons into containers for loading onto ships for
transport. This section has the most complicated formulas to make the model work for
everyone, but its built for people to simply input numbers without all the excel complexity. This
has been broken out into its own section because of the length of explanation required for this
all to make sense.

This section breaks down the cartons by the container it fits in it fills up a 40 container, then
fills up a 20, and if there is still cartons that are inefficient to ship via a container it ships via
LCL (Less than Container Load) loose freight.
Shipping Cost Breakdown

All Screenshots

--------------------------------------------------------------------------------------------Margin Analysis for Distributors, Brick & Mortar Retailers, and Online Retailers
--------------------------------------------------------------------------------------------This section is from another answer that really adds value to this answer & I wanted you fine
Quorans to have the info regardless of where you came across it!
Matthew Carroll's answer to E-Commerce: What's the average Profit Margin earned by
apparel distributors? Brick & Mortar Retailers? E-Commerce / Online Retailers?

( This answer has been completely revised & expanded in light of some awesome holiday
reading)
Lets get some definitions dialed in prior to launching into a deeper investigation of your
question.
Background & Overview: This section will give you a quick background how Distributors,
Retailers, and Brand Direct E-Commerce work as businesses and their corresponding
relationship to the brand who makes the products available for retail.
Distributor:

A distributor is an entity that engages into a formal business relationship with a brand for the
rights to serve as local representation and (most of the time) to be the exclusive purveyor for
the brands products. In fashion, distributors are generally the international partners lending
their relationships, understanding of the intricacies of the local market, and financial resources
to effectively capitalize on a brands market opportunity. Therefore, distributors are primarily
involved in B2B relationships - they purchase a large quantity of goods (a min. # set by the
brand in order to grant distributor status pricing discounts) and primarily sell to retailers in the
local market. However, distributors are increasingly capitalizing on the e-commerce by
managing the local e-commerce presence for the brand in that territory.
An example of one of best international distributors in the world for fashion startups is Jack of
all Trades (JOAT) Co for Japan. I have worked with JOAT over the years with several
companies and one clear value propositions for their organization is Lloyd Seino. Lloyd is a Biz
Dev / Brand Manager (as we would call it in the US) and truly has one of the best eyes for a
fledgling brands market potential in the crowded Japanese fashion industry. JOAT is also
regarded as one of the leading companies for identifying and building a brand into a Japanese
powerhouse (as Lloyd has done with dozens of brands).
[ Note: You can generally find any brands distributor by going to brandxyz.com -> Contact &
look for International. This section will have the names of the international companies that
distribute the brands products. ]
In other industries there are domestic local distributors that have regional territories - a two
good examples are food and alcohol. Due to the large geography of the US, food was most
commonly broken down into regional distribution because of the large number of customers per
region and difficulty in coordinating the logistics of food delivery. Lets take the example of a
buddys health bar company that he purchase 2009:
1. In 2009, Ryan, my buddy, purchased the rights for Southern California to distribute energy
bars to local and national chains in that region.
2. By purchasing the rights to Southern California, Ryan could purchase the energy bars at a
special distributor price
3. Ryan could focus on building deep market insight into Southern California, developing great
relationships with retailers, and maximizing the effectiveness of his advertising spend in based
on whats going on there (i.e. He could setup a booth at a local music festival to sell his energy
bars while the kids are dancing in the perpetual summer sun of Los Angeles - where this
festival would fall under the radar of the national marketing goals of this company)
Retailer:
[ Note: I have written an extremely in-depth analysis of the relationship between Retailers &
Brands and how this dichotomy drives retail prices that you see online and in-store - How do
designers set prices for dresses and why do dresses often cost more on a designer's website
than on purchase through an online retailer? ]
This is a vendor, generally within the home market for the brand, who purchases goods at
wholesale (about 52 - 55% below what you see at retail for). The retailer issues a purchase
order (a legally binding document to purchase X # of goods at Y price to be delivered at a
specified time frame) to a brand. The brand takes all of the POs and goes to production for
deliveries roughly about 4 - 6 months after the PO was issued. Upon completion the brand
ships the goods from their warehouse or factory (depending on the size of the retailer).
This is what the stages look like from the Brands perspective:

The Retailers job is to focus:

Building brand equity with the customer to be a shopping resource.

Create a customer experience that derives long term value from investments in
customer mindshare (i.e. I think that I am going to stop by Bloomingdale's after work,
said the proverbial customer)

Develop extensive local customer insights that enables the retailer to optimize their
merchandising assortment to reflect the local trends, fashion, and personality of a
stores retail presence

Understand local advertising mediums & methods to maximize the effectiveness of

advertising dollars based on how local trends (i.e. San Francisco may work extremely
well with clever Facebook Posts while West Texas can do well sponsoring a High
School Football team)
Lets take a look at how this process looks for a single retail store or a simple model:

When we are talking about a major retailer like Nordstrom, this model gets a little more
complex. Since the retailer has to manage inventory between multiple stores, the retailer will
often have a brands shipments delivered to their Warehouse. At the warehouse, the shipment
will be broken down and allocated to each store based on forecasted demand. Additionally,
you will see that a certain allotment will be held back in the warehouse to cost effectively
manage fill-in orders.*
This is what the retail logistics process looks like:

* The San Jose store runs out of a medium green t-shirt, its more cost effective for
Nordstrom's to combine that medium green t-shirt in addition to all the other orders routing
through the regional distribution center. This is in contrast to the San Francisco store pulling
the out of stock size & shipping the one unit to the San Jose store.
E-Commerce:

There is little difference fundamental difference between a Retailer & an E-Commerce

relationship. Both are responsible for creating an engaging retail experience, building
defensible customer relationships, gathering customer insights to guide merchandising
decisions, and manage demand generation & advertising investments. However they differ in
three main ways:
Digital Medium: Obviously the biggest difference is the fact that retailers sell products
via a website while retailers deal with physical stores.

Zero Transportation Costs: Purchasing online is a much easier experience due to the
fact that you dont need to get in a car, drive to the store, fight for parking, deal with
sales staff that hates their jobs, wait in a checkout line, and then get home.

Deeper Customer Insights: Shopping online enables retailers with much deeper
customer insights on purchasing patterns & products at the individual customer level where brick & mortar retailers must make a concerted effort at checkout to gather billing
zip code at checkout.
E-Commerce retailers leverage two huge advantages:
Massive Population: Obviously the biggest difference is the fact that retailers sell
products via internet to the entire country (technically the world, but thats another whole
can of worms) while brick & mortar retailers are limited by the customers geographically
in a given stores territory. As of 2012 there is an estimated 154.6 million people that will
purchase something online in 2012.

Targeted Demand Generation: If an online retailer have slow moving inventory that
you need to sell (commonly referred to as turn), then they can send a target email to
your customer base of highly targeted people that have purchased a complimentary
product (i.e. a jacket that would go great with that shirt). Alternatively, an online retailer
can level the power of Google to increase their keyword spend to drive up their paid
position on the brands keywords to generate sales.
--------------------------------------------------------------------------------------------Section 2
Understanding the Cost Basis
--------------------------------------------------------------------------------------------Brands traditionally employ a Cost X model that takes the loaded costs for producing, landing,
and fulfilling their goods & services by a multiple - commonly referred to as a Keystone markup.
One of the biggest mistakes you can make in pricing is not having an educated idea of what
your cost basis will be. If you dont have an idea - then its easy to misprice an item and kill
your business because youre not making enough money on each unit to finance your
operating expenses.
Keystone Markup is a pricing methodology that multiples the cost basis by a factor of two
(sometimes can be up to 5x in the case of jewelry) to dictate the price for next rung in the value
chain. Keystone markup arose as the simplest way to universally markup goods across the
retailer to a profitable level. Generally speaking, it is logistically impossible to uniquely price
each product (from 100s or even 1,000s in a given retail location) to reflect market conditions
and retail demographics. The theory being that retailer profitability was more of a function of
units sold versus maximizing each products price. Subsequently, this approach normalized
prices across the marketplace (i.e. everyone is pricing a shirt at $100).
What does the costing build look like for a typical brand:

Landed Cost: The represents the total cost of paying for the item, shipping to the US, tax &
duty, receiving in the warehouse, and getting on the shelves ready to sell.

Fulfilled Cost: This is the cost basis that I generally like to always keep in my head because it
represents the fully-loaded cost basis of selling an item & gives me a better idea of how much
cash I will have at the end of the day.

Wholesale Price: The Wholesale Price of a product is the revenue in one channel for the
brand, but its the cost basis for the retailer who purchased it from the brand. For retailers like
Urban Outfitters, Finish Line, Journeys, or Amazon the wholesale price is the baseline
inventory cost for them.
This is quick graphic to show you how this relationship works:

To put this all together into a graphic of a real product with real world pricing, lets take a look at
the pricing of one of the old boots from one of my old brands, VL Project:

--------------------------------------------------------------------------------------------Section 3
Distributor Margin Analysis
--------------------------------------------------------------------------------------------A distributor is an entity that enters into a legal relationship with a brand to provide
This explanation (obviously) gets more complicated as the company grows - but lets keep it
simple. There are two models than create the pricing landscape (once we know what the
distributor is charged product, we can more acutely understand how they charge for it). There
are two predominate pricing models:
Cost + Model
Distributor Price = FOB + x%
Wholesale - Model
Distributor Price = Wholesale - x%
Cost + Model
FOB is the cost to the Brand to produce the good or service. This represents the baseline cost
to the brand to produce good and is the starting point for analyzing the revenue model to the
brand and thus do a margin analysis. When you are growing a fashion brand, the typical range
for the markup % or the + in the model is anywhere from 25% - 40%. After working a lot of
brands and speaking with loads distributors, you end up starting at FOB + 35% and
progressively this % gets smaller as the brand does more business. The logic is as follows:
Volume of units to the distributor will be small in the beginning and the brand needs to
35% to boost contribution margin to OpEx as the burn rate is particularly high for startup
brands (you just need a lot of people to do all of the stuff required to build a brand
properly).

As the brand grows the cost/unit (FOB) is driven down. Therefore, the margin $ value of
the contribution margin is driven down also.

The realization of scale is good for the brand and good for the distributor so this model

incentives the distributor to help grow the brand in the particular country in a responsible
manner.

The logic is that you demonstrate transparency by showing your Cost Basis in efforts to
build a partnership where the distributor & the brand benefit by realizing scale
economies. However - BE CAREFUL - if you dont choose the right partner they can
screw you over by virtue of your honesty.
Important qualifications about this perspective:
1. FOB means that the distributor is responsible for coordinating logistics from FOB
Destination (most likely Hong Kong) to their host country. FOB is an old legal term for Free
On Board meaning that ownership of the product changes once the product is delivered to the
shipping carrier - make sure that you get paid T/T Advance (a fancy way of say a wire) prior
to shipping. If you dont get paid first, they legally own the goods and have fun trying to collect
from a company in Japan or UK.
2. Tax, Duty, and Quota is a very tricky art that should be the responsibility of the distributor.
Japan has horrendously high tariffs and their Quota system requires intimate understanding of
the inner workings of the system along with the experience to account for the screw ups.

This is why you want to work closely with your Distributor to figure out the right pricing for the
brand for that particular market. This will require the brand to spend time over there and figure
out the market (what products are priced where & whats the market feeling). However, this
doesnt mean that you dont need a distributor to enter a country - there are an insane amount

of factors that require you have someone with relationships to the retailers and their pulse on
the culture to nail down properly.
Wholesale - Model
The Wholesale - Model is more common with larger brands like K2 or Patagonia (I reference
these two brands specifically because I have worked with them in the past). Elements of the
Wholesale - Model:
Pricing for the product is indexed to US Wholesale (which is the largest revenue source
for most brands) thereby obfuscating the true cost basis (think Apple & COGS).

You generally see a range of Wholesale - 30% to start with. As the distributor achieves
the performance hurdles of the distribution agreement they will realize greater
discounts (duh!).

If you have the clout to be able to employ this model - you should do it. But most likely
you will get beaten up so badly in the beginning that this model is prohibitively
challenging for most new brands (anything younger than 3 years).
This a real world example of a pair of shoes & the margin from one of my old distributor
relationships from VL Project.

Distributor Revenue & Margin Analysis

Margin from the distributors perspective is rather complicated. For small brands, you want to
allow the distributor to set pricing - however, you need to make sure that their distribution

timeline is both aggressive, yet prudent. You wont build any staying power in a foreign
countrys fashion scene if you dont have clean & controlled distribution. Many of you can
relate to Ed Hardy from the early-00s when it was moderately cool - now it is literally trash.
Distributors negotiate exclusive rights to sell a brand in a country because it creates an
exclusive value proposition that ensures the highest possible price that they can charge for this
cool American Brand. When you have exclusivity you reduce the ability to price check for
comparable goods and thereby stronger positioned to be a price setter rather than a price taker
(ie empower consumers).
In the beginning, you will see that prices are fairly inelastic for cool brands (however, these
barriers are falling rather quickly in the globalization of fashion) - pricing models trend on 2.7x
to 3.5x Landed Cost.
Distributor Pricing Model for Mens Shoes in Japan under Wholesale - Model

Check - If a standard 2x markup on Wholesale in a foreign country is employed a $100 Shoe

US can be as high as $300 in Japan. Remember a 63% duty rate for imported goods from
China.
This pricing can vary immensely by the deal & by the country - what are the tariffs that the
distributor is responsible for? What does the market command? There are brands here that
are meh! but are gold overseas - this can often float a brand in between fashion cycles.
--------------------------------------------------------------------------------------------Section 4
Retail Margin Analysis
---------------------------------------------------------------------------------------------

Retail Price: This is the price that the ultimate consumer of the product pays when you
purchase a product from Urban Outfitters, Bloomingdales, Finish Line, etc. This price is also
generally keystone or Wholesale Price times 2. For Example:

[NOTE: Keystone is the general rule, but certainly Wholesale Price can be 2.1x Landed or
Retail could be 2.2x Wholesale. This all depends on the retailers pricing power, brand
positioning, and market position to be able to make these tweaks.]
For purposes of moving forward, I am going to assume that you understand what Gross Margin
is (Gross Profit / Revenue) or the % of each $ of Revenue that drops down to fund OpEx. Lets
run through a quick example, from the Retailers Perspective:

This is an oversimplified margin analysis. Lets take it one step further to account for the
realities of life. Two items that can be used to better exemplify try margins are the Credit Card
Fees (you can push CC fees into OpEx under Bank Fees, but we wont go there) & Shipping &
Fulfillment costing.
CC Fees: Credit Card Fees are pretty straight forward as they are a % of Gross Sales that the
CC processor charges to the Retailer for use of a CC or Debit Card. They range from roughly
1.65% - 5.4% (for a small retailer processing an AMEX or Discover card - now you know why a
lot of bars / convenience stores in SF & NYC dont accept cards?)

*** This may not seem like a big deal, but a 2% reduction in Gross Sales is a BIG Deal.
Assume that a retailer sells 1,000 units/week & there are 52 weeks/year.
One of the more interesting aspects that you should take into account is the shipping &
fulfillment analysis for this margin analysis.

Brand Warehouse -> Retailer Warehouse -> Individual Store

We live in an age characterized by the economic realities of lean inventories. If you read
Nordstroms quarterly or annual SEC filings, one important aspect to note is that management
highlights increasing profitability because of more effective inventory allocations & stock
optimizations. As a brand when, regional chains function in a fairly decentralized manner meaning that brand shipments go directly to each store.
**** Assumption: The shipment will be sent FedEx Ground from Zone 1 to Zone 5 (CA to NYC)
@ a rate of $24/carton or $2/unit (footwear is the unit - shoes take up a lot of space).
(Remember this shipment is going directly from the brands warehouse to the individual Retail
Location)

Shipping truly is an industry of scale economies and this new world of lean inventories requires
major retailers (like Nordstrom) to leverage these cost efficiencies by having brand shipments
routed to their hub & then ship individual stores (driving costs down by having one bulk
shipment to each individual store, of demand forecasted product compositions).
Active Margin Management:
One of the more interesting things that I began to do was implement a proactive management
strategy for retail distribution in the US. Generally, a brand lets its sales reps control most of

the communication with the people that the brand is selling to. This really didnt make a whole
lot of sense because if I am running the bloody company - I need to actively know how the
product is performing at retail for small boutiques. Boutiques are your leading indicator for
pricing & sizing (two hugely important aspects).
Every two weeks, I would call every independent boutique that I worked with - that was
about 117 doors in the US. I focused primarily on the top 30% that I found were the
most interesting.

After chatting with all of them, I would build maps of what I was seeing. I would hear
that a certain product was not performing well in Baton Rouge, LA at $210 retail but was
absolutely killing it at $240 retail in Colombus, OH. In addition, retailers would actively
express their frustrations with heavy product positions on say Nike Dunks in that same
Baton Rouge, LA shop - but the shop in Orlando, FL was drying to get some but
http://Nike.net (nikes wholesale management system wouldnt hook them up with an
allocation).

Based on this feedback, I would build full pricing analyses for each of the biggest bellweather retailers - generally 10 - 12 every 2 weeks (Generally, I did this at night from 12
- 2:30am which is my last conference call of the day 2:30am PST is 5:30pm in China
end of work day).

In the above example, I would have the Baton Rouge, LA retailer reduce price of $195
from $210 but structure increases in other products to compensate for Margin
Reductions. Basically testing price sensitivity to create an optimal margin structure for
the retailer.

In addition, I would use the credit that I extended Baton Rouge, LA store & the different
Orlando, FL (My relationship with them is the only common factor between these two
guys and they both owed me $$) and shift Baton Rouge stores Nike Dunks (that he was
long on) and get them to the Orlando guy.

What did I gain:

Boosted Cash Conversion (If I spent that much time caring about their business, who
the hell do you think that they are going to pay first?)

Increased Rev/Account (I have multiple touch points with my customer and I gave them
something that no one else really could give them - they are of course going to give me
a larger merchandise location at their store)

Deep market insight ( simply just knew more than anyone else about market dynamics
and could apply that knowledge throughout all aspects of the organization - thereby
building the human capital endemic to the organization).

--------------------------------------------------------------------------------------------Section 5
E-Commerce Margin Analysis
--------------------------------------------------------------------------------------------Now lets get to the fun part - online retail is near & dear to my heart and this is the part that I
really wanted to answer. E-Commerce is an incredible channel because you have the ability to:
Create the Retail Environment: Being online means that retailers have the power to
design the retail narrative that visually communicates the retailers story. Think about it a brick and mortar retailer will maybe remodel the story once every five to seven years.
With an online store - you can dynamically change the homepage, create a new theme
for the season, add sub-shops for designs/styles, or with a little html & CSS you can
tell a totally different story.
For a more in-depth version of this story, check out: How Retailers Can Replicate the 'Magic'
of the Apple Store... Online (I am really proud of that piece)
Tell the Story: Being online provides the retailer with the ability to tell the products
story to bring the customer in the world of the retailer. Online retailers can add looks to
augment the retail experience - the story enables online retailers to tell a story that
would be challenging for a brick & mortar. Did the sales associate get busy and forget
the brands background? Were they too busy and didnt get a chance to connect with
the customer? Online gives the retailer to tell the story that gives the customer a reason
to buy stuff.

Deeper Customer Insight: The luxury of e-commerce is that we have an incredible

number of tools to track & analyze user behavior in ways that brick & mortar would only
dream of. Although its challenging to nail down your e-commerce analytics - its
extremely powerful to have a detailed customer profile to tweak your merchandising &
promotion strategies.

Regular Engagement: The era of using Facebook & Twitter to simply promote your
products is dead. Modern e-commerce social strategies involve crafting a narrative that
makes your fans want to engage by NOT talking about yourself. For example, a music
blog will use a new mix to engage fans & readers & then subsequently sell tickets to the
show after they are on the page.
This all leads up to the point of analyzing the costs of the costs of e-commerce and gather
some insight on the associated margins of online retailers.

We are going to look at this first from the perspective of a typical Online Retailer like
Nordstrom or Urban Outfitters (retail brand).

You might be wondering why the costs of shipping & fulfillment must be included in the Cost of
Goods Sold - well thats a good question. Most retailers have to offer free shipping as a normal
course of competing online today. The IRS says that when a promotional expense is a
standard practice (i.e. free shipping on all orders) it must be calculated as a COGS expense.
Here is a little graph that shows you the prevalence of free shipping as a norm in online retail:

Therefore, when an online retailer utilizes free shipping it must be allocated to COGS.
In Financial Modeling: Where can web startups learn about financial modeling that accounts for
the important metrics and costs? I take you through the costing build of Customer Acquisition
costs. But here is a quick summary:

This should give you all the tools you need to more fully understand the costing build & Margin
for an e-commerce retailer.

Support Matt producing great quality content by purchasing a copy of the model here:
http://fail-harder.com/products/...
Updated 9 Feb, 2013. 74,450 views.
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Chris Olson, Involved in a Startup Accelerator.

19 upvotes by Amir Ziai, Behzad Behnamfar, Eric Benjamin Seufert, (more)
An education project we worked on at Amplify (a startup accelerator) was all about building a
Financial Model.
Slides Include:
Projecting Financial Results
Understanding Drivers of Revenue
Understanding Drivers of Expenses
Building the Income Statement
Building the Balance Sheet
Building the Cash Flow Statement
Do's
Dont's
Check it out here:http://amplify.la/model
Written 27 Jun, 2012. 3,720 views.
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Christoph Janz, Internet startups, SaaS

6 upvotes by Anya Deason, Des Hakim, Lili Balfour, (more)
The best financial plans of early-stage Web startups:
are relatively simple just one Excel tab or a few at most (a later-stage company will
often require a more complex plan but in the beginning you can keep it simple)
are based on the key drivers of your business (your conversion funnel, your projected
ARPU, churn etc.)
make your assumptions transparent and easy to change
contain very few hard-coded numbers which would make the plan hard to revise (an
exception to this are historic numbers, of course)
avoid Parkinson's Law of Triviality spend more effort on what really matters and lump
together stuff like tiny expense categories
contain a few extra lines for sanity checks
I've written a few blog posts about the topic:
Avoiding Parkinson's Law of Triviality in your financial plan
Financial planning for SaaS startups
A KPI dashboard for early-stage SaaS startups - new and improved!
You'll also find some (free) templates on my blog.
Written 3 Oct. 829 views.
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Brian Flaherty, entrepreneur

13 upvotes by Denis Oakley, Ani Oko, Zach Weisman, (more)
My advice: the best source of learning for your financial model is your business and I doubt
what you find online will be very useful. If the business is sufficiently developed, you should be
able to identify what the costs and revenues are and what they are likely to be in the future.
Typically, the process looks like this:
Guess out how much it costs to acquire users from each marketing channels (e.g. ads,
Google placements, social marketing, founder salaries, etc)?
Guess how many users you will get over time
Guess conversion rates for generating revenue from each customer
Guess how much revenue you generate from each conversion

Guess the costs of the business (cost of servicing each user, other per-unit expenses,
office space, salaries, other fixed expenses)
Ultimately, how much cash do I need? How much do I generate? And when?
If you have real data, then real data is usually better than guesses
If you are building a model for investors, it's not all that important. Smart investors will not
believe your financial model. They won't even look at it unless they are already interested in
investing. In that case, they will probably build their own models according to their personal
preferences. They know that financial models for startups are usually completely wrong and
not predictive of actual performance. What they should be looking for is whether the numbers
make sense:
Do the founders understand the costs and revenues of their business model?
Does the model make ridiculous assumptions about the world?
Does it seem like the business is going to be profitable and scalable?
What are the fixed and variable costs?
What are its profit margins as it grows?
How many people will it need and how much will they cost?
How cash intensive will the business be? How much investment is needed to get the
business to profitability or an exit?
When could it conceivably be cash flow positive and fuel its own growth?
How big can it get? How fast?
How long before it needs more money?
I think if you focus on making intelligent guesses about the answers to these questions, you'll
have a much better financial model than anything you could find online or buy from a
consultant. And if you need to pitch it to investors, then you'll understand it and be able to
explain it better.
One last thing: Comps. Because startups are not predictable and the data you need to make
an accurate forecast does not exist, it's sometimes more helpful to study comparable
companies. If similar companies (e.g. on Crunchbase) reach an exit in 3 years for $50-70
million dollars, then yours might do the same.
Written 20 Aug, 2013. 2,466 views.
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Tej Dhawan, Global Insurance Accelerator, Startup... (more)

13 upvotes by Terrence Yang, Erin Bell, Daniel Koller, (more)
I highly recommend Startup Models (www.startupmodels.com). Delivered as an Excel
workbook, it is available for free from the website above and is very self-explanatory. An
optional companion ebook is available online from the website as well.
The automated model will take you through setting up the basic variables, setup costs,
recurring and non-recurring revenues and expenses, employee and contractor costs, other

standard and non-standard revenues and expenses.

Written 4 Oct, 2012. 3,101 views.
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Mark MacLeod, I am CFO or advisor to several freemi... (more)

9 upvotes by Alan Nguyen, Brad Neumyer, Adam Hoeksema, (more)
I try and cover modeling and metric topics regularly on my blog. In addition, there are some
good learning events particularly the one by founder institute that cover this. Dan Martell and
Dave McClure used to run finance for founders which sounded very interesting.
Ultimately, you can only learn this by doing it: get an advisor, mentor, investor and build a
model together. Have them teach you how to fish.
As our portfolio grows at Real Ventures, I will be doing group sessions on this and 1 on 1
modeling.
Written 26 Feb, 2011. 4,161 views. Asked to answer by George Favvas.
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Lili Balfour, Advised over 100 early-stage companie... (more)

10 upvotes by Kingsly Jebakumar, Chris McCoy, Kapil Kanugo, (more)
I just created an online course on Udemy covering the topic. After advising companies on
financial strategy for six years, I realized that entrepreneurs really need a fun and interactive
way to learn.
You can check it out for free at Finance for Startups by Lili Balfour | Udemy use code
QUORA50 for 50% off.
Updated 9 May, 2013. 1,773 views.
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Alan Nguyen, Media company exec., founder @ funded... (more)

6 upvotes by Denis Rasia, Antoine Carriere, Antonio van der Weel, (more)

In addition to Matthew Carroll's awesome answer. I would also add in a sensitivity analysis.
Such as what does your LTV of each customer or what happens to time you hit Break Even if:
your product gets delayed by x months
sales is down 20% from forecast
avg sales commission drops by x%
sales conversion raises or drops by x%
viral k factor at different rates
comparing debt, and looking at growth and return on invested capital
The idea is to get a better idea of what things might look like if different external factors were to
occur. And sensitivity analysis helps you respond appropriately if some one were to be really
critical of your financial forecasts (like investors).
In addition, here are some links that maybe helpful:
HBR- Paul Saffo - 6 rules for effective forecasting
http://www.usc.edu/schools/annen...
McKinsey Quarterly - Creating Value
https://www.mckinseyquarterly.co...
Dave McClure 's Start up metric slide deck
http://www.slideshare.net/dmc500...
Written 14 Jun, 2011. 3,416 views.
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Chad Osgood, CEO of Premier Logic. Founder of 18th... (more)

16 upvotes by John Waller, Michael Beddows, Mark MacLeod, (more)
Find someone that does them and learn from them -- an entrepreneurial CFO, for example.
The models aren't as complicated as they appear on the surface, but trying to go through one
without context and discussion is likely to miss a lot of the point.
Some of the key things we identify are:
1) Unit economics. What drives your revenue? What adoption do you anticipate? Attrition?
How much revenue does each user represent (ARPU)?
2) Cost of revenue. Transaction fees, licensing fees, other acquisition fees etc. are all
considered. You need to know that if you generate $10 of revenue it took $n to generate it.
3) Operating expenses. These are hopefully fixed costs and can include everything from
office expenses to cloud costs.

4) Capital expenditures. Most web startups are light(er) on capex, but you're still likely to
have some. You need to understand these.
From this, typically you'll create projections of cash flow so you know where you stand, how
much capital you need, etc.
This is all at a very high level of course. So really, your best bet is to sit down with someone
and work thorugh a few examples of your own if you can.
*Disclaimer: I'm not a finance guy, though I've had the luxury of working with great finance
people.
Written 10 Jan, 2011. 3,848 views.
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Ken Johnson, co-founder @ Manpacks.com - Subscript... (more)

5 upvotes by Virlitz Casidsid, Mike Townsend, Adam Hoeksema, (more)
I recently went through a crash course in financial modeling. No expert advice here, but some
simple lessons learned as a non-MBA entrepreneur. The best place for learning is inside your
own spreadsheets, imo.
1) Find a basic model to use as your starting point. I got lucky with this, but if you know
someone with a failed business you could ask them for their old financial spreadsheets.
2) Dive in. You will need many many hours to give this model a shape that resembles reality,
so find your most productive times of day and don't break the focus.
3) The advice of someone knowledgable is huge, as you will need someone challenging your
assumptions and providing you with some benchmark business costs along the way (some of
this can also be found online - this post is pretty great http://blog.guykawasaki.com/2007...).
Other people have spoke about the levers that drive your business and it's very true, as you'll
be able to answer questions like "what happens if we aren't converting sales at the rate we
expected?" versus "how valuable is decreasing our churn rate by x%?" And, you'll also be able
to approximate what your business looks like in a couple years, and which acquisition channels
will likely bring you the most revenue.
Above all, the projections forced me to challenge the validity of my starting assumptions,
mining whatever data I had and putting together a more realistic picture of what our growth and
optimization looks like.
Written 2 Mar, 2011. 2,652 views.
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Yuri Gorzey
6 upvotes by Denis Oakley, Alexander Ainslie, Wade Myers, (more)
I would highly recommend Startup Financial Model! This is the best tool I ever found on
internet. I am recommending it to all my friends entrepreneurs. I used to work on a project and
we hired PWC, it cost us almost $40,000 to build custom financial model for our project. I was
pretty impressed when one VC referred me to Startup Financial Model, it's a great tool and its
basically free.
Written 20 Aug, 2013. 1,255 views.
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Eric Benjamin Seufert, Analytics, Marketing, and Strategy

7 upvotes by Ron Williams, Raul Alvarez Prieto, Eric Duffy, (more)
I won't go through the nuts and bolts of building a complete financial model comprised of all
financial statements, as that's beyond the scope of a pre-money web startup. I'd build a DCF
model based on projections of user base growth and per-user engagement / revenue growth.
For user base growth, I'd try to estimate virality, the spread on paid advertising campaigns, and
organic growth (I have built a virality model here: http://ufert.se/user-acquisition...). For per-user
engagement and revenue growth, I'd estimate how the development of new products and
features will increase the LCV of users over time. Then factor in fixed and variable costs to
come to some sort of a projection of income over the next 3-5 years.
Written 26 Jun, 2012. 1,516 views.
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George Haines, Founder: MicroInterns Program, Founde... (more)

2 upvotes by Eric Wei and Vinod Sankar.
If you are in the New York area, I'd highly recommend Taylor Davidson's Skillshare class:
http://www.skillshare.com/classe...
If you're not near the NY area, check out his website, he is a great resource and I learned a lot
from him:
http://taylordavidson.com

He has a newsletter and templates you can use to "tell a story with math," which I think is a
great way to look at an otherwise mundane topic.
He's worked with a ton of startups doing this very thing and he's really good at what he does.
Written 27 May, 2014. 589 views.
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Jon Choate
3 upvotes by Denis Oakley, Bruce Gilbert, and Ali Abdu.
Like Anonymous, I too found the Startup Financial Model by accident and have been very
pleasantly surprised. We needed a tool that would allow us to model our projections in a way
that investors require and this saved me spending countless hours building it myself or
spending countless other hours repurposing an existing inadequate model. Also, founder Wade
Myers was incredibly responsive when I had questions. The cost ($40) is meaningless when
compared to the opportunity cost of building this model myself from scratch--time that will be
better spent acquiring customers for our startup.
Written 19 Sep, 2013. 968 views.
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Jeff Berry
1 upvote by Vishnu Ravikumar.
Be sure to incorporate a CHOOSE or OFFSET function to run several cases (or at least an
upside, base, and downside case) dynamically. This will make your model user-friendly down
the road.
Written 18 Jul, 2012. 778 views.
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Antonio van der Weel, Strategy consultant at SparkOptimus

2 upvotes by Michael Fine and Adam Hoeksema.
One thing i'd like to point out as a sub-topic within financial modeling are growth predictions.
Growth forecasts seem to involve quite some guess work, especially for early-stage startups it

would be very interesting to know the growth curve of companies within a certain industry.
Big consultancy firms have departments that create growth models for the growth forecasts
needed by M&A advisors. I wonder how startups can do this? Maybe if the community would
share such data, or extract such data from some source ourself. Does anyone know any places
online where you can find historical growth data?
Written 23 Apr, 2012. 1,456 views.
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Anonymous
3 upvotes by Denis Oakley, Kai Wu, and Sunil Godithi.
Don't look beyond the Startup Financial Model Startup Financial Model If I had to say it in one
line - "it's the simplest, yet most comprehensive financial model".
Like most start-ups we were looking for a base model to model for our projections. Having
worked in the financial industry I had access to fair-share of models from the non-tech
companies, but most of the metrics dint make sense for our tech start-up and we really dint
have time to build one from the scratch.
That's when I stumbled upon the Startup Financial Model Startup Financial Model at first it
looked like just another online model, but we went through the training videos and found the
model to be exactly what we were looking for. I reached out to their customer care with some
questions and within 30 minutes got a reply to all my questions and concerns from the founder
Wade Myers himself. He was super nice about answering my questions in detail and was kind
enough to offer assistance in guiding us through some parts that we dint understand.
1) The Model is built in a very clean and structured manner.
2) It's a 5-Year monthly build-up model.
3) All the assumptions are managed from one Assumptions Sheet.
4) All inputs and outputs are very well thought-out.
5) It makes you think through some of the small but very important expenses like Training,
Recruitment Cost, Churn Rate, Lead Generation Fees, etc.
6) The model has plenty of extra spaces to add new line items to customize it to your specific
needs.
7) The formulas are very well written taking into account small nuances like roudup, ifna,
vlookup, and many more.
8) Summarizes on a quaterly and annual basis.
9) Automatically calculates key metrics and plots them into easy to understand graphs.
10) Has Scenario Analysis, so you can easily create multiple scenarios and see the difference
between them.
11) Has a lot of advanced sheets if you are post-money like CapTable, Debt, CapEx, & Balance
Sheet. (We dint use them, but they seem very comprehensive)
=============

How does Gilt get photos of merchandise

from their vendors?
Short Answer:
They don't. They photos are taken by Gilt to establish congruency in their merchandising
strategy based on what's most effective for their consumers
Longer Answer:
As most major online retailers have learned, you cannot rely on brands (i.e. me or the vendor
of the products being sold on the e-commerce site). The rationale being that the aesthetic &
how I display the product photography might not work with your website design or "best
practices" for product display - so you can't rely on it.
Let's take a look at how photography can differ by retailer:
The Takeaways from the following images
Retailers have different ways of displaying products.
This is the "best practices" -> product photography should be different for every retailer
because it represents a core competency merchandising strategy that most effectively
communicates with each individual retailer's customer.
Different backgrounds to bring alignment across ALL product's being retailed.
1. Tobi.com (Anthony Wang's company, Tobi, has really been a bad ass supporter over the
years)

2. RevolveClothing.com (Michael who owns Revolve is another huge supporter of the brands
that I have been apart of - something that I am really thankful for.)

So as you can see, everyone shoots their own product photography & it's incredibly important
to do it!!! To exemplify my point, please take a look at the product photography that we use:

What to notice about MY Product photography versus retailers:

We like shooting on black background (cuz most of the brands I work on are men's
focused and dark & mysterious).
We shoot on black glass (notice the reflection on the bottom).

We shoot "hero" shots primarily -> shooting multiple product angles gets really
expensive for smaller brands.
To answer your question more directly - here is the process for product photography:
1. Gilt calls up a brand and say "hey, you guys are cool! Do you have any product that you
want to cut out?"
2. Brand agrees and forwards over a catalog and an At-Once availability. (This is an image
of an old At-once availability report that I sent to Gilt a couple of years ago.)

3. Gilt responds with the products that they want to see in person and then make a
decision.
4. Gilt places a Sample PO to purchase samples of products that they want to photograph.
5. The brand ships the product to Gilt.
6. Gilt then gets together as a team to discuss the product assortment and photograph the
product.
7. Then Gilt tells the Brand that we are going to sell styles VL00913, VL00912, VL00907,
VL00930, etc.
Bottom Line:
Gilt does not rely on the brands to submit product photography, but orders samples (and pays
for them) and photographs the product themselves.
=========

What are the differences between Stipple,

Thinglink, Kiosked and Luminate (formerly
Pixazza)?
Images are a critical aspect of web surfing today as they provide situational context to the
content that is being consumed. From music blogs leveraging images to contextualize the
song or artist to Tumblr's predominately re-blogging and socializing images as editorial content,
images are a fundamental part of this stage of the webs maturation cycle.
With the vast majority of web users scanning pages, rather than reading everything - the
image is the anchor-point for the brain to quickly filter whether this article is interesting enough
to invest the viewers time in reading. This is a constant cost benefit analysis of the web
pages / articles:
layout for information communication,
word choice that facilitates keyword abstraction,
sentence structure that the eye can quickly parse & discern, and
visual cues (i.e. images) conferring the content and expected benefit of consumption
(i.e. learning something cool)
Considering how important images are to the modern web experience, it is logical that Stipple,
Luminate, and thinglink have emerged to offers tools that help contextualize these fundamental
building blocks. Luminate, Stipple, and Thinglink fall into the category of Interactive Image
Discovery (IID). Interactive Image Discovery is when the viewer (consumer) of editorial content
(i.e. reader) proactively engages with an image to answer a simple question - what is that?
This question is inherently the holy grail of search and simply cannot be answered by
conventional search methods. These three companies (Stipple, Luminate, and thinglink) are all
working to provide tools that enable users to extract value through tacit searching of photos by
interacting with elements featured by call to action icons.
There are some incredible forces at work here and the right solution will be the player that
can deliver the tools that address the confluence of value propositions by crafting a substantive
& equitable revenue allocation that effectively rewards & incentives all parties. To understand
what the solution looks like we are going to deeply analyze the very complex inter-dependent
value creation relationship between:
1. Brands - Products in the Images that create economic value for images
2. Publishers - The distribution medium to facilitate information communication
3. Customers - Revenue source for incentivizing product/market fit (i.e. content/image/product)
All the Neato Things:
Different Interaction Elements - All of the players in this space have +/- the same basic set of
features. You can add graphical tags that:
bring up text pop-ups (like a comment),
link to a social profile,
bring up images from Flickr
Social Sharing
Illustrate Retail Products

The main thing that this article explores is products - because this is the aspect that will drive
the major economic value and serve as the impetus for these product proliferation - making
content creators money and inherently building businesses for these Interactive Image
Discovery companies.
This answer is about investigating how these IID products solve problems that present
economic value add. Probably the best use case of an IID tool is to capitalization of brand
hype when it is attributed to a celebrity & published in a mass market format. Fashion is THE
industry that extracts enormous economic value (read revenue model) from images with
celebrity-attribution and desperately needs a solution (and I will be arguing its the foundation
for building a modern brand) that helps the image viewer answer the what is x in y photo.
To illustrate the dynamics of three of these players - the easiest place to start is on the brand
side of the equation.
===========================================================
The Brand Side
===========================================================
You are cruising CNN, trying to be responsible, and an excerpt from an interview with Justin
Timberlake in Details magazine catches your eye so you click on it. The aspect of the article
that jumps out at you is the photo of Justin (providing the 1,000 words of context to your brain
about this article) - you think, Justins a pretty bad ass guy - I could pull off that look - this is all
before you even start consuming the content. Next you begin to actively (or passively)
deconstructing the various aspects of the photo to establish if you really could pull it off
There are two types of questions that your quickly parsing A) do I have any of these things in
my current wardrobe and B) who makes them (implicitly so you can purchase them & look like
JT). The questions below illustrate some possible questions:

There are only TWO parties involved in the creation, distribution, and promotion of this photo
who can authoritatively tell you what any given article of clothing is:

1. The Brands who provided these clothes to Justin for this photoshoot.
2. The Stylist who contacted each brand and everything together so Justin could look like a
boss for this particular editorial shoot.
The brands have an enormous vested interest in getting the word out that they are the White
Shirt or make the Vest in this photo - a photo like this can literally add rocket fuel to your
brand. However, this is extremely challenging as:
Cool Brands are Small - celebrities are going to be wearing the coolest new brands that
drafting into the cutting edge of consumer fashion (fashion forward, but accessible so you still
resonate with your fan base). Small brands inherently are cash strapped and do not have the
marketing $$$ required to push this message - now if you are Julie Fredrickson (Anne Taylor),
then this is a horse of a different color. Unless its a formal (Black Tie) event, stylish means
small brands.
[SIDE BAR: This doesn't mean that big brands can't extract value from a more
specialized and focused discovery tool. Big brands have the marketing $$$ and
the marketing $$$ are what publishers need. However, I have been
implementing unique collaborative efforts to account for this - pick a vertical
partner with scale and have them alley-oop the little guys (i.e. me). This would
be like having a Levi's (they are the big boys with the big $$$) presenting Cloven
(my footwear brand) - Levi's engender's good will through supporting the
underdog, publishers get the $$ that they need to keep the doors open, and the
vertical player gets the press needed to become a larger player (and therefore
spend $$$ at the publishers). It's something that I am just dialing in, but it's
getting some powerful response - will keep you updated]
Reaching You - Unless you are already follow the brand (via social, email, or blog channels),
how the hell are they going to reach you to tell you that Justin is wearing their shirt? That being
said, if you already know about the brand, you are already a customer or are funneling to
become one - so it is slightly less of a priority to aggressively promote the celebrity connection
(I love everyone who has supported any project I have been privileged to work on... but dont
be sad, you know we all have limited time). We need to reach new people to enable the
brands diffussion through the population and garner customer mindshare. This is an
enormous challenge that brands marketing & PR teams are struggling with every single day.
However, if you can harness the brand / celebrity attribution the impacts can result in
stratospheric growth. Lets take a look at a personal example from my co-founders old
company M3DIUM footwear.
In 2003, M3DIUM was a scrappy Santa Barbara footwear company started by Eric Meyer
(found, built, and sold Simple Shoes to Deckers) and M Coleman Horn (my co-founder on
Cloven and our old brand VL Project). In 03, People magazine featured a pair of M3DIUM
shoes that Tom Cruise was wearing and place this small call out:

What happened to to M3DIUM following this single press hit:

Barneys received upwards of 7,000 calls per day for the next week looking for these
shoes
M3DIUMs website was generating something like a 10x increase in traffic and weborders we going *nuts*
Barneys entire phone system was locked up with customers frantically searching
for this pair of shoes
Barneys was pissed at this, but resulted in huge direct business and locked in customer
mindshare when they touch point came with new consumers (ohh thats shoe Tom
Cruise was wearing)
Nordstrom goes store-wide + automatic reorder on M3DIUM almost immediately - I
believe it was the first time that Nordstrom has gone SO big with a brand so quickly.
Ultimately, this single marketing event served as the genesis that got M3DIUM on the
radar of Pentland (a major footwear conglomerate) who subsequently acquired M3DIUM
in 07
In fashion, there is an crippling problem in communicating this information to the ultimate
customer - but huge financial benefit to get it right. To illustrate the complexity, lets take a
look at the process flow of how an editorial image like this comes about:

*** Cloven is the brand I chose because its the company I run and it was the easiest way to
illustrate this example ***
UPDATE: I don't think that I illustrated the fact as clearly as I could have about
the licensing of rights to this JT photo. IN #4 the paparazzi snap photos and then
sell them to a photo agency. The photo agency then is the licensing party from
who publishers like People license images for the editorial post that they are
writing. iStockPhoto is an agency that most common people know. However,
this is an background infrastructure aspect that is less cool to talk about, but I
wanted to at least clarify this aspect.
Some important takeaways from this infographic:
Disjointed Communication - Look at how far removed the Publishers (People (magazine)) of
the photo are from the information holders of the items that Justin is wearing. How are you
going to get all the product details to the right editor? Its possible, but there needs to be a
system that automates this process to facilitate brand association & discovery. Here was the
old model of doing this:
1. Stylist contacts brands (which is a problem in and of itself because during the VL days
I had probably 20 different stylists for Lil Wayne trying to get product)
2. The stylist may present 3 outfits and 90% of the time they are so busy, you have NO
idea what JT is actually going to wear
3. The event happens and photos are taken and people publishes the article
4. Most Likely, the stylist is out partying being cool with the celebrities from the show. It
can be a week before the brand even gets a photo of JT in my product - much less

communicate it to People.
5. Now, I have to create my own demand since there was NO reference point that JT was
wearing Cloven. I email the photo (once I get it from the stylist) to my sales reps, who in
turn mail it to buyers, in HOPE that they put it in an email to their stores. Then you have
to get the floor reps to know about it AND THEN incentive them to mention it to
customers.
IN Short, the communication process is a fucking mess and brands rarely exact any value from
being on this celebrity. But you keep trying because if you do get it - INSANITY SALES (see
M3DIUM infographic above)
Measuring & Quantitatively Defining Impact - There is a quote (someone help me here)
about an executive making a joke about how marketing is a shotgun blast and has undefined
benefits. In the infographic you see the last stage is "massive audience" - this is a huge
problem. For small brands we need to understand WHO the product is resonating with and
tailor our message accordingly.
Crippling Timing Issues - These types of photos have a very short life - meaning they are
voraciously consumed within hours of their publication - and die quickly as the news cycle
evolves. Unless the brand information (on any product) is in the photo before the article is
published, then its almost as if the event did not happen - trying to reach the author is
miserably challenging, time consuming, and you end up extracting negligible benefit.
**** Remember the Disjointed Communication Structure from Above ****

This essentially presents the main problem that represents significant economic interest for
Luminate, Stipple, and thinglink. All the other features of these Interactive Image Discovery
tools are great, but this illustrates a problem that is worth significant marketing dollars to solve.
Lets summarize the problems that I need an Interactive Image Discovery tool to solve:

1. Facilitate Getting the Get on Major Publishers Radar - There needs to be a central
place that exists within the authors existing workflow (or can replace another image repository)
when she is looking for the right photo of JT. Trying to force the user to go to multiple
resources is inefficient and time consuming (in an industry where time is more precious than
gold) - the tool needs work FOR the Publisher.
2. Contingency Strategy for Uncertain Image Selection: The image that is selected by
publishers for the article (featuring the Justin Timberlake photo) is of one of hundreds that were
taken at that particular event. The brand (who has everything to gain) has absolutely ZERO
control over what photo is taken. Therefore, the tool needs to facilitate putting the image tags
on every photo - so my brand is featured regardless of what photo is ultimately used by the
Publisher
3. Accuracy - This is huge! I would be LIVID if some other brand was attributed as being the
White Shirt. As we said earlier there are pretty much only two parties that know what the
right answer is to those questions - the Brands and the Stylist.
[See Rey Flemings answer right below - to illustrate the accuracy problem]
4. Flexibly Manage & Capitalize on Hysteria - As a brand, I absolutely must capture
everything I can from sending via a celebrity driven photo layout featuring my brand
- to a specialized landing page,
- directly to the product page to boost conversion,
- boost my social marketing initiatives, or
- maybe direct the inbound shopper (who clicked on getting the vest to a retailer because I
am out of stock).
5. [MOST IMPORTANT] Analytical Insights Driving Strategy - Fashion is an industry
characterized by uncertainty - long lead times to market, inefficient audience size tracking, and
information asymmetries about populations. Traditionally, physical retailers controlled
customer demographics, sell throughs, and basically EVERYTHING of value that brands
fundamentally need to run our businesses more efficiently and effectively. This information
should be collaboratively communicated to all parties - so everyone can benefit.
These are the 5 critical problems that an Interactive Image Discovery tool must solve to present
a significant value proposition to me the brand. If a tool delivers on the value (the scope of
which was illustrated in the Tom Cruise + M3DIUM example above) - then it represents
something that I am willing to pay for.
I am going to say that again - STIPPLE, LUMINATE, or THINGLINK - if you deliver solutions to
those needs - I will want to pay you a ton of money... voluntarily... no questions asked... I
*almost* dont care what you charge
===========================================================
The Publishers Side
===========================================================
Now that we have qualitatively defined the underlying issues, we still have this last component
- the publishers (the content source where you consumed the JT image).
There are essentially two classes of publishers that compete in this section of the value chain
1. The Big Boys from Print - These are the household names that earned brand recognition
primarily through print and have fairly successfully transitioned to significant online presences
(i.e. People Magazine, US Weekly, Maxim, etc)

2. The Scrappy Independent Upstarts - The Tumblrs of the world / user generated content
(UGC) that is progressively getting more professional, but does NOT present a sufficient
market opportunity for Interactive Image Discovery tools to be investing their time & energy
today. However, this is a 3 year (maybe sooner considering the pace of innovation of the last
12 months) as the content creators & platform needs to mature.
The Big Boys from Print
The magazines that gained & sustained critical mass / popularity in the late-90s through today
have the consumer that will most benefit from these Interactive Image Discovery tools. The
target audience can be characterized as Gen. Xers who are generally internet savvy (they
started using regularly in mid/late-20s to early 30s) but brand association (i.e. meta-tagging for
resource) is based on the old school print media (the majority of people associate People
Magazine with the printed publication in the grocery store while Perez Hilton is not in the
category because of the mental association). This population is in or approaching their prime
earning period of their lives, substantively employed (who would market to that 14.7%
unemployed <25 yr old demo??) are engaging with pop-culture through what they have for the
last 10 years.
The publisher side of the equation is probably the most interesting aspect of the model - as
they are facing some debilitating headwinds:
Display Ads Suck & Are Pointless - Stop trying to force me to look at display ads, they dont
even matter to me because I dont see them! See - Banner Blindness. Display ads force the
user to exchange peripheral distractions as the economic cost of consuming the content - the
consumer doesnt really have a choice in the matter. This is detracts for the core product of
editorial content - the right solution needs to have significant revenue impact but focus the
product.
Lets compare this to TV commercials - if done poorly, the consumer ignores it (i.e. any Bud
Light Commercial (barring the Super Bowl) is just dumb). Lets contrast that with the Old Spice
commercials that were so good people flocked to the web to share and chat about. Build a
product that earns money for you.
Your Revenue Model is Fucked - Print purchases are dropping like stones, display ads dont
work, pay-walls dont work for disposable content, individual content creators are getting
scarier as technology evolves (i.e. Huffington Post or Perez Hilton). Publishers will eventually
need to establish radically new ways to generate revenue - as current display ads & pay-walls
are ostensibly the same thing for the last 100 years.
[Note: Disposable content means that any given article or image has a very short economic life
cycle - once its yesterdays news, its in the archive wastelands. I would contrast this with
Quora content that gets more valuable over time as more people discover it, share it, and
cultivate substantive discussions around the content]
Collapsing Distribution Barriers - Traditional publishers like People Magazine have scale
today because they are living off the customer mindshare & brand development from the print
days. The majority of internet users still have celebrity gossip meta-tagged as People
Magazine (i.e. when I want some celebrity gossip, I go to People Magazine). However as
internet users become more advanced and technology enables passive content discovery (i.e.
Flipboard), these branded competitive advantages are destroyed quickly.
With these headwinds, the Interactive Image Discovery tool that creates a systemic value
proposition will:

1. Drive Revenue during Impulsive Time frame - deliver substantive economic value to
publishers surrounding the impulsive celebrity-attribution euphoria of buying the heels Taylor
Swift wore at the VMAs (the economic value is in the purchasers social status ascription when
she tells her girlfriends that these are the heels that Taylor Swift wore at the VMAs).
A product that delivers value & drives more revenue means that the beneficiaries of this are
going to have to compensate publishers. I don't know one CEO that would say - "Ohh People,
you just drove 10,000 visitors to my site, engendered huge good will, and I just made a lot of
money - screw you, I'm not paying for this" With a display ad, Its so ambiguous what the "brand
development impacts are" that it is a difficult sell that requires skill for publishers to derive
substantive revenue. The solution is the tool that drives so much value that everyone benefits
and shares the economic gains of the product.
2. Compelling Opt-in - derive revenue from content that the user wants to consume (versus
display ads that dictate the costs of time investments)
3. Emotional Engagement Cultivates Loyalty - build competitive advantages through
emotional engagement & similar to me ascription (i.e. I read TechCrunch mainly because of
MG Siegler - thats TCs source of competitive advantage for locking me in versus the dearth of
personal connection among any of the other tech offerings *cough* VentureBear *cough* additional supporting anecdotes Sean Plott & Day9 Daily or GeekDad & Wired)
These publishers are looking a lot like department stores in 05/06 -> Then they wonder what
happened now that Zara and H&M are kicking their ass. At least JCPenny (surprised the shit
outta me) has corrected course with fast fashion offerings from great designers... but now they
have Ron Johnson... so maybe they deserve a handicap... God he is sick)
The Scrappy Independent Upstarts
[NOTE: I am only going to spend a little bit of time on this because its part of a much larger
piece specifically geared towards Tumblr]

[See MG Siegler?? I know how to follow the rules ... Quantcast verified AND it's the same
image that you used in a TC write up on growth - see we pay attention]
Although Tumblr is a fantastic platform for virality, the content creators are still innovators in the
product adoption curve that we all know from Introduction to Marketing. The platform can be
characterized as time rich, cash poor (dominated by teens to early-20s) who are more
concerned with ego (i.e. followers & notes) then monetizing their product - the content
displayed to their followers on their Tumblr page. Shit! The entire basis of Tumblr inherently
devalues the individual empowerment because the re-blog feature commoditizes the content
itself - let me explain:
- TumblrXYZ posts photo

- TumblrABC re-blogs thereby distributing TumblrXYZs content as the product offered by

TumblrABC to ABCs followers
- The barriers are equally as low for TumblrDEF and so on and so forth until the content has
properly diffused through the population and its lost all social value and falls into the depths of
archive history.
Another way to explain this is:
Matt sees an interesting article by MG Siegler and copy and pastes it into a Quora post - where
Matt gains value through new followers, shares, citations, etc and make some small note at the
very bottom that MG deserves credit. However, the fact that the creation of what I am
representing as my product (the plagiarized MG Seigler article) did not require any REAL
cognitive efforts, I devalued MGs investment to make something good.
Tumblr (by in large) are time rich, cash poor young adults extracting value from a feedback
system validating self worth through ego-driven metrics (i.e. followers & notes). Most likely
over the time, the community will mature and cultivates unique value propositions for extracting
monetary value from their investments - hence the argument for 3 years. Some quick
examples that give me hope for Tumblr:
1. Music Blogs est. revenue models through live shows (not the consumption of the digital file)
- I didnt see that coming
2. Emerging artists completely forgoing charging for music, but using it as a marketing tool to
book live shows (al la #1)
3. Web shows (like the Day9 daily) cultivating a relationship with emotionally engaged fans
into a uniquely monetizable value proposition
Okay so 9 pages in and we are JUST getting to the differences piece
[NOTE: I am just going to jump to the solution for the company that delivers the most value by
addressing the core business/financial drivers for this industry. Originally, I was going to go
through and discuss how Luminate completely misses the ball - but as I was writing, I got
increasingly pissed off at just how wrong they are - When you look at realities of building a
company, there is almost zero logic supporting their strategic objectives - so I am just jumping
to the solution]
Stipple is the only player in the space that seems to understand the problem and is
building solutions that can be effectively monetized by brands.
Lets take a look at the editorial map - so we have a quick visual refresher as to all the steps
that need optimization

[NOTE: Stipple's CEO, Rey Flemings has a detailed post on this thread http://www.quora.com/What-are-th... that dives heavily into the Stipple Product.
It's a must Read]
Starts with Pipeline
Stipple has an incredible product called Pipeline that centralizes paparazzi photos from 5 of the
top 7 photo agencies in the world - this means that the publishers (People, US Weekly, Maxim,
etc) can access all the photos they could every need in one central place in a pretty bad ass
UX.
Wait a minute - wasnt there something about facilitating work flow above (see Brand Summary
#1). So they are making accessing image assets for publication easier - thats valuable in and
of itself, but lets do something bigger.
Brands Seed Pipeline with Authoritative Product Information
#3 in the infographic above is a brand who is excited about Justin Timberlake at the VMAs.
Pipeline has a live image feed from these events and you BETTER believe that I am going to
on that system to be tagging every photo of Justin Timberlake when he is wearing my shoes at
the VMAs.
Because the editorial team at People (magazine) knows that they can access all of the photos
they need conveniently and efficiently, they are already in the system. Thereby Brands are
throwing themselves at contributing the correct tags as soon as possible - after all the more
tags the more money from consumers engaging of their own accord. More dots the more the
customer has a call-to-action to even question What is that.
Symbiotic Ecosystem of Efficiency
Brands tagging images earlier draws attention to photos that increase the likliehood of that

particular photo making it to the big time (i.e. being published by People.com) - Who knows
maybe the editorial staff is feeling generous and adds a little extra shout out in the article to
check out those shoes
Flexibility Empowering Dynamic Demand
Lets say for example that your photo makes it, its blowing up the twitter-sphere, and you are
wracking up web sales.... until - you are simply sold out. Well before you were shit out of luck
(like a couple of Thrillist and Daily Candy campaigns I ran with VL), but with Pipeline, I can
login send the traffic to Nordstroms and benefit my wholesale partner and People keeps
making $$$.
Quality Control & Editorial Standards
The big boys are large companies that have editorial standards - they may not be The Atlantic,
but at least they have grammatically correct sentences with proper spelling. In addition to
empowering cleaner/more refined products presentation for publishers, the information in the
photo is Quality Controlled by two parties with mutually beneficial financial interests.
Simply put - Stipple fucking gets it and IS THE ONLY company that provides an
integrated solution that presents a clear economic value proposition that I, as a brand,
am willing to pay for
Luminate
Advertising is the problem, not the solution
Luminate seems to have this idea that display adverts are how you monetize images is through
adverts in the same way that Google monetizes search - However, this position couldnt be
further from the truth because of the tacit questions we hit in #1.
The consumer is not explicitly conducting an action with the expectation of a tangible result like
in search (i.e. Search for analytics and the top Google ad slot is for Google Analytics) - the
users action is the formulation of an unknown query ( whats that). Based on the above, this
does not solve the root problems for publishers (they dont need more ads that users dont
want) or present a solution of economic value for brands.
Experts - When only two parties know the answer - Experts dont help
Luminate employs experts to distribute the workload of qualifying the contents of images.
Thats fine if you want to post an interesting link about an information resource, like

Thats all fine and good, but that isnt very valuable. *Maybe*, *Maybe* you could say that

could be monetized by travel, but that has an even more absurd conversion rate than display
ads. Not that many people are going to convert into booking a holiday based on a photo and a
tag. These experts can add qualitative tags that are good but do not generate $$$ for
anyone.
Luminate has ostensibly ignored the parties that extract the most economic value from the
contents and accuracy of an image. They have also created a cost center by having to
compensate experts for work (thats an assumption because I cant really imagine anyone
doing this for menial work for free) versus building something that drives revenue and has a
fundamental commitment from all parties
========

What is the next wave of innovation in ecommerce after flash sales and private
sales ?
Flash / Privates Sales erupted onto the US e-commerce scene in 2009 / 2010 and truly
championed an new business model in e-commerce enabled by the assimilation of ecommerce & Web 2.0 championed by Facebook (product) and the iPhone. However, in the
wake of the massive influx of competition in the private sales space, the market is poised to
move on to it's next phase. What will the future wave(s) of innovation(s) in E-Commerce be
that will be as significant as Private / Flash Sales were in 2009 / 2010?
7 models that could be the future of retail.
1) Bespoke Retail.
The democratization of creativity , new production techniques allow much more efficient and
interesting creation of units in tiny numbers.
- Its quite likely that soon well see more players like bowanddrape. com who make entirely
personal clothing based on your exact size.
-You could soon see personalized cosmetics and beauty products sold on the basis of your
genetic make up, local climate, age and other factors that make a great selling story.
- Sites like Etsy that align makers with buyers offer an increasing number of people who make
products around your exact needs, as a reaction to the current world of IKEA and CB2, its
easy to see how prices could come down as demand goes up.
2) Predictive Retailing.
As more of our possessions start recording and sharing more data and as people routinely use
allow Facebook to be used as a way to sign into Online stores, I see a trend arising where
retailers will make timely offers of goods around your predicted needs.
Coats could be offered days before a cold front reaches your town, items could be suggested
to you based on the TV shows youve watched , Celebrities you liked & status updates youve
made. Sites like https://www.stylitics.com/already monitor what you buy, with the hope of

making suggestions around this. All these data points could then be blended with current
Social Shopping Sites like Wajam and Fancy where you can start to act as affiliate marketers to
your friends and be given money off for persuasion.
3) Rise of the Small Retailer.
With e-commerce sites becoming almost free to operate and technology like Square allowing
much easier credit card payments and a population bored with mass produced blandness.
When you bring easier creation of items on a small scale due to technology like 3D printing, the
idea of pop up stores , funding engines like Kickstarter and the populations thirst for crafted
products, its easy to see why small scale retailers could end up taking over our shopping
streets where space left by retailers who could not compete with online retail is used.
4) Local Flash Sales.
Location based mobile marketing could easily empower physical retailers to use Flash sale
techniques to draw in customers from a close perimeter at a precise moment in time for either
perishable goods or items as a loss leader to bring in customers.
One of the unique advantages of physical retail is its much easier to up-sell other items once
people are in store and take advantage of impulse purchases.
5) Commodity Subscriptions.
While I've been rude about many subscription models I think there are a tranche of products
we buy each month or week that we have no interest in. To toilet roll, milk, eggs, toothpaste,
and washing powder, there are many baskets of goods each week that would benefit
enormously by being delivered automatically and without us needing to think about. Soon
thanks to better grocery networks we will find autofilling of our fridges a common solution and
one that could be aided by the connected home and internet enabled fridges. See this post for
more information.
6) Ultra-Fast Fashion.
Zara changed the nature of Fashion retailing by changing their stores line up one or twice a
week, as a result large fashion houses have upped their centuries old game of 2 seasons a
year, and now the likes of Prada and Louis Vuitton may make 4-6 collections per year.
But in this age of decreasing patience, the incredible power of celebrities and taste makers and
the ability to make Bespoke clothing and better supply chain model perhaps we will soon see
sites like As seen on screen and retailers working off the back of paparazzi images to offer
identical items to people a day or so later.
7) Disruptive Manufacturing.
Companies like Warby Parker, Dollar Shave Club and Tesla have done an incredible job of
disrupting industries with either lazy competitors or monopolistic attitudes. I cant help but think
well get a new wave of companies buoyed by this success to enter new verticals that need a
shake up.
I can think of few harder markets to enter than car production, so if that can be done then
perhaps we will soon have new contenders in new verticals.

Considering the length of this answer - you can purchase a pdf copy at http://failharder.com/products/... ==> for $10 you can have super-cool pdf to print and read at your
leisure (this answer is 32 pages).
Paying is completely voluntary - as I wouldn't have wanted myself to not have access to the
info when I needed something really in-depth 5-years. If you want to support and purchase it you are amazing!! And if you don't, then let's work together to figure out a way to get there
together!!
Cheers - Matt
=========================================================
This answer has been in the works for about 3-months, so I hope that it is something that is
valuable to everyone. Here is the basic outline
1. Intro & Logic Drivers
[Lots of Charts and Graphs]
Generation of Economies of Scale
Individual / Product Dichotomy
Recognizable Transition
Direct Communication
Strategic Focus on E-Commerce
2. Current Trends Supporting the Next
Social
Private Sales (Check out the chart on discount erosion over time)
Mobile / Location
3. The Three Waves of E-Commerce Innovation
[Wave 1] Bespoke Curation as White Label Business Line for E-Commerce
[Wave 2] Open, Vertical Integration of Demand Planning
[Wave 3] Infrastructure as a Service
4. [Wave 1] The Deep Dive Analysis
Personalization as a Competitive Advantage
Strategic Advantage of Small - Medium Players
Buying Traffic Sucks! Maximize Existing Customers Who Evangelize
Play to Your Strengths (the Big Boys are Drowning in Data)
5. [Wave 1] Just-You-Style - Startup Business Modelsl
Product Overview
Mock-ups
Value Proposition

Pricing Model
The Up-Sell
Features
Financials
==========================================================
We all know that E-Commerce is accelerating its assault on brick and mortar retail. Lets take a
look at the overall Online Retail Market Revenue & Growth Rate:

One of the main segments of E-Commerce that is prime for disruption is Apparel & Fashion.
Historically (i.e. before 10 years ago), if a fashion-savvy teenager wanted to purchase an item
from Abercrombie & Fitch & there wasn't one located in the local mall - there were two options:
1. purchase via mail order catalog or 2. wait until they took a vacation to a location that had an
Abercrombie retail store. The web ostensibly flattened the playing field by enabling anyone in
the contiguous US to purchase any item from an online retailer.
This article is going to focus on fashion and brands driving the next waves of innovation in ECommerce:

Rationale for Focusing on Fashion & Brands Driving of the Next Waves of Innovation in
E-Commerce
Social Facilitated the Generation of Economies of Scale of Users:
Prior to '07, it was inordinately challenging to generate sufficient online traffic for most ECommerce startups, brands, and online retailers in general. In order to generate traffic, an
online retailer had to build significant customer mindshare, to even have, the customer "think"
to go to their website to check out a brand or product & make significant investments to put
online retailers in the workflow process of the user (i.e. sending an email with product
information relevant to the users). In addition, the technology, required to power these
systems, was expensive, specialized, and young/immature. Over the past 5-years, we have
seen 850m+ people join Facebook, a massive boom in tech startups building & refining
solutions for workflow process problems (i.e. email marketing), and a drastic reduction in the
cost of implementing these solutions.
Hence in 2011, the process to generate significant audiences and thereby acquire new
customers is much easier. As such, E-Commerce is one of the pillars to building a modern
brand & a significant monetization tool for consumer web products.
22% Increase in the # of buyers in the marketplace (diffusion & tech. assimilation)
74% of ALL web users made a purchase online in Q3 '11
Powerful Relationship between Individual & Product:
One of the most important aspects of fashion is that it is a highly emotional experience for
purchasers of the products & the payoff of its use. Humans are inherently social animals &
have a powerful desire to be accepted by the herd (i.e. social & professional networks) thereby, your choice of what you wear is a direct reflection of who you are as an individual (or
how you want to be perceived as a member of the herd).
Over several hundred thousand years of evolution, humans have learned to draw immensely
on visual cues as a means of assessing character risk about the people we interact with &,
therefore, leveraging apparel as a means of establishing an individual's similar to me visual
references (i.e. if I wear tight pants + gingham check collard shirt = SOMA startup hipster).
Fashion is one of the main external manifestations of whom we are as individuals and serves
as the impetus for visual feedback to observer about our personalities.
Recognizable Transition:
The purchasing of apparel online represents a systemic behavioral change from the old way of
doing things (i.e. purchasing apparel from a limited assortment at a physical retail location).
Everyone pretty much associates purchasing of apparel with physicality of being in a store,

engaging in an economic transaction (i.e. purchasing product), and immediate satiation of the
desire to purchase (i.e. walking out of the store with the product in hand). We were able to try
on clothing prior to purchasing and we received immediate satisfaction from the transaction (we
walked out with the product immediately following the conclusion of the transaction). Thereby,
purchasing online separates the transaction from the satiation of the desire (i.e. the impetus for
engaging in an economic transaction).
Direct Communication:
Brands have embraced the web & social media with voracious enthusiasm. Before the social
revolution, brands had a tertiary relationship with the customer, whereby the customer had
dealt with the retailer & the brand served as the product of the retailer. If the customer loved
the brand, the retailer received the customers goodwill/happiness as the provider of the
garment (versus the brand as the producer of the product - it's a level of abstraction away from
a direct relationship between product & consumer). The retailer controlled the relationship and
therefore is the recipient of the customer's projected satisfaction or enjoyment of the product
(as opposed to the brand that created the product).
Social media transformed the ability of a brand to communicate with their target demographic from a proxy relationship (brand -> retailer -> customer) to a direct relationship (brand ->
customer -> retailer).
Strategic Focus on Building E-Commerce:
More so than most other areas of consumer products (aside from books, music, & video),
brands have started to strategically focus on building their direct business with customers.
Currently, direct business (brands selling product directly to the customer (via its website) has
been an ancillary consideration to most brands (i.e. the direct business took the back seat to
wholesale (Major retailers like Nordstrom & Bloomingdales). A couple of reasons behind this
are:
Lack of Experience - One of the main reasons for this was that it was E-Commerce was
relatively new and most CEOs didnt have enough direct experience to champion investments
in E-Commerce as a strategic priority. Based on this inexperience with this channel as a
significant revenue driver, most CEOs have not devoted significant financial resources to
cultivating this revenue channel. Conversely, the maybe stymied from investments in ECommerce in the '04 - '05 boom that didn't generate miracle returns (that's a combination
timing (just too early), technology assimilation (pre-Facebook & Pre-iPhone), and artificial
macroeconomic growth incorrectly supporting dying business models).
Inability to Gain Considerable Audiences - Prior to the social media revolution, engaging in a
direct relationship with a brand required a fairly substantive investment on behalf of the
customer to find the brand. Supporting the previously mentioned Direct Communication trend,
the customer associated a brand with a particular retailer (i.e. Nordstrom) and was accustom
to, comfortable with, and meta-tagged as going to that retailer for the brand. Therefore, the
Brands website (and subsequently the E-Commerce business) had insufficient traffic to signal
an area of material concern.
After years of languishing in the single-digits, most brands finally get it & have made building
their direct businesses as a core new growth opportunity. In addition, with the huge cost
pressures that fashion is under fire from (See Secondary themes) along with retail pricing
pressure - brands are turning to the 65-70% margins from their direct businesses as a huge
opportunity. Furthermore, the ability to harness a direct dialogue and engage the customer in a
long term relationship (through the massive adoption of social media) means that this
represents a huge opportunity for most brands.
Let's take a look at how this can impact margin.

==========================================================
Three Forces that are Fueling Future Innovation
==========================================================
Fashion is also the industry that leads tech trends in terms of marketing & branding leveraging online tools to craft a relationship with customers that facilitates & fosters dialogue
and aspirational affinity for the brand (99% of brands are aspirational in one form or another
regardless of the market segment). In an effort to understand where the next waves are going
to be, we need to understand the current waves that are driving the market.
1. Social is hands down one of the most significant influencers of the next wave of ECommerce - that is driving the current wave of E-Commerce 2.0. Social (primarily Facebook)
transformed web behavior (in the aggregate) from receivers of information (i.e. reading a news
article) to interactive engagement (commenting or sharing - anything that basically promotes a
user action). As incredibly important & transformative as Social is, its the current wave - Signs
that tell you that this trend is in motion:
Since Facebook Fan Pages/Like pages were introduced, Fashion Brands were
socializing their marketing efforts to facilitate E-Commerce (i.e. Check out our new
collection).
Retailers like ASOS, Urban Outfitters, et al have Facebook Shops open - and major
retailers are currently running major campaigns around informing the Retailer's
Facebook followers about the channel and developing the revenue channel
Startups are currently being built around Facebook Commerce (Social) Commerce,
ranging from white label stores (al la Payvment) to analytics (al la AddShoppers) - an
ecosystem rising around trends supports it's current position in the product lifecycle and
state of diffusion - it's happening now.
This isnt really a new wave or an innovation - its just something that is a logical extension of
the technology. We are in the early adopter stage of this trends evolution - its new, but its

definitely not the next wave.

For example, Forrester Research predicted that Social Commerce would reach $14b by 2015.
Granted, its a current trend in motion, but it is forecasted to represent ~5% of Online Retails
revenue in 2015 - and thats after ~10 years! (lets say that the social trend really kicks off in 06
when Facebook is released to a wider audience - so that means this trend (by 2016) will be in
motion for 10 yrs. Think about Google was after 10 years and the contribution they made to
Online Sales development over the period - $14B is fairly muted when compared to overall
theme).

2. Private Sales are a glorified email marketing fad that exploded onto the retail landscape
and, over the past two years, has been quickly commoditized with 100s of players jumping into
the space. This trend truly represents a wave because of its voracious growth over the past 4
years and subsequent crashing of this industry as a business model as 100s of competitors
have ostensibly commoditized the industry out of existence.

Private Sale Sites and their corresponding incredible growth rates have imbued some profound
developments in the marketplace:
Time Value of Economic Value - The most incredible development in E-Commerce was that

Private Sales sites (al la Gilt Groupe, JackThreads, Rue La La, Plndr, HauteLook) conditioned
the customer to trade cost savings for product delivery. Before this, Zappos was setting the
expectation of Free Shipping & Gilt Groupe (primarily) fundamentally transformed this
expectation.
Price is a Deadly Value Proposition - Competing on price is one of the most challenging
positioning decisions in business. When a brand makes the decision to market itself purely on
price (i.e. purchase these items at 50% discounts), then there is no place to go but down
(citation Wal-Mart stalled growth as prices have continued to increase). By virtue of focusing on
the price, you are inherently devaluing the product the Private Sales Site is purveying. The
retailer is in a falling knife market environment that is extremely challenging to navigate and
almost always ends up in a bad place.
The Pivot Out of Deals - Gilt Groupe has been the only player to being the transition (pivot) out
of pure Daily Deals (into Park & Bond - but more on this later) - something that all of the Private
Sales players need to figure out their pivot out of the deadly margin game. 90% of the time this
is going to be a Private Label play that will support a blended margin near the levels of those
Gilt enjoyed when it still held it's first mover advantages.

[NOTE: To update & expand my most successful Quora article(Matthew Carroll's answer to Gilt
Groupe: How does Gilt's business model work?) - I am writing a follow-up about the industry
and the state of the game - So stay tuned to a lot more on this front.]
3. Mobile / Location is one of the most powerful tsunamis that was introduced in the
marketplace in 07. The pervasive adoption of smartphones (lead by the iPhone's introduction
in 07) - consumers began interacting with the web in a fundamentally new way - on the go
(away from their desk/laptop)
The smartphone revolution championed a new world of the internet as a physical manifestation
of the digital world (al la foursquare led by the brilliant work of the laudable Tristan Walker).
There are two major factors to this wave:
Check-ins - a new interaction with the on the go lifestyle of most consumers to earn
rewards and receive discounts based on the interaction of the real world and the digital
world.

M-Commerce - (Mobile Commerce) was an entirely new genre of E-Commerce whereby

a user is enabled to purchase products regardless of geographic proximity to a
computer.
Forrester Research predicts that M-Commerce will grow to $31 Billion over the next 5 years in
the US - thereby doubling Social Commerce. Let's take a look at Forrester's estimate:

UPDATE: 1/7/2013 - Mobile Commerce Forecast updates

Forrester Research estimates that M-Commerce will grow into $31b industry, nearly double
their forecast for Social Commerce (Hence why I am not very big on it becoming the Next
Wave, when it's a wave that's already in motion) by 2016. Let's take a look at how they predict
the next 5 years will evolve:
This wave of E-Commerce where an individual's physical location facilitates purchasing of
goods or services in three main forms:
Purchase Online & Pick-up in Store
Geographically Targeted Discounts
Mobile Check-Ins for Loyalty Points & Discounts

However, like Social, the Mobile / Location wave is currently underway diffusing in through the
marketplace and does not represent the next wave.
Tertiary Trends
[Note: There are some fairly profound secondary / tertiary trends that support my position on
the next waves of innovation, but these will be discussed in a later post. Some of the most
salient secondary themes are:
Experiential Development of Web Users - as people gain more experience with the
internet, they will become more competent and willing to more fully integrate ECommerce into new aspects of the their lives.

Collapse of Inexpensive Foreign Goods & Increasing Input Costs - The era of cheap
manufacturing is quickly dying with 20% YoY wage inflation in China compounded by
BRIC's ascension into the middle class. Competition for input commodities in all
products will systemically change how we all purchase goods & services.

Rise of US Manufacturing - With rising Chinese RMB and a depreciating US Dollar, the
US is strongly positioned to champion a manufacturing boom over the next 5 -7 years
(pretty much all the good t-shirt & jeans factories in LA are at full capacity. Made in USA
will become increasingly important (as it was for 150 yrs prior to 1950s, when we GDP
per capita (PPP) rapidly appreciated). Although this trend is in its infancy & has
considerable hurdles (lack of vertical supply chain, a labor force (look at what happened
to Alabama's tomato crop after the immigration legislation), and infrastructure) to
overcome - it is a major theme that could enable the US to realize something similar to
what we are seeing with Germany's GDP in Early - Mid 2011.
There are two really important themes that are necessarily Innovations in E-Commerce right
now.
1. Retailers Driving Content Creation: I first noticed this at the beginning of the year with a
Carnival Cruise Web Commercial about a family on a holiday. In addition, tonight I read
about Karmaloop (a street E-Commerce player that I reference a lot in my posts) having
users upload vids to create a new web series. [More on this later (when I flush it out
more but it's pretty interesting).]
2. Private Label: I have a REALLY long post on Private Label and why it's becoming a
critical aspect of the Revenue Development of a Fashion Brand. I would go so far as to
say that it's going to be one of the main pillars of brand strategy over the next 10 years but more on this later.

These tertiary themes will be discussed in excruciating detail in a subsequent post - Ill update
with links]
Summary - These three trends lay the foundation for the next waves (all of which would not be
possible without at least 1 of these trends. In addition, the next waves of innovation will be
built upon these three trends. Therefore, for purposes of looking forward, the consumption
medium has been set and the next waves will not be an entirely new means of

interacting with or engaging in E-Commerce - the next waves of innovation will be within
the same context (web-based & mobile).
==========================================================
Three Waves of Innovation in E-Commerce
==========================================================
All three of these trends are fairly independent - the order is fairly arbitrary
1. Curated Personal Style Subscription
Over the past 6-years social and E-Commerce have evolved into a way of life for the vast
majority of internet users. However, recommendation of products pretty much sucks. For
example, Amazon Recommendation Engine is useless (maybe its just my experience - but
every single recommended item I have either purchased or a competing product that I have
decided against purchasing) & the best in the business, Netflix, is only moderately insightful.
I am fairly well versed in machine learning & NLP, but have failed to see an implementation of
recommendation algorithms on a product basis (although Hunch is getting pretty close) that
present a substantively compelling recommendation that compelled me to purchase a product.
The next wave of E-Commerce will be services that fundamentally leverage the massive data
sets in conjunction with expert curation - to drive purchases by introducing the product to the
customer that presents a clear value proposition.
There are three salient aspects of this model:
1. Leveraging of Data: Online Retailers of all shapes and sizes have vast treasure troves of
data that are currently not fully being employed - most of the time they are not even being
connected. This next wave of innovation will involve the connection of various data sources into
a central platform that delivers more insight into the product selection, procurement, &
merchandising process.
2. Subscription as a Business Model: The first time that I really noticed subscription gaining
product/market fit (in online fashion) was ShoeDazzle. Smaller E-Commerce Fashion Sites
should be focusing on a deeper, more personal relationship with the customer - thereby
leveraging the power of the subscription model to deliver more product and round out their
cash flow cycle.
3. Expert Curation --> Personalization: As I mentioned before, pure algorithmic
recommendations suck - I mean if Amazon's "you would also like" can't produce a decent
recommendation so save it's life - then I don't believe that anything is ready for prime time.
However, if done correctly, these algorithms could focus the selection criteria. Thus, making the
work of a stylist / expert easier and more efficient.
There has been loads published in the last 6 months about the coming revolution in Mens
fashion E-Commerce into style curation (a la StyleBop - Buy the Look - and Mr Porter.com The Look & The Story). It is well understood that men purchase fashion very differently than
women and want to buy style that is put together or curated (Man Shops Net - WSJ).
Heres the real kicker - no one has fundamentally implemented this process into a product.
The majors like Mr. Porter, Gilt Man, and ShopBop have jumped way out in front with
editorialized content. However, their scale is an inherent weakness to the personalized
approach that a curated personal stylist subscription model could offer for men. In addition,
these major players are positioning themselves to compete with the Bloomingdales of the

world with expensive items - Mr. Porter, for example, has most of their items at $500+ and
there is a huge market for everyone else who simply doesnt have this kind of disposable
income to spend on fashion.
Why is this the next wave:
People Want Cool Stuff: The web will progressively become more individualized as users find
their niche, form new relationship, and discover new ideas/products/art etc. This wave fully
embraces this trend and delivers a service to monetize the relationship.
Tech. Maturity & Sophistication: To a certain extent, this evolution was not possible until
probably 2011. The Social Web needed to mature (and an ecosystem built on top of it), users
needed to mature and gain more experience (and sophistication) with the web and interacting
with it (versus being receivers of the web al la Web 1.0), and the analytical environment to build
a better web needed to mature as developers tailored their offering into the appropriate
Product/Market Fit.
Personal Relationship: The web will become increasingly personal and E-Commerce must
respond to deliver products and services that feel like they are made for the user. As youll
see in the startup model, the relationship is paramount in delivering a subscription fashion
service.
==========================================================
FULL Startup Business Model Analysis at the end of this overview - most of you know
how I really hate it when authors give copy-blogger generics to shorten the post - or textbook
over-simplifications that dont really articulate the complexity of the real world. So I have added
a full business model with screenshots & financials to showcase what a curated fashion site
would look like, how it could be implemented, and what the potential revenue would look like.
Enjoy! Feedback, Flaming, Comments, and Funding (al la me!) available if you are so inclined
==========================================================
2. Open, Vertically-integrated, Analytical Demand Signaling & Planning
Fast Fashion (Zara & H&M) has fundamentally revolutionized the fashion-industry by upending
the traditional seasonal approach* for retail primarily through their analytics driving a modern,
vertically integrated manufacturing beast. This transformation is akin to Toyota kaizen (along
with the other Asian car manufacturers) that reshaped the automobile landscape in the United
States where foreign manufacturers wiped the floor with its US competitors.
The ability to transform actionable analytical insights into demand-responsive product
compositions presents the core strategic value proposition for fast fashion & the driving factor
that will revolutionize the industry as a whole (we are moving to a whole new level above the
prompts innovation mandate).
The traditional way does not work and is ever increasingly augmented by the underperformance of traditional seasonal firms and out-performance by those fast fashion market
leaders. In an effort to fully investigate this wave, we need:
Understand the background as to how industry norms were established as a means to
illustrate how disruptive Fast Fashion is.
Define the push factors & technical developments that will foster in the next wave of ECommerce.
Layout the How the Solution Works.

There is an emerging trend for each E-Commerce site to try and harvest their own proprietary
"demand signals" based on like / want data. For example, Bonobos has their new "Want"
feature, Amazon has their yellow "like" button, Bluefly similarly with a "Want" feature. Individual
players in the space are all trying to go it alone - which never results in a favorable outcome in
the aggregate.
I completely understand the need to begin to harness demand signals based on analytics, but
having every E-Commerce site build out their own functionality is ridiculous. What makes this
ridiculous is that no one player has sufficient scale to truly capitalize on these data points to
make constructive decisions. In addition, this information needs to be distributed to all
stakeholders. There must be standardization for the implementation and utilization of demand
signals.
In the traditional retail model, retailers guard sales data and statistics about product
performance. Brands have been significantly inhibited for maximizing revenue & being a true
partner in delivering the best product in the correct quantities to the retailer by virtue of the
disconnect (and often discord) between the two player. Traditionally, brands have not had
access to the retail performance data and have been forced to proxy methods for estimating
demand &, therefore, production quantities for products. By retailers controlling this data today
inhibits brands (vendors to the retailers) from delivering products that maximize the retailer's
merchandise offering. The current information asymmetries heavily rely on buyers (who let's
face it REALLY aren't factoring customer mindshare, the brands level of diffusion, or the
individual factors of the brand - buyers are buying in their overall patterns for the category as a
whole). This is the same thing with proprietary demand signaling products like wants / likes as
a proxy for understanding market & audience.
The one retailer in the space that I have MAD respect for is Amazon's Vendor Central. They
are definitely leading the charge, but it still needs a lot of work - to flatten data communication
and leverage all parties working together.
Please don't suggest that Facebook Like Button solves this - the company is evil and can't put
something like this together that will actually benefit other companies businesses. COME ON It's Facebook they won't even let the users of their products have their data - do you REALLY
think that they would do anything that presents monetary value to other stakeholders?
When you take a look around the internets, the only company positioned to do this is Amazon but it has to be an open standard that:
What Does this Innovation Look Like?
Distributed System - This wave will be about massive distribution of a service that harnesses
demand, centralizes and then distributes it to all the stakeholders

Vertical Integration - This wave embraces the spirit of the internet - pushing development to
take on the Man. In order to compete with larger, better financed, and highly efficient teams the web needs to pull partners together and build a better ecosystem. Although the 2011
prevailing tech theory revolves around Apple (company) /iPhone controlled Apple AppStore for
quality - this simply wont exist in the web as a whole for the better part of 8 - 10 yrs.
Retailers need to communicate better with suppliers to maximize capitalizing on demand based
on supply-based opportunities & brands need to leverage marketing & promotion to drive the
retail & brand businesses together.
Integrated into workflows - don't make me log into another dashboard. The demand
signaling product should push to Google Analytics (the fairly universal tool that everyone uses,
even if they have more advanced analytics tools). This is a big limitation of Bitly in the fact that
they aren't making data analysis easy for me by controlling my analytics within their product I'll use your product more if you give me the data to put to work. The way that this tool is going
to create value is by making data widely available and located in a place where people can
actually see it & use it.
* The traditional seasonal approach is where product available for purchase at retail (i.e.
what you see at the stores) is produced in two main production cycles - Spring/Summer &
Fall/Winter.
Supporting Data Points
Universal Predictive Convergence Analytics - So this is now hitting the general media culture
after we started talking about it in 2011. Moral of the story - Quora puts you way ahead of the
game.
-------------------------------------------------------------------------------------------3. Infrastructure as a Service - The Missing Link
This gilded age of the consumer/mobile web has it roots in the commoditization of technical
infrastructure that Amazon championed stemming from their CapEx investments from the
early/mid-00s (what ultimately becomes Amazon EC2 through Amazon's excess server
capacity).** Now as the incredible technical developments of the web gave rise to Amazon
EC2, the huge growth ofE-Commerce will push the back-end infrastructure to innovate.
The world before Amazon EC2, tech startups were forced to engage in a massive CapEx build
out. An article that beautifully illustrates this is Marc Andreessens Wall Street Journal OpEd Why Software is Eating the World). This is ostensibly the same thing that is still happening in
Online Retail & retail in general. The Majors are building out the infrastructure:

Walmart Takes over Supplier Logistics - http://buswk.co/nhJ7dz & (B-Net Article http://www.bnet.com/blog/retail-...)
Amazon.com wrings profit from fulfillment - http://www.sfgate.com/cgi-bin/ar...
"They're building out fulfillment because they realize that fast and predictable
delivery of product is a huge driver of their business," Colin Gillis, an analyst at
BGC Partners LP in New York, said in an interview. "With the revenue growth
rate that they have, it's not like they're doing this just because they want to.
They're trying to catch up to their sales growth."
The investment in fulfillment centers last year - the company's largest operating
expense, at 9.5 percent of sales - brought the total number of warehouses to 69.
To help further automate its order-fulfillment business, Seattle's Amazon agreed
to buy warehouse-robot maker Kiva Systems earlier this week for $775 million,
the company's biggest acquisition since its purchase of shoe retailer Zappos.com
in 2009.
Urban Outfitters Prepares to Grow Online - Internet Retailer (http://www.internetretailer.com/...
Macys Breaks Ground on Fulfillment Center in WV - Internet Retailer http://www.internetretailer.com/...
Now these retailers have hundreds (and in some cases thousands) of different brands. For
example, Zappos has 312 Mens Footwear brands ALONE and Walmart has something in the
order of 50,000. There needs to be a scalable, easily implemented solution for the brands that
the retailers sell.
Think about how beautiful Amazon EC2 load balances and effectively responds to traffic
spikes. It also is extremely easy to implement - even a pretty JV coder like me can get an
instance up and running without much fuss. There needs to be a player that delivers order
fulfillment & inventory management (remember we already established how much larger ECommerce is going to become) in a capacity that enables leveraging of economies of scale
through services only an aggregated player can provide.
Now there are two main players that kinda do this:
1. Shipwire Fulfillment - Shipwire is a specialized E-Commerce Fulfillment company that
lead the industry in formalizing a pricing structure & delivering 3rd party logistics
services as a service. Although they are small and relatively new, they are hands down
one of the market leaders in the space and on the right track. They need to drop prices
considerably and flush out their model, but all things considered its a good start.
2. Amazon Fulfillment Services (Fulfillment By Amazon (Amazon FBA) - Amazon is
currently operating a fulfillment service, but its not dialed and its pretty expensive. With
Amazon operating 13 Fulfillment facilities in the US, and opening 4 more (as of the week
of Sept. 12 Amazon made in-roads to opening fulfillment facilities in CA - W00T!). If the
server infrastructure buildout of the early 00s is emblematic of Amazon's future
fulfillment capabilities in 5 years, then this could be in the innovation that the industry
desperately needs.
Here are some background resources on the investments that Amazon has made in

building out it's infrastructure:

Amazon added more than 7 million sq ft of distribution space this year (40%+ over 2010)
$130 million on a pair of distribution centers in New Jersey: http://f4il.co/PHRbGV
$135 million on a pair of distribution centers in Virginia http://f4il.co/PHRmSv
$200 million in distribution centers in Texas http://f4il.co/PHRyRP
$139 million in two sites in South Tennessee http://f4il.co/PHSupm
$150 million in southern Indiana http://f4il.co/PHSDsI
5 - 10 new fulfillment centers in California over the next 3 years at an avg cost of $150
million per 1 million sq ft (http://f4il.co/PHSTIg)
$750m - $1,500m in California (at least $500 million to open large distribution centers
and other facilities in California that would create 10,000 full-time jobs http://f4il.co/PHSZ2z
The killer part about this is that there is already the physical infrastructure built - in every city
there are 3PL (third-party logistics) warehouses that will store, pick-n-pack your orders.
However, they dont solve the critical aspect of inventory management.
Here is what the solution to this wave will look like:
Load Balancing Inventory Between Warehouses: By virtue of clarity in the demand signals,
the new service can shift inventory from Warehouse A to Warehouse B (thats located closer to
the demand source) to drive cost efficiencies.
Long Haul Injection Shipping: The main profit center for United Parcel Service & FedEx is
the volume of packages driven to any one location on any given day that allows them to
combine hundreds of shipments into one large container. By virtue of aggregating hundreds of
brands and coordinating the logistics, the entire ecosystem derives cost efficiencies from scale.

Great Clarity into the Supply Chain: A system like this will reinforce Wave 2 in that all

players will better understand where their supply is and how to structure product promotion
strategies accordingly.
Social Proof: Here are some recent developments that support this becoming a major wave:
Google Targets Amazon (company)'s 'Prime' with 1-Day Delivery - http://on.wsj.com/tvrhbq
Demonstrates the strategic priority of E-Commerce
Illustrates market opportunity for new players with the resources and strategic alignment
to get into the industry
This problem is 'insanely' logistically complex - the math & algorithmic complexity of
conquering something like is perfectly geared for Google
FedEx Said to Plan Order of 30 Wide-Body Boeing Freighters (http://buswk.co/uGfXMg)
$5.26 BILLION in CapEx for these 30 new planes - FedEx is a finance wiz and would
not take a major order on like this if it did not forecast an even larger increase in volume
17 million packages will be shipped on Dec 12, 2011
~10.26%+ in shipment volume in 2011 from 2010
15.6 million shipments shipped on Dec 17, 2010
12 million shipments on Dec 15, 2008
10.6 million shipments on Dec 16, 2006
Source: http://on.wsj.com/tkRuAl
Google Tests Same Day Delivery in San Francisco
(http://f4il.co/U5vFKp)
This follows eBay's move into the space & United States Post Office (http://f4il.co/U5w67u)
==========================================================
Wave 1: Deep Dive Investigation into Curation
==========================================================
[Note: I want to define a couple of terms so we are all playing on the same level - here are
some definitions that I am going to use:
Majors: The 800lb gorillas in Fashion E-Commerce like Nordstrom Bloomingdales (Macys),
Saks Fifth Avenue, Net-A-Porter,Urban Outfitters. To get an idea of their scale:

Independents: These are the Online Retail / Fashion sites that are primarily focused on being
boutiques -> they mainly sell the new, high-end consumer fashion. The main players in this
space are RevolveClothing, Tobi, eModa (even though they suck and dont pay their bills), and
Karmaloop
Here are the push factors to why this trend will emerge:
1. Low Competitive Advantage in Product Offering
In the mid-late-00s the Majors (i.e. Macys, Bloomingdales, et al) were facing a problem - they
all sold +/- the same brands, at the same price level, and were in the same locations - thereby
commoditizing their entire retail segment by virtue of growth aspirations fueling homogenization
(and thereby progressively destroying value proposition. During the Mid-00s consumption
boom - the Majors all sold the same brands, focused on Jack Welch-Style Efficiencies &
Synergies (like cutting customer service to increase profitability - http://on.wsj.com/nC98ZM,
and ultimately destroyed any discernible value proposition that enabled them to be price setters
in the industry. In the same manner, most fashion E-Commerce sites are in direct competition
with the majors - offering the same brands and pretty much the same prices.
Back in the mid-00s the Majors were still riding high on engendered brand positions &
established customer mindshare (from the last 40 years of evolution - customers, only just
maturing with the internet, still primarily held a mental association that I go to Nordstrom to buy
nice Clothes:). Most of these Major retailers simply didnt understand the true threat that Zara
& H&M posed to their core businesses - instantaneously responding to demand signals that
delivers product in the emerging trend and at sufficient quantities that the customers wants.
Simply put - they had better product in the right places & the Macys and the Bloomingdales of
the world could not compete (and arguably are still only in 2011 beginning to achieve
substantive market progress in response to the massive changes in the macro-retail
environment. Surprisingly, JCPenny is leading the charge through a fast fashion boutique
approach with their Mango partnership.
(WSJ - Penny Introduces New Weaves of http://wsj.com/article/SB1000142...)
Currently, most independent online fashion sites are falling victim to this same trend (that Major
Department stores did in the mid-00s - commoditized product offering). The Independents
(RevolveClothing.com or Tobi.com, or Karmaloop) compete with the Majors (Nordstrom.com,
Bloomingdales.com, Net-a-Porter) - they have VERY similar product offerings in the consumer
fashion space (i.e. not when it comes to High Fashion like Zegna, Loutboutin, Gucci, etc)
2. Portable & Effective Data Extraction Best Suited for the Smaller Players
Traditionally speaking, boutiques were a place that the shop owner knew who you were and
was the fashion expert that provided some value add services (being in the know and having
a relationship with the customer to make recommendations about purchases).
E-Commerce has exploded in the last 5-6 years as the process matured and more people have
experience with it.
- The advantage of E-Commerce is the ability to emotionally engage your customer base by
virtue of your smaller scale - its a lot easier to apply qualitative customers insights that fosters
your customer development strategy
3. Buying Traffic Sucks! Play to your Strengths

Google AdWords drives significant traffic to the fashion retailers & the smaller guys
simply dont have the financial resources to compete.
The big boys have crazy, advanced tools, like Marin Softwares Pay Per Click
Management Solution. In addition, they have the staff & the tools to blow the little guys
out of the water.
The Independent Players wont have the ad-buying budgets, highly specialized Pay Per
Click or data analysis staff, or advanced tools to win against the big boys. Even if you
do have some of it, they major fashion sites will simply copy your strategy. For example,
some of Internet Retailers most recent estimates have paid Search Taking up a
significant portion of ad budgets:

4. Understand Your Position & Embrace Strengths to Maximize Value Proposition

Leverage your small scale to have a direct communication strategy that emotionally
connects consumers to the E-Commerce channel.
Just think about it - trying to effectively segment an email list to 1m people (like lets say
Nordstrom's) versus an smaller competitor who is segmenting a 4k email list is

completely different. The smaller chains have the luxury of dealing with 000s of
visitors/orders/customers versus the majors like Nordies that has 000,000s - use this to
your advantage. For Example, a smaller player has the considerable strength of:
Once you have built customer profiles over a couple of months, you can have more
insights about how to segment an email list to effectively engage & communicate with
your customers.
5. The Big Boys in Online Retail Are Swamped in Data
Many of you know, that I have a personal vendetta against the big boys and believe
that they scale inherently their ability to innovate.
The big boys have xx millions of visitors per month & trying to add customer insights
requires such a significant investment that its really not possible at scale
As a smaller player you are at a significant advantage to have substantive insights that
drive profound impacts on your product offering.

==========================================================
The Startup Model - Just-Your-Style
==========================================================
This is what I see Personalization site / Product line Looking Like:
Just-Your-Style Mens Fashion Subscription Investigation & Analysis
Just-Your-Style.com (JYS) is a placeholder name for this prospective business model analysis
that flushes out the personalization concept for E-Commerce next wave of innovation. This
company is intended to be built as a new business line to the 100s of fashion sites out there so
for example, it would exist on top of RevolveClothing.com or Tobi.com or an application of NetA-Porters Predictive Algorithm.
Just-Your-Style was one of the first fashion E-Commerce sites to fundamentally embrace the
boutique atmosphere on the web through the stylist approach to fashion E-Commerce.
Based on a couple of brief conversations, the Mens aspect of Just-Your-Style has been an
opportunity that Just-Your-Style has not completely dialed in.
Summary
Just-Your-Style should embrace that boutique/niche position and offer a subscription fashion
model for men that replicates a stylist at a local boutique making recommendations for a guy
about what to buy. It doesnt make sense for Just-Your-Style to invest an incredible amount of
resources into styling users without them coming back - This model employs a Subscription
basis to realize the monthly benefits of recurring revenue from customers as compensation for
the costs incurred for stylists time & energy.
Here are some of the main goals/aspects for the products design/development:
1. Personally Selected Items - Just-Your-Style is a boutique and this model needs to begin
at its core with a personal interactions between the Just-Your-Style Stylist and the
Subscriber. This is something that the larger players like Mr. Porter & Gilt cant do - they
simply have too many customers to be able to fundamentally implement a project based
on personality like this! Every time fashion is attempted to be recommended
programmatically at scale - it consistently fails (i.e. Google & Boutiques.com).

Having a stylist to think about the wardrobe, make suggestions, & engage with the
subscribers creates a compelling competitive advantage that will emotionally lock in
subscribers
2. Integrated Workflows - The subscriber is making a trade off when they sign up for this
product I (subscriber) will give you my monthly budget for apparel in return you make
me look good without me having to think about it. A product like this should understand
that the guy is not going to log-in - otherwise, they would be making purchasing
decisions for themselves.
Emails that prompt the subscriber to complete explicit actions should be key. For
example, on the simple mock-up on the next page - Clicking on the image of a shirt
should lock in the selection for the subscribers monthly shipment
3. Customer Insight - This subscription business line will enable Just-Your-Style to grab
deep customer insight that can be directly applied to the main business. Utilizing the
subscription business as representative samples for the demographic & style
preferences of the overall mens business at Just-Your-Style.com.

Value Proposition for Just-Your-Style

1. Revenue

2. Markdown Planning (Profit Optimization)

I have received 4 emails in the last two weeks from Just-Your-Style about the Summer Sale
that you guys are pushing pretty hard. One of the biggest problems of End-of-Season /
Closeout Sales is letting the people know that these markdown items that they would want are
available. This subscription model enables you to target people whose taste preferences are
best suited for the particular inventory.
With this model you can direct inventory that you might be getting long on to their most
effective source for acquisition & enjoyment by Just-Your-Style subscribers - only through the
deep customer insights that this business generates can allocation & planning optimization be
done dynamically as part of the standard workflow process of the company.
3. Cash Flow Stability
A monthly subscription models creates a fairly consistent source of income for Just-Your-Style
that is less volatile than strictly relying on Email & Inbound traffic generation. In addition, the
predictability of shipments means that out-of-stock items can be secured (reducing the
opportunity costs of lost sales) weeks in advance and under-performing inventory has a new
life to be appropriated to the right customer.
A subscription model enables the financial stability provided by the benefits of predictable
shipping cycles for lean inventory management
4. Buying Traffic Sucks - A More Effective Revenue Generation Tool
Buying traffic through AdWords is an expensive proposition that turns markets the Just-YourStyle, but mainly as the purveyor of the item that the potential customer was searching for.
Fashion E-Commerce has become fairly commoditized over the last two years and a great
purchasing experience does not carry the same weight as it did 3 or 4 years ago when Zappos
was King - now everyone has free shipping & easy returns.
A stylist-based subscription model builds on the core competencies of Just-Your-Style and can
be leveraged into a distinct value proposition - a virtual boutique that understands the customer
& is committed to filling out the whole closet.
Example Pricing Structure

Notes:
- If the monthly $ value of the shipped item is below the Monthly Subscription Price, then it is
carried over to the next month as a credit OR used to credit the Complimentary Good that is
shipped with every order
The Up-Sell Model - Every Month Receive a Wear it With Item with the Shipment
Every month, the subscriber should be sent an additional item that complements the
Subscription Items per their Level. The Wear it with items are specifically chosen to be
paired with a piece from the current months shipment or from the previous months (As the
service gets off the ground, the Wear it with item should specifically take into account items
that the subscriber says are his all-time favorites)
Here is the beauty of the model - guys are lazy and (Im willing to make a big bet) the
overwhelming majority of the time, they are going to keep the Wear it with complementary
item.
How it Works:
Every Month the subscriber is sent something that the Just-Your-Style Stylist believes will fill
out their profile. In addition, an item is selected that looks good or complements the
subscribed item. For example,
Subscription Item Complementary Item
Jeans Collard Shirt
T-Shirt Jeans
Collard Shirt Jeans
Collard Shirt Jacket or Outwear
Jacket Collard Shirt
3 Days after the Shipment Arrives, the subscriber receives an email to lock in the order and
provide feedback on the items.

Feedback & Improvement

When the item is delivered, Just-Your-Style sends an email to the customer requesting that
they rate the complementary item. There are three elements that should be included in this
email:
1. Subscribed Item
Rate It
Automatically builds out your customer returns
How Did it Fit Add a 3 aspects (like Google is doing with Google Places)
Keep It
Authorizes Just-Your-Style to charge the subscribers CC for the subscriber price
Return it
Creates a shipping label & Feedback box for rasons
2. Complementary Item
Rate It
Automatically builds out your customer returns
How Did it Fit Add a 3 aspects (like Google is doing with Google Places)
Keep It
Authorizes Just-Your-Style to charge the subscribers CC for the subscriber price
Return it
Creates a shipping label & Feedback box for reasons
Returns:
One of the most successful E-Commerce startups of the last 5 years was Zappos - whose free
shipping & free returns systemically changed the industry. By virtue of employing these two
policies, the consumer was incentivize to purchase two items with almost zero risk for the
purchaser. As a direct result of this program, Zappos experienced a return rate of 37% in 2010
or $374m - however, customers loved the fact that they got to try before they buy.

Sending a complementary good that the customer did not specifically purchase does present
significant risks in this model. However, there are several ways to ideas
1. Guys are Suckers for Hot Girls Approvals
On the packing slip, show a picture of a cute girl introducing herself as his stylist & why
she thinks that he will look good in these choices - as a guy, I can tell you that I will wear
whatever a hot girl says that I look good in. This also creates a sense of connection and
social contract between the subscriber & Just-Your-Style - if Just-Your-Style gets these
complementary goods right over a couple of months, then a significant level of trust
and goodwill will be harvested between the subscriber and Just-Your-Style
2. Discount
Market the fact that by virtue of being a subscriber they got this 2nd item at a reduced
rate - you increase the probability that the subscriber will keep the item simply because
its a good deal
3. Encourage the Subscriber to Photograph the Himself with the Return
If the subscriber elects to return the item, then he should be prompted to take a picture
with his phone to show Just-Your-Style what he didnt like (Also, the take a photo to
return should be incentivized because the subscriber is having to do extra work & JustYour-Style is extracting value out of it). Just-Your-Style grabs an incredible new piece of
information, a visual idea of what the customer looks like - making the stylists job easier
next shipment.
Building Out the Closet
Stealing a page from Expensify, building out the wardrobe of a person is going to be
shitty, time consuming, and hardwork.
The solution to this is easy, build a web app, (much like expensify), have people take
photos of the stuff that they like on a daily basis (or as they wear them).
Additionally setup a forwarding email address so that people can forward email order
confirmations for the items that are purchased online.
On-boarding Process
1. Style Image of What you Would Like to Dress Like
Goal: Have the subscriber qualitatively select the trend that they want to dress like
Defines: Defines the major trend that will be used to make recommendations - Example
trends:
Americana Urban Sophisticate Euro-60s Summer Sendagaya-Hipster
2. Select a number that broadly defines where you think your style lies

3. Select the number that broadly defines where you want your style to be
4. Select the Looks that you could see yourself wearing

5. Do you have core/staple items (Jeans, Jackets, etc - generally more expensive items
that will be gradually added to your subscription) that we should plan into the
subscription?
6. Connect Facebook to personalize your recommendations (We wont post anything to
your profile)

Information that is helpful:

Gender (Obviously, you dont want to see recommendations for girls stuff, if youre a
guy)
Location (If you live in NYC then the clothes for winter we suggest will be different than if
you lived in the constant summer of Los Angeles)
Fans (If you like house music, it implies certain aspects helpful for style
recommendations - likewise if you listen to Dave Matthews, its incredibly useful for style
insights)7. What items that you have purchased from Just-Your-Style do you love the
most!
Purchase History
Display Thumbnails of the items that the user has purchased
Grab Feedback from the subscriber about fit & how much he wears it.

OR
Want/Like Demand Signaling
If they arent a customer, list items that fall into the Trends the user selected in Step 1 have them Want the items that they like the best
Want items will help the stylist to better understand what products appeal to the
subscriber & present items that the subscriber is most likely to be stoked with.

Financial Model

For Google Search: Matt Carroll - Google+

Updated 1 Jul, 2013. 69,130 views.
Downvote
Comments25+
Share47

Arie Shpanya, CEO Wiser.com

36 upvotes by Justin Choi, Rudi De Groot, Rodrigo Pas Garay, (more)
Between now and teleportation in lieu of free shipping, I see a few opportunities for online
retailers to expand on existing models and capitalize on the hoards of data available.
Personalized Flash Sales
Dealing with mounds of inventory and targeting customers ready to make a purchase should
provide these companies with piles of data. This data can translate into truly personalized
offers with an expiration date that quickly pulls in the customer.

70% of customers make use of coupons delivered to them through email, so outlining a unique
24-hour deal would make customers feel appreciated while generating sales (with a sense of
urgency). Either way, eCommerce merchants will increasingly know more about their
customers and capitalize on that knowledge to truly personalize their offers.
eCommerce Integrated into Media
With the introduction of the Fire Phone, Amazon is taking steps to surround their customers
with online shopping opportunities around every corner. Literally. With their Firefly function,
users can snap a picture of anything and purchase it from Amazon with one more click.
Window shopping can now involve money changing hands.

If only they had a Fire Phone

This is just an expansion of eCommerces role in our everyday life. There are plenty of spaces
available to include online shopping plugs, including digital publishing sites such as Buzzfeed.
With Buzzfeed regularly churning out articles such as 19 Reasons the Summer Sucks for
Anyone Wearing Glasses or 21 Things Only People Who Suck at Makeup will Understand,
its easy to picture offers for croakies or mascara placed in the articles. They have already
begun to feature promoted articles, so it is only a matter of time before these promoted articles
sell goods with just one more click.
Profit-Optimizing Dynamic Pricing
Currently, competition sparks the need for price transparency. One company sees a lower price
and realizes it must follow suit to stay competitive. However, as data yields more and more
information on resources and consumer preferences, repricing commodity goods may root
itself in economics, instead of competition. With sales and supply chain data integrated, pricing
software can determine what the market-clearing price will be for these commodities, and
change it accordingly in real-time.

Why bother with a market clearing price? If youre looking to maximize profits, employing
dynamic pricing to find that equilibrium is necessary. Offer a higher price, and do not expect
many sales. Offer a lower price and you leave money on the table. Dynamic pricing is a
reasonable inevitability for eCommerce because of this mutually beneficial relationship;
businesses will maximize profit and customers will trust prices.
Written 2 Jul, 2014. 4,924 views.
=========================

Brand Strategy: How do designers set

prices for dresses and why do dresses
often cost more on a designer's website
than on purchase through an online
retailer?
For example, ModCloth carries a dress by BB Datoka called the "classic stunner dress" that
retails for $91.99, whereas BB Datoka sells the same dress on their website (where it's called
the "Clarissa dress") for $110

This is deceptively complex question as the answer requires an explanation for how consumerfashion brands price products and subsequently the factors that drive price deviations. This
answer is broken up into 2 parts:
1. How are prices in consumer-fashion set?: This reviews the actual pricing analysis from
two of previous footwear brands with illustrated examples to explain how pricing is done in the
real world.
2. Why are prices on a brands site different from a retailers? Illustrates the market,
organizational, and strategic challenges facing the current landscape for consumer-fashion.
These factors drive the price discrepancies & explains why they occur.
As many of you know, I run a brand called Cloven Footwear - a mens outdoor footwear brand
that just launched SS12. For purposes of answering the question, I will illustrate in-depth
analysis of how we priced one of our launch models and the problems that are inherently
involved in the process. Since Cloven has not been in the market for consumers to purchase,
the answer will pivot into actual data from the VL Projects Deckard Boot to provide more
insight into the observed pricing deviation.
1. How are Prices set in Consumer-Fashion
Consumer-fashion is a bare knuckle, knock em down, drag em out brawl that is hands down
on eof the most challenging, engaging, and addicting industries that I have ever worked in. It is
an insanely ambiguous and obfuscated operating environment surrounding the horrendously
complex brand development and diffusion processes.
In order to effectively serve the marketplace, the consumer-fashion industry is split into two
complimentary segments of brands and retailers. Brands focus on designing, producing, and
delivering great products to the marketplace that engage their target demographic. Retailers
focus on optimizing their brand assortment, inventory quantities, and demand generation that
maximizes product / market fit for each retail location or property.
GAPs terrible financial performance throughout most of the aughts is probably the best
example of the risks & challenges that can plague a vertically integrated retailer when one of
these two divisions is lost (in GAPs case it was that they lost their product-mojo and are only
just starting to get it back). Hence the specialized focus of these two partners has governed
the strategy for consumer-fashion & retail for the better part of the last 20 years - the core
reasons that this has been successful the business model are:
Retailers:
Derive long-term value from major investments in building customer mindshare (i.e. I
think that I am going to stop by Bloomingdales on Saturday)

Have extensive customer insights that enables retailers to optimize their merchandising
assortment of brands, styles, and inventory quantities dynamically for each location (i.e.
GAP only sells GAP stuff and thats risky if the GAP product sucks)

Trying to own the brand side is hugely expensive & massively risky when the entire
organization has been built around the retail side

Brands
Great product design & authentic brand narratives emerge from data-informed & designdriven cultures (versus being reactionary in data-governed design - although Zara and
H&M are dialing in a damn good solution that could prove this wrong)

Brands begin life by focusing on one product vertical (i.e. Cloven for mens outdoor
footwear) & dont have the resources nor the product depth required in the demand
generation model (remember we are talking about the last 20-years - well get to how
the world is today)

Need the freedom to work with hundreds of retailers to effectively distribute inventory
risk and disseminate the brand narrative to get the word out

Before the onset of the Great Recession & technical innovation began to sow the seeds of
change, consumer-fashion brands B2B wholesale (i.e. retailers) generated around 80 - 90% of
revenue from retailers for the first 2-years. This relationship creates two transaction points
where the product is 2x the cost basis for the preceding transaction - a theory in retailer called
Keystone Markup.
Keystone Markup is a pricing methodology that multiples the cost basis by a factor of two
(sometimes can be up to 5x in the case of jewelry) to dictate the price for next rung in the value
chain. Keystone markup arose as the simplest way to universally markup goods across the
retailer to a profitable level. Generally speaking, it is logistically impossible to uniquely price
each product (from 100s or even 1,000s in a given retail location) to reflect market conditions
and retail demographics. The theory being that retailer profitability was more of a function of
units sold versus maximizing each products price. Subsequently, this approach normalized
prices across the marketplace (i.e. everyone is pricing a shirt at $100).

Brand to Retailer: This is the B2B wholesale transaction where the brand sells products to the
retailer at wholesale price. This B2B price is based on theory of audiences of scale (i.e.
millions of customers going to Nordstrom brick and mortar retail stores and online properties)
who should receive a discounted price (off retail price) for the retailers contribution in the
consumer fashion dichotomy. The brand sells to hundreds of retailers to provide them with the
volume of units required to run their business profitably.

Retailer to Consumer: This is the B2C retail transaction where the retailers sells product to the
customer at retail price. The retailer sources product from hundreds of brands to dial in their
product mix for selling product to their customers.
Now that we have established the basic building blocks for pricing, we need to establish the
market rate to understand how individual products are priced in the marketplace. When you
are in the beginning stages of launching a brand, you do a market analysis to clearly define
the competitive landscape. This competitive analysis determines the corresponding balance of
style, price, and quality that enables the brand to most effectively capitalizes on the opportunity.
The products price must reflect a value proposition relative to where the competition is
positioned. The rationale is that the overall product landscape establishes the data points that
a customer will evaluate the product relative to what the customer sees as comparable goods.
In consumer-fashion there are general pricing bands that establish certain boundaries for
potential pricing. For example, one of the launch styles for Cloven was a boat shoe where the
pricing bands for a mid-tier boat shoe are about $70 - $90 retail price. This means that pricing
the product outside of this range immediately draws a red flag in the eyes of the consumer as
being out of place (i.e. not in the $70 - $90 expected price range) - so pricing is heavily
dependent on consumer expectations.
There are two important aspects of this foundation:
Prices are confined to ranges of established norms outside of the brands control &
constrained by the consumers expectations (i.e. if you are going to make product for
this market, you have to price within this range to even be viable)

The price range is a subjective analysis of the competitive landscape from the brands
perspective
To illustrate how prices are set, lets roll through the process for how Cloven conducted the
market analysis and subsequently arrived at our retail price.
1. Market Product Opportunity Analysis: The strategic analysis of how competitors have
positioned their brands & products by price - where price is the defining metric to govern the
product development of the startup

2. Define Strategic Brand Position: Formally establishes where the brand will sit in the
marketplace to serve as the unifying creative direction of the brand.

The potential price is inherently defined by how the brand needs to position its product relative
to where the competition is. The logic behind Clovens pricing is:
The market is defined by the Sperrys Authentic Original boat shoe - it has been in the
market since 1935 and is one of the first shoe styles ever created - anything that Cloven
would produce would be compared relative to this anchor product.

Cloven uses a super interesting technology that will offer a dramatic improvement on fit
& comfort over current Outsoles used in production - leading to a fit and comfortable
advantage over the competition

Cloven uses Outsole & Midsole tech to reduce leather quantities generating a lower cost

basis that allows Cloven to compete on price as a small company without economies of
scale

Pricing below Sperry will offer an incentive to the customer to try on the product competing on product quality for brand-insensitive customers (i.e. I dont care what
brand it is so long as it fits well)

[Note: For the rest of this answer, we are going to pivot to an actual example from my old
brand VL Projects Deckard Boot.]

3. Wholesale Price: Wholesale price is the price charged by the brand to the retailer for
product that they have ordered - its revenue to the brand and represents the cost basis of the
retailer. The general rule of thumb is that wholesale price is a 2x keystone markup on the first
cost (the total cost to create finished goods ready for sale in the marketplace) or in other words
- wholesale price is a 50% discount (0.5x) retail price.
However, the simple world of 2x keystone markup is ending as ERP and IT Systems enable
new insights in all aspects of the retail business that were previously abstractions based on
averages. Today, most brands are under considerable pricing pressure from retailers to
markup wholesale price at less than 2x to provide the retailer with the margin required to
profitably sell the product. Retailers are marking up wholesale price 2.1x to 2.4x to
compensate for inventory markdown & return risks that delivers the overall margin required to
achieve the profitability goals of the firm. This focus on margin is a function of increased
adoption of IT Systems that allow deeper insight into product performance on the brand and
product level versus the obfuscated aggregate view that plagued organizations just 5 - 7 years
ago.
Despite the major strides in retail analytics, its still a major challenge to dynamically price
products based on demand signals and current stage of brand development - subsequently,
retailers generally apply a universal markup on wholesale price to derive the retail price. Both
brands and retailers live and die by the wholesale price - if its too low then the brand risks not
generating enough Contribution Margin to run operations and conversely if its too high then the
brand risk pricing the product outside the optimal competitive price range.
The important aspects for a brands wholesale price are:
Wholesale price is a dance that requires the brand to balance the scope of retailers
markup strategies with the realities of order volume and profitability constraints on

funding the brands operations

Recognizing that setting the wholesale price on the high end of the range allows the
brand to always back off the price through discounts on product (i.e. 5% off wholesale
price for 1,000 units) or marketing discounts (i.e. 5% discount for ad-spend or marketing
placement).

This is an example for how pricing works in the market:

4. Product Development: After you have your target price and wholesale price, you begin to
work backwards to define your costing & materials. The operating cycle in consumer-fashion is
traditionally 12 - 15 months meaning the from the time you have your design to when it finishes
its basic life cycle in the market.

One of the main problems with the launching a new brand is that you have absolutely zero
pricing power - meaning that you have the market setting the price within a narrow range &

subsequently have a high cost basis to manufacture product. This begins the most challenging
part of this stage - the tweaking of materials to levels that deliver sufficient quality right up to
the monetizable equilibrium between the quality of the materials, construction of the product,
and the customers willingness to pay for these costs. Keep in mind that $0.50 in
manufacturing costs equals about $2 at retail (2x markup to wholesale and 2x markup to retail).
Here is an example of the product development revisions made to the VL Deckard Boot to
dial in the first cost subject to the constraints of wholesale price & retail price.

We are in a very interesting period in the modern business environment as the fundamental
business model that has ruled consumer-fashion for the last 20-years (what was referred to in
the 90s as the China Strategy) is dying - the world of cheap goods is over. Factories in China
are closing and the good factories are dropping small & unprofitable brands to stem the losses
from 20% real wage growth & materials inflation like leather (cows eat lots of corn & most hides
are shipped from the US to China for tanning).
In footwear particularly, a brand has essentially zero pricing power or ability to generate
economies of scale for a considerable period of time. The break points are generally around
15,000 pairs, 45,000 pairs, 80,000 pairs, 150,000 pairs, 400,000 pairs where prices drop by
10% - 15% successively at each interval.

===============================================
Why do dresses cost more on a designer's website?
===============================================
Consumer-fashion at its core is highly tactical, deeply psychological (a style/trend gaining
momentum is highly reflexive of the mood that pervades social-cohorts), and heavily

dependent on intellectual-capital (i.e. aesthetic, creative, and strategic direction requires

immense cognitive investments).
Direct business (brands/designers selling product directly to the customer via its website) has
been an ancillary consideration to most brands (i.e. the direct business took the back seat to
wholesale (brands traditional B2B revenue channel for major retailers like Nordstrom &
Bloomingdales).
2.1. Conflicting Priorities Destroy Feedback Loop:
One of the fundamental problems driving price deviations in consumer-fashion is the dearth of
communication & data sharing that adversely inhibits the development of a healthy & efficient
feedback system between the two primary vertical partners, Brands & Retailers. This is a
structural problem that arises from the business cycle at two distinctly unique phases:
1. The Buying Cycle:
The traditional (... and rapidly deteriorating) business model for consumer-fashion revolves
around 9-month seasonal sales cycle, where 80% of a brands revenue is generate through
B2B wholesale orders place by retailers (via buyers - the person/team responsible for
procuring inventory from brands that achieves the optimal merchandising assortment for the
retailer) at major industry trade shows. The importance of trade shows in the archaic business
model for consumer-fashion arose to provide a convenient, centralized location and time frame
for retailers to touch, look, and feel all the products from hundreds of brands, dial in their
merchandising assortment for complimentary products (i.e. boots from Brand X that would look
great with the selvage denim from Brand Y) in direct, comparative context, and account for the
production lead times for brands to manufacture the goods.
At the trade shows, brands exhibit their seasonal collections of samples - the array of potential
products that are in the final stages of product development and represent the full product mix.
Buyers subsequently place orders for the styles, variations, and quantities that they believe will
work best for their customer based on what other products in the pipeline, the goals of the
merchandising assortment, the retailers brand & market position, customer & sales
development strategy, and customer demographics. Obviously, brands are only going to go
into production on the styles & variations (variations are generally the different colors - they
have the same parent style, but differ by color) that retail buyers have placed firm orders to
produce.
The trade shows are scheduled around the seasonal production cycle for brands:
Jan - Feb: Trade Shows
Mar - Jun: Production
Jul - Aug: Shipping & Inventory Turn
Sep - Nov: Selling Season
This process inherently does not make sense to me because an entire segment of the
consumer-fashion industry is basing major, life-and-death decisions on product volumes for
inventory based on a proxy demand signal - the retailer buyer serving as a representative
agent for consumer demand. Now the most accurate forecasting methodologies still involve
are a weighted algorithmic + Delphi Expert Model, but even with the incredible strides in retail
analytics - the concept of elite group of people (buyers) controlling major segments of the
ecosystem through their assessments of what they like or believe the customer likes. The
prevailing theory that drove the evolution of this model was that buyers have all of the
extensive customer intelligence gained by the retailer that is inherently put into practice through
the B2B wholesale order placed with the brand at the trade show.

The major problems with this stage of the pricing model are:
- The order placed the buyer is a based on limited historical data constructed by vanityanalytics like gender, category, and price - these top-line numbers are generally too broad to
deliver true insights to account for brand-specific factors
- This order does not take into account endemic brand factors like the current stage of brand
development, customer mindshare, marketing & promotional activities of the brand - all
demand signals that will substantially impact retail performance
- There is a disconnect between the end-customer even having the opportunity to see the
scope of the product landscape (products that perform poorly with buyers at the trade shows
are dropped and never make it to retail) - buyers are making decisions for the customer as their
representative agents with only tertiary support of this relationship (by monetarily supporting
the retailer based on the product assortment)
Bottom line for how this influence price
The marketplace is directed by buyers:
placing orders for product constraining the product scope

forecasting quantity demanded by top-line data that doesnt factor any endemic brandspecific factors

order determined 9 - 12 months before the product hits retail shelves and the customer
even has the opportunity to product market fitting feedback
[Note: I am not trying to take a piss on buyers - I have an immense amount of respect for what
they do and consistently am awestruck by some of the most talented buyers in the industry.
Being a great buyer requires that they procure products that customers will purchase for the
current season, but they need to build a product pipeline of demand for styles that they are
financially judged against. This means that they need to stay step ahead of their customer
falling into 3 - 5 different customer-demand narratives to balance current demand while
seeding trends for the next season. Great buyers introduce a style one season as an outlier
styles that drive purchases next season to capitalize on demand as the trend diffuses over the
current season. Furthermore, buyers need to prime for trend shifts that will be hitting the
market in one year (and subsequently require introduction today to incept the idea and begin to
trigger the want/demand at the correct time).
Buyers are what we would know today as curators except they are under incredible levels of
stress as their decisions are made way in advanced and responsible for financial performance
of the retailer. If a buyer screws up one time - they can destroy profitability for entire product
lines or divisions. After spending a lot pf time working with buyers over the last 10-years, I
generally dont like a lot of buyers because of the too cool for school mentality that drive
purchasing decisions based on ego rather than data-informed and intelligent. Hands down the
best buyer in Mens is Emma Lee, at Gilt Groupe - to say that girl is brilliant is an
understatement as I consistently look at what her buys tell me about the industry.]

2. The Sales Cycle:

This is where the plot thickens and gets really interesting - lets fast forward 9-months through
the ordering, production, and shipping & fulfillment to a retail store - the product is now on the
retailers website or store shelves. Customers now have the opportunity to purchase the
brands product. In retail, there are certain sales level that innately occur simply by virtue of
product being in the marketplace - the product is on the stores shelf, the customers it, likes it,
tries it on, and buys it - easy peasy lemon squeezy. However the vast majority of sales are
generated following about 11-touch points with the trend/style/brand/products - meaning that
converting consumers into customers requires on average about 11 touch points with the
product on blogs, in marketing, at retail, or the consumers wearing the product to generate
sufficient customer mindshare that drives purchase actions.
The most exciting data is the on the ground sales staff qualitative data collection and
archetypal narrative development. Talk to a really good sales reps at Nordstrom - they have
massive mental databases about the most valuable customer behavior and how customers
break down aesthetically to certain groups (this is highly subjective data and definitely subject
to huge bias - but the fact that its based on a significant amount of time & transaction by sales
reps building the insight on the actual transaction level makes it far more interesting than #s on
a page as each instance is embodied by a visual reference).
Remember how in the Buying Cycle section, I commented on the prevailing logic was that
retailers have all the customer insight? Well, the systems is fundamentally screwed up in that
retailers do not share any of this data with their vertical partners - it is viewed as a competitive
advantage and subsequently the property of the retailer. This data-siloing behavior adversely
constrains brand partners from foundation level data to inform the basic comparative
framework in the Market Analysis.
Retailers protect this data because they are desperately clinging to this as a competitive
advantage (like Networks in releasing content to the web that fuels piracy) and do not share it
because they are scared that brands will usurp the retailer and go straight to the customer.
Ironically, its this protectionism that is forcing brands to build their own consumer-direct
relationships to gain this information.
This protectionism mentality creates the following main challenges in the Buying Cycle:
Retailers do not have the resources nor the incentive to effectively make use of this
purchase data for the 100s of brands that retailers stock

Demand generation is the responsibility of the brand - how can brands make meaning
use of data to refine the product mix & pricing mix if the market feedback is hidden from
them? For example, lets say I ran a marketing campaign with a discount of 15% off a
pair of shoes at Bloomingdales San Francisco. that discount code must be able to be
scanned and accepted by the Bloomingdales ERP - meaning that the brand loses any
insight about the customer and has given up generating any long term value from
issuing this discount.

By not sharing feedback like this and relying on the brand to drive demand generation
(i.e. the brand driving traffic to the retail partner), the brand is incentivized to full that
support from the retailer and focus on owning the customer relationship in a way that

creates the most strategic, long term value for the brand

It would make sense to drive traffic to the brands core strategic objectives like the
brands Facebook Fan Page or to the brands E-Commerce site to work on building the
customer relationship.

- How do brands discover marketing channels when customer insights about referral traffic is
deliberately hidden from the brand? If the brand is responsible for generating online traffic and
sending traffic to Bloomingdales but cannot benefit from the customer insights then how can
brands tailor marketing campaigns?
- [Most Important] Brands cannot effectively price products without substantive insights into
the data feed meaning that there are systemic problems with this model
Bottom line for how this impacts pricing: Conflicting priorities between vertical partners drive
information asymmetries that inherently inhibit accurate insights into the market fitting pricing
feedback and leads to widely inaccurate information fueling pricing discrepancies.
2.2. High Subjectivity and Large Biases Adversely Impacting the Comparative Pricing
Analysis:
In Section 1, we discussed that the first stage of pricing involves the brand conducting a market
analysis of the competitive landscape. This market analysis establishes the brands evaluation
of the strengths and weaknesses of competitors products and determines an implicit estimation
for how the brand will balance style, price, and quality that will most effectively capitalize on
opportunities in the marketplace.
This market analysis is an extremely challenging process because of the dearth of information
available at the product level (retailers protect this data) and the high degree of managerial
bias in evaluating competing brands & products for this framework - there is simply no way to
extract transaction data from the marketplace. There are proxy signals like time to discount
and channel checking via local retailers, takes time thats not really practical as pricing
decisions are made 9 - 12 months before products hit retail shelves - but no hard data available
to brands to truly substantiate traction based and product / market fit effectiveness for products
in the analysis.
Additionally, the pricing strategy is driven by highly-emotionally biased managers that deeply
invested & fluent in brand-specific details. This leads to a managerial bias that outweighs
product differences in favor of the brand - most of which is are not reciprocated by the
uninitiated new market participants (i.e. customers).
This problem is seen all too often in tech when founders focus too deeply on a niche and
product features as a source of competitive advantage. For example, lets take a fictitious daily
deal startup that also schedules the local services in conjunction with the daily deal (i.e. eat at
this restaurant at 2 PM or the massage at 3 PM). I have heard probably 20 - 30 pitches over
the last year where this occurs that the founder will say that the scheduling is what
differentiates them from Groupon or LivingSocial and has lost site that features are not a
source of competitive advantage. In the same vein, people who work in consumer-fashion
(and I, admittedly, have found myself to have done this numerous times in hindsight) become
so ingrained with their products that profound product differences to internal team does not

translate into how the customer sees it.

Furthermore, the current phase of the brands development process dramatically skews the
comparative analysis. New brands that are just entering the market have little traction and
social proof to validate their brand & product strategy leading to an inherent undervaluation of
their product and overvaluation of their competitors (the though being well, this more
established player is priced at $80, so we need to be below them because no one knows who
we are.). Subsequently, a brand that has caught fire and are generating substantial traction
begin to overvalue their historical success as the basis for vertical product extensions and new
found ego-based biases that overvalue their pricing power to command above market rates.
Bottom line for how this influences prices: The subjectivity and biases associated with the
initial pricing framework is one of the most important factors in understanding why prices
deviate between retailers and consequently from retailers to brand direct. The price is
established by emotionally-invested managers that are heavily entrenched in relative
valuations of their products and do not have the information resources to effectively adjust the
pricing strategy before going to market.
2.3 Supporting Legacy Revenue Channels with Conflicting Agendas
As we established in section 1, Retail Price is a function of Wholesale Price that the brand sets
based on the market analysis and Brand Strategy. In the traditional consumer-fashion retail
environment where B2b Wholesale represents upwards of 80% of the brands revenue, brands
set Suggested Retail Price on their websites at the top end of the marketplace, and often times
above the actual retail price quoted to retail partners, to support the B2B revenue channel and
make retailers appear like a good value / discount.
Prior to 2010, it was an inordinately challenging process for brands to generate sufficient online
traffic in consumer direct (i.e. BrandXYZ.com E-Commerce Business) to be a strategic priority
for most resource starved brands. The prevailing theory was that retailers have made the
significant investments to build customer mindshare and owned the customer relationship so it
was in the best interest of the brand to drive traffic to their retail partners.
For most brands without significant online consumer-direct presences, which was most brands
before 2010 when you began to see brands 10Qs pepper in statements targeting 15 - 25% of
revenues coming from consumer direct channels, the brands site served as an authoritative
reference for product information to consumers on price. This meant that on artifically high
prices set on the brands site and comparatively better price on the retailers would generate
opportunity costs to drive purchase via the retailer.
In the majority of cases, a brands site served as an authoritative reference of product
information source about brands products where an artificially high price would make a
comparatively lower price at the retailer assuage concerns with any consumer. With B2B
Wholesale responsible for such a large portion of revenues, it was thought that driving a small
number of traffic (the aforementioned inordinately challenging process) would assuage pricechecking customers concerns to deliver these customers to the most strategic purchasing
channel.
One of the core value propositions that retailers create is the cultivation of mindshare (I am
going to go to Bloomingdales on Saturday) and generation of significant amount of goodwill as
the customer - whereby the customer had dealt with the retailer & the brand served as the
product of the retailer. If the customer loved the brand, the retailer was the beneficiary of the
customers goodwill/happiness as the provider of the garment (versus the brand as the
producer of the product - it's a level of abstraction away from a direct relationship between

product & consumer). The retailer controlled the relationship and therefore is the recipient of
the customer's projected satisfaction or enjoyment of the product (as opposed to the brand that
created the product).
Establishing mindshare & building goodwill deeply connects consumers with retailers - a trend
that is even far more pervasive online as offline. Online shopping for consumer-fashion is a
world of information asymmetries that, when done properly, engenders significant brand
engagement & loyalty (i.e. fanatic Zappos customers thrilled by overnight shipping, free
returns, and killer customer service). One of the most interesting things about a high
Suggested Retail Price on a brands site enabled a certain flexibility for retailers to set prices at
optimal levels for their target demographics.

To support their retail partners, brands would set the Suggested Retail Price at the top line of
the marketplace with the understanding that retailers would adjust their prices to what works for
their customers.
Historically (i.e. before 10 years ago), if a fashion-savvy teenager wanted to purchase an item
from Abercrombie & Fitch & there wasn't one located in the local mall - there were two options:
1. purchase via mail order catalog or 2. wait until they took a vacation to a location that had an
Abercrombie retail store. Great consumer-fashion E-Commerce sites understood that their
value proposition was in their ability to generate significant loyalty by serving the void in the
marketplace that the fashion-savvy teenager wants across the country.
This process of E-Commerce sites being one of a very select # of Online Retailers to retail the
cool brands has the same impact that boutiques traditionally held & create pretty loyal
customers that are branded to one property over another - say Tobi.com to
RevolveClothing.com. This is not like daily deal sites like the zero sum game that LivingSocial
& Groupon engaged in an epic trench-style war of attrition - customers are predominately
StyleABC site or StyleXYZ site with little overlap.
By pricing on the high-end, the brand enables the retailers to dial in their pricing model to what
works for their customer & explains why this prices can vary significantly from retailer to retailer
as well as designer/brand to retailer.

2.3.1 Tertiary Drivers in the Legacy Channel

1. Cash Requirements:
Product Information Management is a major challenge for any E-Commerce company &
consumer-fashion brand - especially when technical development is not an in-house core
competency of the firm. Therefore, more E-Commerce sites historically implement blanket
discounting models - if the product has X% remaining stock after 4-week then the product is
automatically discounted by 10%.
Once an order to a retailer leaves the docking bay, the ownership of the product changes to the
retailer - an accounting & legal concept call FOB or Free on Board. Thus, the brand has little
functional control as the retailer owns the product & has the financial imperative to turn the
inventory. The brand can do things like threaten to pull the account from a retailer - but this
does not happen most of the time because the brand needs the retailer more than the retailer
needs the brand.
2. Organization Oriented Around B2B Wholesale Business:
Brands are still predominately organized to serve the business model of the last 20 years where sales reps ( glorified order takers ) form the backbone of the revenue generation
priorities of the firm. A small consumer-fashion brand ( <$10m) has approximately 3 - 7 sales
reps covering geographic locales - remember this model is geared around sales reps who
would put samples in the car and drive around their territory to sell shops.
In the wake of the financial devastation brought on by the Great Recession, management
teams for consumer-fashion companies retreated back to what they know best. Generally
speaking these are guys and girls in the 30s & 40s (Gen-yers) whose first response is to get
back to basics (i.e. the dying 20-year business model) to keep the company alive - thereby
reinforcing the sales reps sole in the company & managerial support for this model
3. Drive Retail Support
Major retailers were the primary revenue channel for brands & their scale enabled brands to
achieve the volumes that made the business attractive. The goal of the brand was to support
the retailer and stay in their good graces by driving potential traffic to the retailer. Here was
the basic strategy:
A major retailer like Nordstrom.com will place a pre-season order for 1,300 units with a
wholesale price of $105.00

The Brand sets the Suggested Retail Price at $245.00, while the retailer prices it at
$230 representing a 6.1% discount

Assume that seasonal mins are 2,500 units - a minimum is the # of units set by the
factory that must be purchased by the brand prior to the order being accepted.
Here are how the #s breakdown in this example:

By virtue of Nordstroms scale, their one test order of 1,300 units ($136k) essentially pays for
production for the entire season ($135k). However, the real value is in working with Nordstrom
over numerous season, when the numbers can look like:

In order to illustrate the huge challenges in building an E-Commerce presence for a consumerfashion brand, take a look at some statistics from VAEL Project.com in Season 4 of the brand.

Keep in mind these traffic #s are based on a brand that first hit the marketplace in Jan 08 - so
these visitors are based on a product in the marketplace with 1000s of promotional blog
articles. In my example about Nordstroms, we are showing that Nordstrom *could* be
generation something like $5.25m in top line revenue. Additionally, if we extrapolate this
VAELProject.com E-Commerce out (assume $40k/mo), we are looking at brand direct at about
8% of total revenue.
2.4. Emotional Engagement Drives Pricing Power:

I wholeheartedly believe that modern brands are evolving into more substantive, direct, and
engaging relationships with their consumers to the level of aesthetic & intellectual peers. This
transformation has is roots in the Great Recession when the macroeconomic devastation
sparked a reevaluation of consumption psychology to and technology opened the door to a
new world. Consumers writhing in pain from the markets ferociously bite after they played by
the rules of the aughts (purchased a single family home, worked in secure corporate America,
and leverage home equity to buy TVs). After the house was foreclosed on, Corporate job lost,
and all the debt-fueled toys were taken away - the pervasive American consumption psyche
has started a fundamental change as consumers (consciously & subconscious) are shifting
their consumption dollars to products & brands that deliver greater value beyond product & with
whom consumers identify with as individuals and feel like their business matters to the
companies they are supporting.
This shift in consumer psychology was enabled by the explosion of the social web that
collapsed the barriers for consumers to discover about brands & products and learn about who
they are as people. The brilliance of the social web is that it enables engagement to be driven
by rich, personal, and substantive relationships that support companies & people that you
actually like and identify with. From Quora to Gilt Groupe, every transformative startup over
the last 5 years has demonstrated that great products require the creation of a meaningful
emotional bond between the user/customer & the product/brand that fosters a sense of
personality, ethical, & philosophical congruency. This is what we now call emotional
engagement - where the combination of product, brand, and social experience cultivate a
friendship between the people at the brand and the customer.
The phenomenal successes of Etsy, Kickstarter, and invested.in demonstrates that consumers
will support independents that are less price-sensitive when they know its helping the little guy.
The most interesting thing is that customers are implicitly beginning to monetize the brand
experience & deep emotional engagement of these types of products.
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