Precise Formula for Retail Startup Success

The New World: Digital Native Retailers

The retail landscape looks much different than it did less than a decade ago. Today’s consumers have become exponentially more powerful than ever, thanks to the advancement in digital technologies. Digital native retail startups have embraced this trend and framed innovative business models to optimize operations, segment consumers, and create convenient, satisfying multi-channel consumer experiences throughout the retail value chain. On the other hand, traditional retail is no longer a healthy business model- over 200 American retail companies have filed for bankruptcy since 2010. The digital-first retailers are swooping in quickly to capture market share by using a multi-channel approach – by selling directly to consumers as well as using traditional business to consumer models. This retail evolution has upended the way consumers shop.

In the process, these organizations -spanning every product from detergent to mattresses- are radically affecting consumer preferences and expectations at every touchpoint. This model allows brands to sell their products at lower costs than conventional retail brands, and maintain complete supply chain control over the manufacturing, marketing, and distribution of products. These well-positioned retail startups are not just competing with some of the biggest brands in the retail market. They’re fighting by rethinking not only the product and service, but also the business model.

Given this disruption from retail startups, traditional retailers built solely on the legacy wholesale model need to adapt according to the changing industrial landscape for its survival. To grow in the future and win over consumers, retailers must experiment with different offerings and operating models.

This article examines how successful startups have set themselves apart in the market and unveils their secret formula across broad areas of the value chain.

Understanding the secrets behind retail startup success

1. Singular Product Vision – Simplicity is the new retail luxury

Before the internet era, the retailer’s product inventory was constrained by the dimensions of space- most of them were limited in what they could sell by the amount of available shelf space. This constraint incentivized retailers to stock the most popular products and cut those that underperformed. However, the internet broke limitations of space, and now retailers don’t have to worry about conserving shelf space and holding less stock. More importantly, they don’t have to limit themselves to trendy or fashionable goods. Retailers can mine for the “long tail” of products, offering wide varieties in different categories that don’t usually get shelved in brick-and-mortar stores. For example, Apparel stores can now hold thousands of inventory options, and music stores could sell millions of artists’ records. Holding a long tail of inventory allows stores to reach wider segments of consumers, proving to be far more profitable than the short tail approach of brick-and-mortar stores. Most of the world’s dominant retailers are all on the internet today. The long-tail business model is advantageous to the retail business.

However, interestingly, the fastest-growing digital-native retailers aren’t following the successful long-tail approach. Most of these brands are selling only a handful of different products, and many companies just started with just one ‘perfect product’. Casper, a digital-native mattress brand, began by selling a “perfect” bed to remove choice paralysis from the industry. Dollar Shave Club uses a subscription model to ship razors directly to consumers. Bonobos, a menswear retail brand that sparked the inventory-free showroom store business model, began with a single pair of men’s pants. All these companies styled themselves as disruptors, aiming to revolutionize the way consumers sleep, groom, travel, communicate, and work by perfecting a single product.

These startups minimized confusion, cutting down the noise of choice to get consumers’ attention by branding their product as “the best.” The long-tail business model of retail giants like Amazon have induced consumer paralysis with the huge range of options available. Retail startups selling a single “perfected” product serves as a prestige move, elevating the perceived quality of their offerings. The singular product vision established by these brands is currently  the most prudent move in the market. A single product in the portfolio permits flexibility to pivot back to the drawing board and make continuous adjustments to the product without the need to burn all existing inventory. It’s the best model to continuously tweak product designs and build better versions for a more exceptional customer experience.

With the twin tools of data and speed, startups have an unprecedented opportunity to leverage technologies to elevate the consumer experience in more meaningful ways and enjoy the benefits of retail success. To succeed, organizations should have the capability and willingness to fail faster and adapt to the dynamic change in the retail industry. Selling one product — and focusing on making it great — is how these digital-native startups accomplished success and deliver differentiated 1:1 experience to their customers

2. The New Retail Business Model – for winning and retaining the digital consumer

With fundamental rules of the retail universe constantly changing, the industry demands innovative business models to keep up with the evolving consumer expectations and capture business success. The consumer is today’s key center of focus.

To seize the retail space in this era, digital native retail startups have engineered the Direct-to-Consumer (D2C) business model for winning and retaining today’s digital consumers. The pre-Internet distributor’s dictated life of retail brands was harsh and competitive. In the pre-internet era, manufacturers were subject to the whims of distributors, but business in the Internet world is different. The power balance has shifted to the product manufacturer, as they can easily take the role of their own distributors.

D2C organizations sit on the foundation of incredible advances in information, communication, and manufacturing technologies, propelled by the dramatic shifts in consumer attitudes and appetites. They leverage digital technologies, targeted marketing, and social media strategies to circumvent middlemen (an inherent feature of traditional retail) and connect with their consumers directly. D2C is a winning business model for creating value in the retail industry, as direct consumer relationships create efficient channels for sales as well as powerful consumer feedback mechanisms that can unlock entirely new products or business models. ​

The most successful D2C retailers are winning consumers by delivering personalized brand experiences continuously throughout their journey. Today’s digital consumers are buying brands’ missions as well as their products.

As the boundaries between consumer beliefs and purchase behaviors continue to dissolve, successful D2C brands have devoted themselves to creating the ultimate product to fit their idea of the ultimate lifestyle. Whether doing this by re-envisioning the category or service, or through pure innovation, the core product is the brand vision. Casper and Dollar Shave Club re-imagined razors & mattresses to become fast-movers in their respective product industries, while other brands such as Soylent established entirely new categories of products. These startups are all testaments to the validity of the D2C model.

Unlike traditional retailers, D2C brands continuously experiment with their distribution models, from connecting directly to consumers to partnering with physical retailers, to opening pop-up shops without relying on traditional retail stores for brand exposure. Moreover, direct-to-consumer subscription services have grown significantly in the retail industry; visits to subscription-box websites have increased by 890% between 2014-2018. One of the most successful D2C subscription practitioners is Dollar Shave Club. The men’s grooming brand disrupted its sector by retaining over half of the consumers for one year after their first subscription package. Success in the subscription-based service model requires offerings that can surprise and satisfy consumers repeatedly.

The myriad brands flourishing in the D2C retail model makes it easy to assume success in this space is easily obtainable. In reality, Direct-to-Consumer commerce is grueling and intensive. Retail brands should be comfortable in dealing with ambiguity, ready to accept failures, and must be more responsive to the vagaries of the consumer mindset & retail marketplace than the legacy brands. Continuous scale of business, innovation, and use of data analytics for understanding customers and industry will be instrumental for tomorrow’s retail success.

3. Supply Chain Transparency – for winning consumer loyalty

The future has arrived in retail. Trust, transparency and traceability makes the new consumer battleground, and retailers are facing unprecedented pressure from governments, NGOs, and other stakeholders to provide visibility and engagement across their value chains- both internally and externally. For example, food production companies are facing increasing demands for supply-chain related information about ingredients, fraud, animal welfare, and child labor.

Today, the organizational supply chain has evolved as an anchor of a company’s ability to satisfy customers, drive profitable growth, and deliver novel innovation to the retail market. But with more retail commerce moving to digital channels, maintaining consumer trust in the value chain is more challenging than ever, as digital consumers have multiple choices and elevated expectations about the transparency that retailers should offer. Moreover, Radical supply chain transparency creates business value by enhancing trust and reducing risk across the value chain. It strengthens organizational ethics, conduct, and culture to build confidence, trust amongst stakeholders – especially customers, by meeting their expectations and demonstrating understanding. Consumers expect organizations to fulfill their purpose and value their principles; in return, they are willing to pay 2% to 10% more for products from companies that provide greater transparency.

Many successful digital-native brands work with a mission to enable radical supply chain transparency for engendering trust and affection in customers. They are persuasive rather than coercive. They don’t engage customers by force of advertising, but rather by the power of authenticity and transparency. These missions span the entire value chain: everything from raw material acquisition to manufacturing to last-mile delivery, enabling a 360-degree view over a brand’s entire process. Social responsibility & a commitment to fair commerce pays off- evidenced by growth of the clothing manufacturer Everlane.

This online retail startup has a unique business model; the company stands for “Radical Transparency,” which shows its commitment to disclose its cost structure and manufacturing process. While Everlane’s business model is novel in the industry, it is also quite simple: selling luxury ‘staple’ clothing and accessories online, for a reasonable – and highly transparent – markup price. Everlane caters to what millennials look in a brand – transparency, pro-social operations, and convenience. For every product, the company discloses who produced the product, and the material, labor, and shipping costs associated with it. It also explicitly shows shoppers Everlane’s markup compared to a typical retail mark-up. Over the years, Everlane has expanded rapidly, currently ranking No. 40 on the world’s most innovative companies list in 2018. The organization has an extremely loyal customer base who join long waiting lists for new products, all achieved without any direct marketing.

While the changes like supply chain transparency continue to reshape the retail landscape, the industry is beginning to transition into the second phase of this transformation. And as the dust of digital disruption begins to settle, digital-native retailers like Everlane are reinventing their operating models to make them faster, smarter, and clearer.

4. Consumer Empowerment – Simplifying Shopping Experience for Customers

In the early days of commerce, online retailers and traditional brick and mortar stores focused on making as many products as possible available for purchase. The ones with the most extensive product catalogs – such as Amazon, Walmart, and Target – dominated the market. And the online market leaders like Amazon quickly adopted sophisticated search capabilities to recommend related, viewed, and popular products in the community.

But with the rapid growth of technology, as consumers increasingly turned to the Internet to find and purchase products that are in need, many found themselves overwhelmed by product choice overload – and underwhelmed by traditional product recommendation capabilities that seemed too generic and not personalized to their expectations. Today’s digital customers seek advice throughout their purchase journey, so retailers and brands who can curate shopping options for potential customers and deliver a tailored shopping experience according to the customer’s preferences will win the market. The agony of choice overload is real, and solutions that alleviate this paradox of choice will facilitate the customer journey to conversion.

By delivering curated experiences, retailers can add a lot more value to the buyer’s experience apart from saving their time and effort. It will act as a new way for retailers to position uniquely in the market and differentiate by offering something unique to consumers, which others don’t: Advice, Inspiration, and Education. Expertly curating shopping experiences will inspire loyalty and foster stronger, more meaningful relationships with customers. Apart from making it easier for them to discover products they need, curated commerce acts as a powerful way to attract new customers who appreciate straightforward, quick, and simplified shopping experiences.

Modern-day retailers are curating shopping experience in different ways but with the same objective of presenting consumers with deliberately chosen product selections that are easy and enjoyable to browse. According to Forrester, retailers that gain the most value from curated commerce strategies are those who use their intimate knowledge on customers’ needs, preferences, and lifestyles to enhance the shopping experience. Here are some of the strategies that retailers use for bringing the curated commerce experience to customers:

1) Shop the Look: One of the simple ways to deliver curated commerce experience, Shop the Look, is a storefront feature that is leveraged to organize and highlight products around a style trend, profile, or theme. For consumers, this experience is like browsing a magazine and seeing products being used in real-life settings.

Example: Mytheresa uses Shop the Look strategy to inspire customers to search for products organized around a particular “story.”

2) Influential Tastemakers: Consumers are always fascinated by the celebrity/influencer culture, and they often identify just as strongly with celebrities as they do with their favorite brands. Brands are increasingly capitalizing on an influencer’s popularity with a target market by using curated commerce to associate an influencer (or well-known industry figure) with their brand.

Example: Style Room – a curated shop by Zappos.com that combines edited collections of products and trending wares with social media functionality

3) Subscription Model: Subscription services give consumers a great way to regularly use a curated selection of new products for a small monthly fee. For retailers, this recurring business translates into increased sales frequency and higher customer lifetime values (LTVs).

Example: Birchbox built its business around the curated commerce subscription service model, offering customers a monthly delivery of lifestyle and grooming samples for $10/month.

4) Community Commerce: Social media is playing a more significant part in commerce, giving consumers a way to share their tastes and excitement for products with others. Many retail sites today give customers the option of sharing their purchases with friends online. But the rise of curated commerce is taking “liking” products to a new level and empowering consumers to use product choices as an expression of their identities. And increasingly, the retail site itself is becoming the platform for self-expression.

Example: Social commerce sites such as Wanelo, Fancy, SSense tend to fall into one of two categories: Those that are curated by a third-party retailer, and those that are curated by the site’s member community (Pinterest, Etsy).

In this new retail reality, the consumer wins the game. Transitioning to the next generation of commerce can be a challenge, but embracing the shift to a curated future represents the chance for retailers to create trusted engagement with customers and set themselves up for a sustainable future.

Roadmap to Startup Success:

As quoted earlier, rules of the retail industry have fundamentally changed. In the earlier periods, success in retail used to hinge on being more significant than the immediate competitors. But, in this current era of rising consumer demands and digital advances, leadership is only one part of the winning formula. Wondering where to start? Creating unique products, seamless service, excellent consumer experience, and meaningful brands should sustain a winning streak, and retailers must excel at rapid innovation.

Furthermore, retailers must integrate data-driven technologies within their business model to understand and delight customers continuously who became more demanding and harder to pigeonhole than ever before. Data is essential for creating a differentiated shopper experience that inspires customer loyalty and build long-lasting relationships. However, merely investing in a suite of available solutions won’t instantly translate into business success without a strategic vision in place. Having a fundamental understanding of the brand, customers, and the market landscape can ensure the technologies needed for the end-to-end retail experience in organizations.

Key Questions to Guide Your Next Steps

1)    When customers think about your organization, what feelings, ideas, and solutions come to their minds?

2)    How can you differentiate your organization in the current marketplace?

3)    How can technology be leveraged to maximize your organizational strengths and diminish customer pain points?

4)    How can you communicate your plans throughout the organization and beyond?

No retailer can afford to sit still in this era; they should continuously figure out how to escape an unsustainable position and try to get better at their current value propositions.

Reach out to us if you’re interested in learning how we can help you solve the retail puzzle together and help your business grow.