The fallacy of an online-only brand leading to immediate prosperity
Don’t question the value chain until you can
When you start a new venture in a new industry, it’s easy to question why certain things exist. This is healthy, possibly mandatory, if you want to make an impact and stay ahead of the curve. But it’s highly problematic to take action without understanding why certain entities exist.
Today in the fashion world, new brands often make the assumption that a retailer’s role in the value chain is worthless. Therefore, the logic goes, selling direct to consumer is both the best and easiest option for a brand today.
These two assumptions, without any data, are highly flawed. There are no rules that apply to everything, and the idea of selling direct to consumer is often peddled as a certainty of instant success. If only this were true.
The reality, however, is that every player in a value chain exists for a reason. This doesn’t mean they exist for the right reason, or that they should exist. But you must pay attention to why they exist. In this case, retailers exist because they are primed to own the relationship with the customer, offer a high taste level and have experience putting many different items and brands together cohesively. These are three very important values retailers bring to the table.
The result of these three values is simple: retailers have a strong customer base. From a local boutique to Barney’s, a retailer’s biggest asset is its captive audience. As an emerging brand, an audience is the thing you don’t have, but one that you desperately need. Building this from the ground up — in a sustainable way — is incredibly hard, expensive and slow. Doing this effectively requires an immense amount resources.
Brands like Everlane and Navabi have raised millions of dollars that put them on the time horizon to give the traditional model a run for its money. Hype is another resource, as brands like Off White and Fear of God have shown, although the sustainability of this method is uncertain. (I would put my money on Everlane lasting longer and being more successful than a hype brand any day).
This means emerging brands without significant resources need to play the long game, and, most importantly, be financially sustainable early on. If a brand is hemorrhaging money, it will not exist for long. Many brands are trying to reinvent the wheel and upend the value chain.
The right path might be much simpler. Use the existing value chain by selling to retailers in the short and medium term to allow the transition to a new value chain, selling direct only in the long term. Selling exclusively direct will do more harm than good without resources.
Here’s the blueprint as I see it:
Launch the brand selling wholesale and direct. Make sure your margins and designs work for wholesale, which will bring enormous discipline to the brand. Direct will only get better if wholesale math makes sense. Too many brands take a relaxed approach because they are only selling direct. As a result, they don’t have great margins and then get into trouble when inventory doesn’t move fast because the brand doesn’t have an audience. If you’re going to be this stubborn, then account for slow inventory in the margin.
Spend a lot of time getting into the best retailers you can. This is the primary way to grow your audience. How do you do this? By having a brand people want to buy into, having good enough quality product (more on this below), a good price point, and being consistent in every aspect. Quality, customer service, delivery times — everything needs to be consistent. Working with retailers is a long term game and this should actually align your incentives with theirs.
If you do this well for a few years the next step will make more sense. Only after you have a strong audience and you have data on your customer’s buying habits should you consider selling exclusively direct and cutting out wholesale. Now you are ready to question the value chain. But only question it through the lens of does the absence of a player in the value chain lead to more prosperity? That is the only question worth asking when you question the value chain. Only implement these changes when the answer is yes. Otherwise, you’re questioning something that exists for a very time-tested reason and the results will not be pretty.
Many people today are pitching new brands, in fashion and outside of it, that just “cut out the middle man” and “capture more margin” without considering why that margin belongs to another player in the chain. There is always a reason.
Two side notes:
Selling expensive products direct only is very hard and even harder without a strong audience. Retailers are very good at selling expensive things because they are trusted and the consumer can build up trust seeing or hearing about the product. The more expensive your products are the harder it will be to sell direct. Just think about it in terms of the risk the consumer is taking on an unknown brand. The greater the price the greater the risk. Consumers don’t like risk. Clear return policies and free returns only help so much.
The quality of your products should be good enough to hold up for a while. That is it. Quality only matters when something isn’t high quality. When something breaks the quality is bad. When something is good the quality isn’t bad. There is a diminishing level of returns for quality as the quality gets better. It only needs to be good enough to not be bad. Anything better is a waste of time and money since no one really appreciates it.
Originally published at loosethreads.richiesiegel.com on January 10, 2016.