Blog by David Goldberg / May 27, 2015

Alternative Business Models For Consumer Facing Companies

Share this post
  • Link copied to clipboard.

Though a majority of startups we analyze at Corigin Ventures are consumer-facing, they come in all shapes and sizes. Lately we’ve been discussing (and sometimes targeting) companies around certain business models – why certain models are or will be attractive, which companies are best suited for which models, and the role tech plays in each. Some of these models are traditional, and even pre-date the internet, while others have recently come about solely because of new technological capabilities. Some have names, others are mainly described as analogies (Uber for X, Netflix for Y). The new models can sometimes change the way we purchase or behave (think collaborative consumption), or prove to be a flash in the pan. (daily deals, flash-sales).

Today’s ramble will take a look at some of the models that have been gaining some momentum in the market, the benefits and risks of each, the role tech plays for each, and some examples of companies we think are doing it right (or wrong).

DTC comes in a few different flavors, but often refers to web-only brands selling a physical product. Often, it’s used for “Vertically Integrated Companies,” which refers to the company owning each step in the retail value chain – manufacturing, branding, and distribution.

Trailblazer: Warby Parker

Other Examples: Bonobos, Harry’s, Everlane, Aloha, Frank & Oak, Parachute, Figs

Why It’s Attractive

  • By replacing the middleman (Wholesalers, Brick and Mortar) with technology, margins are drastically increased, allowing both the supplier and the consumer to benefit. Higher quality goods can be sold for a lower price.
  • By replacing retailers, a brand is able to fully own its customer experience.

The analogy we hear most often for this category is “Warby Parker for X,” the DTC eyewear company founded in 2010, that has since gone on to raise over $200M, the latest round propelling it to unicorn status (valuation exceeding $1B). The unit economics are often the easy part with DTC. The real question for a company considering this model (which Warby has answered for eyewear with a resounding ‘yes’) is “will people buy this online?” Interestingly, we’re seeing adoption across industries faster than I’d have imagined, even where ‘touching the product’ has real benefits. I was impressed when fashion companies were able to pull this off. I’m blown away (and excited) that Casper has been so successful with this for mattresses, without letting people do that backwards trust-fall move they are so accustomed to.

Many of the successful companies leverage tactics that mitigate the potential trust issue. Some keep a traditional brick & mortar touchpoint, whether a full retail shop or as an experience/brand extension (Bonobos Guideshop). Most offer free shipping and/or free returns, and many will send multiple options to choose from (Warby’s ‘Try at Home’ program).

Technology’s Role: Data, Inventory Management, Logistics, Marketing

Investor Take: As far as business models go, I’m quite bullish on Direct to Consumer and Vertically Integrated Retail, and think most industries will have at least one dominant, online-only (at least to start) company. The hard part is identifying who that will be, as it’s less technology-based, and more about branding and execution. Deep domain expertise is vital here.

I’ll need to think of a better name for this one. But basically it’s a company taking heavily discounted inventory from a variety of fragmented providers, and packaging them up to the end-consumer in a subscription offering.

Trailblazer: ClassPass

Other Examples: Vive (blowouts), Cups (coffee)

Why It’s Attractive

  • Little to no overhead
  • Attractive economics to end consumer equals easy/cheap customer acquisition costs
  • Scalable

To me, ‘bundled inventory’ is an evolution of daily deals, which leveraged unused inventory and discounts to add incremental revenue to a business, while also providing lead generation. However, many of the companies soon realized they were losing money on these discounted transactions, and were not getting the conversions to full-time customers they had hoped. Many of the customers were ‘serial grouponers’ (no idea if this term has been used, so apologies if not properly crediting), and would just book at places that were featuring a discount.

In a way, the new model, leveraged first by ClassPass with its ‘Unlimited fitness for $99/month’ product, is targeting those ‘serial grouponers,’ those willing to sacrifice just a little to get an almost too-good-to-be-true offering. Many of the classes on ClassPass charge regular drop-ins over $30 per class. While there is a limit (3) on the number of times you can take the same class, there is no limit to the total classes you can take. For reference, I took 6 classes last month, which would have cost me just shy of $200 if I went direct.

In theory, everyone can win with this model. Customers get a great value and can discover new products/services. Providers get incremental revenue for offerings at low-demand times, as well as a simple channel for new member acquisition. And the middleman earns a spread for making it all happen.

It’s easy to understand why many investors are excited about this business model, and we’ve recently seen it applied to other verticals, including blowouts (Vive) and coffee (Cups). We at Corigin Ventures are invested in ClassPass (though its acquisition of fitmob), and are obviously bullish. But this model is not without risks. Of most significance is the tenuous relationship that can develop between the company (for example, ClassPass) and its individual providers. It’s one of those situations where they have a relationship with each other, but in many ways are direct competitors as well. While many customers may augment their ClassPass with full-paid classes, some (like me) probably won’t. This article from the New York Times earlier this month discusses some of those nuances. It will be key for ClassPass, and others following their lead, to leverage technology to build a more sophisticated pricing system that benefits both the studios and her company (think yield analysis and dynamic pricing). Another risk is the lack of control over unit economics, as the company pays their providers a per class fee, albeit discounted. As a result, overuse can result in an unprofitable customer, and underuse can result in a dissatisfied customer. From what I know, the data of these early companies shows that there aren’t too many outliers, and there is enough margin to still earn a tidy profit, but its something we’re monitoring closely.

Technology’s Role: Consumer Data, Logistics, Pricing

Investor Take: We’ve invested in ClassPass/fitmob, so clearly we like this model. While there are risks (there always are), if it works, these companies are extremely scalable, and are playing in large but traditionally fragment industries. We’ll probably be digging into the model further, and exploring other verticals.

If you’re not familiar with this term, you’ve been living under a rock (or in a yellow taxi). Companies have been leveraging this model, in which a technological layer (often an on-demand app) connects its user base to its network of freelance service providers.

Trailblazer: Uber

Examples: Lyft, Zeel, Pager, Postmates, Stylisted, WunWun, Shyp, Washio, Luxe, Eaze

It’s safe to say, there is officially an “Uber for Everything.” Just last week, Geoffrey Fowler put out a WSJ piece on the concierge economy, namedropping dozens of companies in as many verticals: drivers, food delivery, shipping, parking, blowouts, massages, cleaning, even cannabis. A quick filter on AngelList shows 588 companies with an “Uber for X” description.

Why It’s Attractive

  • low inventory costs
  • stickiness of platform
  • company owns customer, and can leverage for data or upselling opportunities (at 100% margin)

As with ‘bundled inventory,’ in theory (and when done right), everybody wins. Freelancers are able to supplement their business and work a flexible schedule, customers get good pricing and unbeatable convenience, and the middleman earns their keep. By making the experience so much more convenient, many of the companies have been successful in growing their respective markets by attracting first timers and showing high repeat rates. We see two approaches here:

Commodity – The customer only interacts with the company, who selects the worker to provide the service (often based on logistics). Consistent pricing and experience, while sacrificing choice.

Marketplace – The customer can view and choose the provider, who set their own pricing. Less consistent pricing and experience.

Legal implications aside, each approach can make sense depending on the sector. Typically, the commodity model is best when the on-demand aspect is important, as logistics can be optimized. Conversely, when time is less of an issue, choice is the trump card. Uber is the perfect example of the commodity approach. You don’t really care who drives you, and don’t need to see their prior work. Just that they are reputable (vetted) and are logistically in the best position to get you. Most pitches that have crossed our desks employ this model. They minimize the lack-of-choice with simple features like prioritizing and blocking individual providers. But sometimes choice is key. One of our recent investments, Stylisted, a marketplace for freelance beauty professionals, employs the marketplace approach. We looked at competitors in the space with the commodity approach, but felt it was important for users to read reviews, see portfolios of the artists, and have someone they felt comfortable with. Additionally, since they focus on special events (weddings, charity events), bookings often take place in advance.

Technology’s Role: User Experience (Convenience), Logistics, Data, Marketing

Investor Take: We’ve been bullish from the start, leading Zeel’s seed, and participating in Stylisted’s. We’ve also invested in SherpaShare, who provides a layer of management/analytics to the freelance workers. While the market is starting to get over-saturated, consumers are also becoming more and more comfortable with these models, increasing the opportunity. There aren’t too many verticals left with a complete white space, so it will be about picking winners amongst a crowd. Per usual, we make our bets influenced heavily by team.

This list is clearly not exhaustive. In a future post, I’ll analyze some other models, including subscription boxes, direct selling, and collaborative consumption. Figured this was long enough for a first post!

Most importantly, I’d love your feedback. What model(s) do you think will be the next game changer?