Don’t confuse members with customers

Thanks to the so-called flash-sales sites we now have a distorted definition of what being a member means. Before Gilt, RueLaLa and the myriad “private” e-commerce business wanna-bees, gaining membership in something typically meant you needed to actually do something more than have an email address and a pulse.

By now it should be clear to everyone that membership to these sites is simply a marketing gimmick. And an effective one at that.

But beyond semantics, the key issue is really how many of these members are actually customers? And of the actual customers, how many have bought more than once in the last year and how many are actually profitable (or have the potential to be)? You don’t have to tumble too many numbers to realize how shallow the customer base for most of these sites must be.

With competition heating up, and overall core sector growth flattening, it won’t be long before some investors become quite unhappy indeed.

Prospects, Not Suspects

The notion that a smart sales and marketing strategy distinguishes between suspects–consumers who MIGHT turn out to become profitable customers–and prospects–consumers who are highly likely to turn into valuable clients–is an old idea. Great sales people possess this intuition.  Great marketers use customer insight, robust analytics and customer segmentation to do this more scientifically.

If you are anything like me, you may have noticed a lot of attention being given to companies that are posting seemingly impressive customer statistics.

The hot social media sites–from FourSquare to Yelp to Twitter to Facebook–have signed up millions of users (in the case of Facebook reportedly over 500 million!). But how many of these folks are actually buying anything?

Members-only “flash-sales” sites use free-shipping and high value gift cards to coax existing members to refer a friend.  Are these newly acquired members turning out to be customers with a positive lifetime value, or is this mostly a land-grab to keep private equity money flowing and high-end vendors interested?

Groupon recently executed a promotion with Gap during which a reported 441,000 customers spent $11MM in just one day. That particular promotion offered $50 in merchandise for just $25.  Most press reports deemed it “successful.”  Really?

Successful in generating awareness?  Apparently.  Successful in acquiring a significant number of marketable e-mail addresses?  Most likely.  Successful in driving short-term revenue?  Clearly.  Successful in creating buzz about Groupon? You betcha.

But how many of these consumers were promiscuous shoppers, only enticed by the deep discount?  And let’s face it, just about any reasonably desirable brand could generate an impressive incremental sales lift by cutting their prices in half.

Most of these hot brands are still dealing in the world of suspects.   Only through time and more rigorous customer analysis will they know they are gaining prospects.

In the meantime, I remain suspicious.

Members only? Or “Members Only” jacket?

A powerful component of customer engagement is providing scarce, exclusive and relevant experiences that reinforce your brand positioning.

“Members Only” or “By Invitation Only” marketing programs can be compelling messages that tell your customer that you truly appreciate their business.   For years leading luxury retailers such as Bergdorf Goodman and Barney’s have feted their best customers with private lunches, exclusive parties or access to fashion designer “meet and greets.”  More accessible retailers like J. Crew and Nordstrom use their loyalty programs to reward members with unique privileges such as free alterations, early notice of new merchandise arrivals or special shopping hours.  In all cases, the customer is granted access based upon some meaningful qualification, typically spending level or loyalty.

But another kind of marketing seems to be gaining momentum, and it’s best illustrated by the flash-sales sites such as GiltGroupe, HauteLook and BeyondTheRack.  These businesses are growing dramatically–RueLaLa recently reported that their sales doubled year over year–and one of their hooks is that their low prices are for “members only.”   So what does one have to do to qualify to be a member?  Having a legitimate e-mail address is just about all it takes.

In the early 1980′s “Members Only” jackets quickly became all the rage.  If you wanted the world to know how cool you were, a “Members Only” jacket gave you quick access to an exclusive club.  But it wasn’t long before just about everybody had one and what propelled the brand soon eviscerated it.

There is ample evidence that, for a while, you can get away with hooking customers with faux exclusivity.  But just because you can, doesn’t mean you should.  Deep levels of engagement and loyalty are not built on smoke and mirrors; rather they are built on forging relationships rooted in respect and trust.

Authenticity matters.

Does your marketing look more Members Only or more “Members Only” Jacket?

The Private Flash Sales Sites Jump the Shark

On April 19 I posted about my belief that the luxury off-price market was about to hit the wall, largely owing to a squeeze between a growing customer base seeking out great deals, and a diminishing supply of first quality branded merchandise.   I suggested that the various players in the space were going to have to evolve their winning formulas substantially to sustain their growth.

Well this seems to be playing out with the various high-end flash-sales sites (Gilt Groupe, RueLaLa, HauteLook, Ideeli and BeyondTheRack and the myriad wanna-bees).   In fact, what made these new concepts so great–and allowed them to gobble up market share–is rapidly being watered down.  Whether you call this “jumping the shark” or “nuking the fridge”, it’s a cause for concern.

All these companies have grown rapidly, attracting both legions of members and significant investment capital.  Their original value proposition was simple: offer well-known, high end brands at unbelievably low prices, and make them available in limited quantities during a short sale period.   This was an innovative re-imagining and up-scaling of QVC–or a blatant ripoff of Europe’s Vente Privee–depending on where you sit on the cynicism scale.  Regardless, during late 2008 and well into 2009, customers signed up in droves and feasted on high demand fashion brands at steep discounts.  Of course the rocket fuel during this time was the substantial amount of surplus inventory that both manufacturers and retailers were desperate to turn into cash.

A review of the flash-sale sites’ offerings today reveals quite a different story than even six months ago.

The first obvious thing is the paucity of true high demand luxury brands.  Tomorrow’s sale on RueLaLa features one true luxury brand (Pratesi), but also Andrew Marc, L. Spaace, Tailor Vintage and Cuddlestone.   BeyondTheRack has some Gucci, Prada and Robert Cavalli–though it’s sunglasses and wallets–not ready-to-wear or handbags.  The rest of their offering is Jonathan Marche, Ninety, SpyZone Exchange, CC Skye and Italgen.   Not exactly household names.  A check of Ideeli and Hautelook reveals the same smattering of brands you have heard of, while the rest is decidedly second tier or no-name.  Gilt Groupe, on the other hand, does seem to consistently have a much broader offering of true high end and fashion brands.

The second item of note is that the discounting is not nearly as extreme as last year.  And this is not surprising.  Last year, when manufacturers were stuck with mountains of unsold inventory, they were often willing to sell first quality product below their production cost.  Today, more and more product is not distressed, but rather made specifically to be sold in these channels; and that means the manufacturer needs a mark-up.  If your product acquisition cost goes up, the retail price goes up (i.e. the lower % discount to the consumer).

The other noteworthy change is the growing mix of product that is not fashion merchandise.  All these sites are starting to feature travel, wine and even bicycles.  On the one hand, this is a smart growth strategy: find more things to offer to your existing clientele.  For others, it smacks of desperation.

All this adds up to a model that, despite being barely two years old, is rapidly evolving and will likely look quite different by this time next year.  My guess is that by then several of these sites will be gone, bought out or struggling mightily, while a short list will leverage deep customer insight and new capabilities reinvent themselves and thrive.  Given that the big guys–Neiman Marcus, Saks and Nordstrom–have yet to do anything meaningful in this arena (and really why is it taking them so long?) we can only expect the competitive environment to become even more intense.

Any guesses on who will be standing tall versus who will become chum?

“Faux Clearance”: Do Outlet Store Customers Care?

One of the hottest retail segments right now is the outlet or off-price market.  Nordstrom, Saks and Neiman Marcus are opening more “clearance” stores than full-line stores.  Bloomingdale’s and Lord & Taylor have recently announced plans to open their own off-price formats.  Hundreds of manufacturers’ outlet stores from Ralph Lauren to Coach to Nike can be found throughout the country.

As I have learned in recent conversations with everyone from neighbors to business reporters to industry analysts, very few customers realize that the vast majority of product in most of these stores is NOT manufacturers’ overstocks or unsold merchandise from the full-price retail stores, but is in fact produced specifically for these stores.  I call this “faux clearance.”

Certainly these stores benefit from the impression that the reason you are getting such a great deal is that they had too much merchandise and had to mark it down to move it.   Their promotional material trumpets 30%, 40% (up to 70%!!!!)  off to reinforce that notion, when in fact in most cases that identical product has never been available anywhere at the “manufacturer’s suggested retail” or “compare at” price.  Deceptive? You decide.

With the retail outlet segment exploding–and the dramatic growth of “flash-sales” sites like Gilt and Rue La La–the reality is that the percentage of directly made for the channel product will only continue to rise.

So if you buy my premise that most customers of these store and sites do not understand the origin of the product in these channels–and btw if anyone has seen good data on this send it my way–would knowing actually change their behavior?

My guess is no, and here’s why.   The players that have been really successful in this market–one great example is Nordstrom Rack–understand that the core customer for these formats is a different customer than their full-line stores and have built the business model accordingly.  This is why Nordstrom can build a Rack store across the street or down the way from their full-line store and still thrive.  This is why we decided to accelerate the growth of our Last Call stores at Neiman Marcus and began work on a new concept.

The challenge going forward will be to consistently execute a compelling value proposition–and that means delivering an experience that complements the parent brand without diluting it and reliably offering great value in the product assortment.  This latter factor is not so easy, particularly as the demands of this channel increase dramatically.

But ultimately if these formats offer compelling price value in their assortments and a great customer experience, why should the customer care exactly why the product is being offered for sale?

Squeeze Play: The Luxury Off-Price Market Hits the Wall

During the past 18 months luxury retail consumers have come to enjoy wide-scale deep discounts.  Many of the deals came from established players such as Neiman Marcus, Saks, Barneys, who–stuck with inventory they could not sell when consumer demand dried up–resorted to extensive promotions to turn merchandise into cash.

The real sizzle to the story, however, came from the so-called “sample sale” or “flash-sale” sites such as Gilt, Rue La La and Haute Look.  These new companies came to market in a perfect storm setting

  • They offer an innovative, fun, convenient new business model (well, to the US anyway, they really just “borrowed” Vente-Privee’s formula)
  • The recession handed them millions of deal seeking high-end consumers
  • There was a glut of inventory available as manufacturers and retailers get caught off guard by the recession.

So things got off to a really good start and the flash-sales sites grew like topsy, with U.S.  industry leader Gilt Groupe quickly gaining more than 2 million members and said to be on track to do some $500 million in sales this year.

Industry incumbents suddenly woke up to the fact that there is a large segment of affluent consumers who really like to get a deal and don’t necessarily want to head out to the sticks to the factory outlet mall (Nordstrom–you get a pass because you figured this out a long time ago with your Rack stores).  So Neiman’s and Saks started experimenting with their own “flash” sales (though, shockingly, neither has yet to mount a serious online counter attack) and announce plans to accelerate the opening pace of their clearance stores.  Lord & Taylor and Bloomingdale’s announce their own forays into the off-price channel.  More “flash sales” sites get launched.  And just yesterday EBay (yes, EBay) launched their own entry into the market.

But here is the problem: the supply of excess merchandise is dropping dramatically just as the consumer offerings–both online and in bricks and mortar stores–are increasing.  The competition for authentic luxury merchandise that can be sold at discount levels that are truly attractive is becoming increasingly intense.  Something has to give.

The reality is that, going forward, there is no way for all these guys to meet their product needs by buying true clearance merchandise (that is, product that was originally meant to be sold at full price in traditional retail channels).  In the near future they will have to have the majority of their product made specifically for their channel (what I like to call “faux clearance”).   Now this is not an impossible hurdle.    Nordstrom, Saks and Neiman’s do this already for their own clearance stores (trust me, I worked on this strategy at Neiman’s).  And you may not realize it, but most of that stuff in those manufacturer’s factory outlet stores is made for those channels as well.

The strategic challenge is that the price value equation for the consumer is changing.  Last year, manufacturers were desperate to unload product and in some cases would unload it to the Gilt’s and Rue La La’s of the world for below cost.  This is turn allowed the flash sales sites to promote product at very deep discounts and still make a solid gross margin.  However, when product is manufactured specifically for these channels the manufacturer is not selling at fire-sale prices, but rather is looking to make more of a regular margin.  Plain and simple, this adds to the acquisition price of the merchandise and that means that the resulting price for the consumer is going to be higher.

The result of all this is that the consumer offering is going to look a lot different in the future: fewer unbelievable deals on true designer product and more faux clearance.  This is certain to change the customer mix for these players as well; fewer well-heeled Fashionista’s looking for a great deal and more aspirational customers taking advantage of lower prices to buy from well-known retailers and brands.

This is not necessarily a bad thing. But it will be a different thing.  And the companies in this arena will have to deftly manage the transition very carefully or the shake-out could be quite traumatic.  Stay tuned.