First Flash Sales & Private Sales is a means to move inventory that garnered enough traction to be companies in themselves.
So, let’s first define the parameters to examine what was different to drive their success and thus capital investments.
The key innovations : moving inventory quickly thus less inventory risk
or higher sell-through and getting massive consumer adoption in a short amount of time (relative to their incumbent traditional ecommerce sites). Often times, these sites sell before they buy ( aspect of the strategy employed in drop-shipping).
Model: Short-term sale of high quality or often high end goods with limited inventory seemingly available. The combination of the following made this approach innovative:
1. Time frame
2. Luxury goods
3. Limited Supply
1. Cash cycle/Inventory risk
2. Fulfillment technology
These concepts are all utilized in brick & mortar establishments, but the
combination online was yet to be seen.
- Experience: These guys actually make shopping fun & addictive! These sites were able to create a great customer experience from showcasing the items to creating a habit–like tuning into your favorite TV show at the right time (that is pre-Hulu, OnDemand, and DVR). People get excited to go to one of these sites at noon or whenever the new inventory goes on sale. There is also a sense of urgency due to a combination of limited supply AND time that motivates buyers . You know it would go fast, which is unlike traditional online sales that you typically have a decent amount of time before the sale ends or inventory runs out.
- Product: Gilt and a lot of the private sale sites were able to get access to luxury items. Selling luxury goods online was (and to a degree still is) rare. This is for quite a few reasons that I won’t get into now. Yet, getting ‘access’ to this type of inventory that could be sold online was actually quite new. [ At the end of the day, the product, especially, for discretionary items, are purchased due to the product quality rather than a ‘need’. So, having quality merchandise was also a key factor].
- Data Accessibility, Collection, & Analysis : For a lot of ecommerce sites, you would not know who would be on your site browsing until the person put in his or her payment info or perhaps had logged in. Private sale sites require login and thus know your buying habits/patterns . If you abandon your shopping cart, they know who you are and what you abandoned. RueLaLa even added a button so that you can automatically purchase it if they get more available. Thus, they have better data than the average ecommerce site because someone actually logs in. This is in addition to their sneaky tactics of being ‘invite-only’ or ‘private’ to get consumers excited to give up their email address.
- Decreased Inventory Risk: Not all of the sites employed the consignment model, where a site could give back anything they did not sell, but they at least were better structured to take limited amounts of inventory available. Other sites do not touch or pay for the inventory until it is sold to the consumer. However, this was a great way to decrease their inventory risk. Gilt ultimately holds some inventory and fulfills, but they minimize the risks . Because there is limited supply, the sense of urgency and impulse shopping that these sites incite also move inventory faster than traditional sites. Thus, there is decreased risk in initial financial outlays/cash flow as well as holding inventory.
- Fulfillment: In drop-shipping, a retailer sells an item without touching the inventory or making any financial commitments. However, if you want to control customers’ experience, you have to actually touch the inventory at some point. So, these flash sale sites utilize aspects of this concept and evolved managing inventory risk. They either did not touch the inventory until it was sold or it was held and returned if it was unsold. In each model, the former especially, new operational issues arise. You get your order , which includes multiple brands’ products, thus you need to efficiently get those items from the brands and then fulfill (pick, pack, and ship) the orders.
2. Distribution/Marketing Innovations
- Email : Email was actually under-utilized as a channel to sell goods with the exception of DailyCandy & Thrillist. Private sale sites leverage email extensively , which if people even ‘open’ an email are much more likely to buy. Additionally, it’s not about a ‘spammy email’ but rather good content. Flash sale sites incorporated better content into their email marketing, not to the extent as companies like Betabrand or Ahalife, but they took it up a notch from the traditional ecommerce sites. Additionally, because it truly was a limited time offer, it is exciting to open the email because each day it’s new versus the stagnant inventory in traditional stores.
- Initial Exclusivity: The ‘invitation only’ concept caught on because people always want to get into ‘the club’. This created some initial buzz , and thus got consumers excited to give out their email addresses .
- Social Media: Because these sites were able to leverage social media channels , they were able to accelerate their growth faster. There is currently a lot of noise , but identifying new channels early on that cater to your demographic has a potential for a huge win.
- Referral Programs: Because of social media channels, referral programs were augmented. They figured out how to create viral loops much more effectively and the right incentives to increase their subscriber base.
- Market Dynamics & Psychological Shift: At the time of the economic downturn, the obvious discount combined with a sense of urgency magnified the adoption of these sites. There was in fact a fundamental shift in the way people think about shopping. Buying ‘full price’ for a Gucci handbag has become in a way embarrassing (somewhat overstated) because the conversation has shifted from ‘look what I bought’ (implying a luxurious, pricey item) vs. ‘look at the deal I got on this’. The bargain hunting mentality has become the paramount of shopping status. Plus, the market opened up where not only the 1% could buy Prada but now the 2% could .
3. Investing in Models not Technology
- Technology as an Enabler not a Solver: I want to acknowledge, that the success of the ‘private sale’ sites are actually not from ‘technological innovations’ but rather distribution innovations, which , sure, you can argue are technological to a degree. Yet, these are about bringing people together or easily promote versus using technology to solve a hard algorithm. That is also why you see the proliferation of sites beyond just Gilt & RueLaLa—a low barrier to entry ‘IF’ you can get access to the inventory, which is really the barrier to entry (it’s a relational barrier that can be overcome versus a lot of the other problems have infrastructural or technological barriers) . With private and flash sale sites, these are actually fairly easy to start but hard to scale.
- Implication: Thus, a lot of the current investment strategy is not due to technology but either from distribution or some under leveraged model both of which can be augmented by channels that allow for better promotion and distribution (ie FB, twitter, blogging, and perhaps closer attention to email—not necessarily true anymore).
Overall, the new model for selling was able to identify new ways to decrease capital intensity than traditional ecommerce and gain distribution quickly. Thus, despite a lack of technological innovations, these sites were able to prove economic attractiveness worthy of VC dollars.