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How Gilt Grew Sales from $25 million to $170 million in 2 years

by Vincent Chan on Apr 27, 2010

Do you know any female friends who are obsessed with designer brands or designer sample sales? If you do, then it’s not difficult to understand why Gilt Groupe and other flash sales or private sales sites are so successful. Why is Gilt so golden? Gilt’s CEO, Susan Lyne, explained:

“Gilt was going to solve a problem for a lot of women I knew. How do we shop for things we love when we really can’t get out to shop the sales, the good sales, the sample sale?”

and…

…there’s no store in the world that could change its entire inventory in a night. We do that every night. Customers know they’ll see something new tomorrow.

When talking about the rise of non-tech focus web startups, besides Groupon, everyone pay attention to the success of flash sales sites, like Gilt, HauteLook, Rue La La, ideeli…etc, as they are extremely profitable. Founded in 2007, Gilt Groupe reportedly had US$25 million in sales in its first year, posted another US$170 million in 2009 (a stunning figure for a start-up), and planned to double that amount in 2010!

During its most recent round of venture capital financing, the company was valued at $400 million. And not surprisingly, with this tremendous growth rate, Gilt is planning for an IPO in a year or two.

Invitation only shopping

Inspired by a highly successful French company called Vente Privée, which sells fashion overstock, Kevin Ryan, former CEO of DoubleClick, decided to bring the same business model to the US in 2007.

His company sells high fashion at prices around 50 to 70 percent off retail. Access is invite-only, limited to friends of the Gilt community, although everyone can get an account if you ask for an invite. Their sales are announced by email a week ahead of time with most of them lasting 36 hours or until everything is sold. According to New York Magazine:

During the hour after its weekday sales kick off, between noon and 1 pm…its site is visited by an average of roughly 100,000 shoppers. For that time, it might as well be the most crowded store in New York.

Gilt is simply a viral-marketing phenomenon because they don’t really have to advertise. Instead it gets referral through users’ personal networks and offers incentives (e.g. $25 credit) to current members to invite their friends to join their community. Result: more than 2 million members and growing rapidly.

High sell through rates

Also, the site’s members are ideal for designer brands because most of them are female, young and high income. According to New York Magazine:

At a department store, a designer’s sell-through rates—the proportion of inventory that is actually purchased—might be around 65 percent over a twelve-week season, but on Gilt, several designers told me, sell-through rates can top 90 percent. Its customers buy everything.

Savior for young designers during recession

From the beginning, the company’s greatest challenge was going to be getting enough merchandise at such a low price level. Many brands worried that lowering prices will hurt their images.

And then recession came in late 2008. People predicted that a deep recession would mean the death of demand for luxuries; however, Gilt has thrived amid challenges.

As incomes tightened during recession, the fashion brands was left with a large amount of inventory. Gilt took the opportunity to suck up all those extra goods, saving a lot of young fashion designers from going out of business.

According to their CEO:

If a designer believes in six items and thinks they’re going to be really big, we’ll agree to take x number as a minimum but we’ll agree to take as many as y. If they can sell the difference at full price, fantastic. If they can’t, we’re going to buy them.

In this difficult times, Gilt offered a quick way to generate some cash flow for these young high fashion brands which operate as small businesses without their own warehouses or factory outlets.

Help designers make more money

However, besides liquidation, why would designers use Gilt if they can’t make any money?

In order to help designers make more money, the site allows members to place orders at the beginning of the seasons, purchasing items that haven’t become overstock yet. In this way, the cost per item will go down because of the increased volume which means that the designer can make more money overall.

Moreover, Gilt is demanding designers to make exclusive lines just for the site. There is a secret in the fashion industry that nobody wants to talk about – designers actually make low quality clothing specifically for sale at outlet malls, which means you could never see those items at retail. Basically, they are planned overstock, helping designers to make an extremely high margins.

Gilt wants to use the same model to expand its inventory. According to their CEO, 35 to 40 percent of Gilt’s women’s apparel will be acquired through this channel this year. Of course, Gilt nor the designers want to let the buyers know which items were made exclusive for the site because they are usually lower in quality.

Sustainability problem

Although the site is wildly successful now, their CEO believes:

This is an easy business to start; it’s a really hard business to scale.

Why? Because there is only so much surplus product in the world. As the company expands and competitors come in, it will be harder for them to get enough pipeline and maintain the quality of their deals.

As a result, diversification is crucial to the future of the company. Before their IPO, they have to prove that their model is able to work outside of just female luxury fashion products. At this moment, Gilt has expanded into multiple categories like men, children, gifts and travel deals.

Conclusion

As legendary angel investor, Ron Conways, recently said on TechCrunch:

Flash marketing, or social commerce, startups like Gilt Groupe and Groupon have “come out of nowhere” and are revolutionizing ecommerce. In three years, he says, you won’t think about Walmart, Target and Amazon when you think about ecommerce. You’ll think about this whole new wave of companies doing flash marketing.

To put it another way, we are witnessing a fundamental and systematical changes taking place in the way products are bought and sold online.

Finally, the success of Gilt has taught an important lesson that happy customers is everything. Why? Not sure if you have noticed, Gilt’s website actually doesn’t apply any Web 2.0 features, SEO tricks or SEM strategies. They just work hard to deliver a simple brand promise – you come every day and it’s new every day. Result: a huge community of loyal customers.


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Revenue per Employee in China vs US

by Vincent Chan on Apr 23, 2010

Saw this interesting post, ranking tech companies by revenue per employee, on Signal vs. Noise and its following discussion. I wonder what the numbers will look like for tech companies in Asia. The findings are pretty interesting. Let me show you the numbers now:

(Note: 37signals has already mentioned that the ideal measurement would be using “profit and payroll” instead of “revenue and employee headcount”. It’s hard to get those numbers though. Still, these interesting numbers should give us a better idea at which companies are the most efficient.)

More established US companies:

Tech companies in China:

While I am not going to make any conclusions based on these numbers, one thing is pretty significant – the revenue per employee numbers of the Chinese companies are a lot less than the ones in the US. Because of technology? productivity? knowledge? Need to find out more about these in the future. 🙂

Happy Friday!

*UPDATE: I have updated the chart and table for the Chinese tech companies with correct data. Thanks for the reader in the comment section.


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What's the Secret Success of Groupon?

by Vincent Chan on Apr 21, 2010

If you have never heard of Groupon recently, you probably are not working in the tech industry because it is all over the blogosphere. After all, growing from zero to US$1.35 billion valuation in 18 months is pretty AMAZING.

So what are their secret weapons? What are they doing right? How are they gaining customers at such a rate? Let’s take a look.

Crystal Clear Value Proposition

Groupon’s goal is clear: help introduce people to your business. Each coupon on the site has a predetermined minimum. If not enough people sign up for the deal to take effect, neither Groupon nor the business makes any money. Groupon makes money by getting a cut of these promotions from the retailers.

According to Jeremy Liew from Lightspeed Venture Partners, Groupon went from around US$100,000 in revenue in Jan 2009 to around US$10 million in revenue in Jan 2010 – a 100X increase in just twelve months.

When many retailers are struggling to survive in this economy, Groupon has become their savior. According to Andrew Mason, Groupon’s founder and CEO, nearly all of their deals have succeeded so far. And there is currently a 120 deals waiting list in Chicago alone. As you can tell, Groupon uses collective buying to create a win-win for local businesses and their customers. No wonder so many merchants are eager to participate.

Built Virality inside the Product

Since each deal is only good for one day, it creates a sense of urgency for the users and make them feel excited.

Obviously, users want to make sure the minimum is hit. What can they do? Tell their friends. Groupon takes that social component to the next level through Facebook Connect and Twitter, inviting a user’s entire network to get in on the deal.

Their user acquisition costs? Zero.

Groupon also invested a lot resources on customer service, from our help line to quick online response to customer issues. So customers are happy and continue to help Groupon reach new heights.

Alternative to Traditional Advertising for Local Businesses

Andrew wants people to treat Groupon like “a city guide that offers promotions“. He wants to help people have fun in the city and save money using the tremendous power of group buying.

In order to do so, they have to work with retailers to create attractive deals. Like the founder said:

We help businesses navigate the new world of social media and Internet marketing in an approachable, creative way. An appearance on Groupon validates these businesses as a cool part of their community.

For local business owners, Groupon has become an alternative to traditional advertising, where they pay up front and hope for the best. In this new platform, these promotions are like a whole new form of local advertising, where merchants only have to pay for REAL result.

Moreover, because of those unbelievable prices, customers will purchase something they’ve always wanted to try but never had the chance, bringing a flood of new customers to local businesses, at least some of them will hopefully get hooked and become loyal clients eventually.

Negative Working Capital

In accounting:

Working Capital = Current Assets – Current Liabilities

It is the amount of money that a business needs to stay in business. According to Business Insider:

Some businesses have negative working capital: they get money from sales before they pay suppliers.

For companies like Walmart and Amazon, they actually need no working capital because they negotiate deals in such a way that they only pay for things after 1-3 months. Most of the time, the stuff they buy is long sold by then. And people who go to Walmart to buy stuff will pay immediately, which means that Walmart is actually sitting on a pile of cash that it really does not need. So they can pay their debt slowly or use the extra cash for investment.

These businesses basically are financed by their customers. Negative working capital is a tremendous thing to have in a business. Apparently, Groupon has a large negative working capital (4 million Groupons have now been sold already). They first charge users upfront, take a cut and pay merchants back later. This is one of the reasons why Groupon is such a great business.

What’s your opinion? What makes Groupon such an attractive investment to VC? Let us know in the comment area.

*UPDATE: One of our readers asked what caused the visit jump from a hundred thousand or so to 2 million in mid 2009.

*ANSWER: Good question! Groupon originally operated only in Chicago, New York City, Boston, Washington, D.C., Los Angeles, and San Francisco. They started to launch to other cities in mid 2009, like Atlanta, Denver, Dallas, San Diego, Phoenix and Seattle…etc, more than 20 cities by the end of 2009.

*CORRECTION: Oops! It seems my answer is not correct. Andrew, the founder of Groupon, just told us the real answer in the comment section. “mid-2009 traffic jump: we used to be groupon.thepoint.com; that’s when we changed to groupon.com”. Thanks a lot, Andrew!

**UPDATE 2: One of our readers asked how Groupon has managed to distance themselves from the pack.

**ANSWER: And he got the answer from Andrew directly on Twitter! His answer, “customer service, copywriting, etc… all the little things you put time into when you care about more than making a quick buck”.


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The Rise of Non-tech Focus Web Startups

by Vincent Chan on Apr 21, 2010

It seems that the rise of social networking and open source technology has helped level the playing field for startups outside Silicon Valley. As noticed by Jeremy Liew from Lightspeed Venture Partners, majority of the current fastest growth web companies, which have grown revenues over US$1 million per month within 12-18 months of launch, are from outside the bay area and many of them are focus on creative business model rather than technology innovation.

Some of these “hot” companies are:

Most of these companies represent what Josh Kopelman called “the future of eCommerce” (e.g. flash sales, local deals, group buying & subscription businesses). They have invested a lot of resources in marketing, sales, customer services and merchandizing. While technology is an important part, it is not the core to the success of their companies.

Lesson: technology is only part of the equation to be successful on the web.

In future posts, we will find out how some of these companies achieve such a tremendous growth.


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Is Your Product Attention Deficit?

by Vincent Chan on Apr 20, 2010

Recently Josh Kopelman, the founder of Half.com and Managing Director of First Round Capital, argued that simply building a product that people want is not enough to guarantee success. He believes that reaching your targeted customers is the REAL challenge in this information overload era. At his first company, Infonautics, his team failed to get any meaningful traction for a fine product after marketing it for 4 years. No matter what marketing channels they used (e.g. online advertising, direct mail, print advertising, email advertising…etc), people just didn’t want to listen to their sales pitch.

In a very crowded market, it is very easy to fall into the trap of being Yet Another SaaS App or Yet Another iPhone App. So what can we do besides spamming every blog writers and potential customers to get their attention? How can we get the word out quickly and still build a brand?

Since Josh didn’t mention any possible solutions, I did a bit research and found the following tried and tested lessons from other startups.

Be Different. No, Really Different.

According to the ideas of “Purple Cow” by Seth Godin and “Zag” by Marty Neumeier, besides making a remarkable product, we also need radical differentiation. Why? Because everyone pay attention to it, talk about it and tell their friends. Just look at Susan Boyle and Lady Gaga. Are they the best singers in the world? Probably not. But they definitely catch everyone’s attention in a short period of time.

Look at LittleMissMatched, it has grown into a US$35 million business in the past 6 years, just by selling colorful, unmatched items and encouraging children to express their individuality through “creative mismatching”. Do you regret throwing so many unmatched socks away now? 🙂

Like Seth Godin said, only products at the edge are worth talking about right now. Playing it safe will just lead to failure.

Making First Impression Memorable

The lack of human touch on the Internet sometimes make people forget the importance of first impression. Ignoring this is one of the biggest mistakes a startup can make (source: 37signals).

So who are doing great in this area? Everyone knows about Wufoo, Tumblr and Vimeo. How about CD Baby? Never heard of it? Me neither…until I’ve read the story about their famous customer service emails. It’s such an unique experience and their customers love it so much. If you are a returned customer, your order confirmation email will start with, “When the neighborhood kids heard you have come back, all their faces press against the glass…”. It’s just genius! No wonder the founder was able to sell the company for US$22 million two years ago.

Unique Personality

Many startups forget they are in the story telling business. Good storytelling let your customers understand your product’s personality. So build a story that you want your customers to tell others. All of the following sites are related to photo/media sharing but each of them have their own personality:

Flickr = Social, Innovative
Smugmug = Premium, Professional, Serious
Carbonmade = Funny, Simple
deviantART = Community
Photobucket = MySpace
Picasa Web Albums = Free, Fast
Twitpic = Twitter

So what’s the personality of your product? Establishing an unique personality for your brand can make your world/market smaller. If you want your story to appeal to everyone, it will just appeal to no one at last.

37signals: Your product has a voice – and it’s talking to your customers 24 hours a day.

Build Attention into Your Product

Sometimes with a little creativity and work, your product can get the attention your company desperately needs.

For example, there are currently more than 300 time management applications being sold on the market. It’s an extremely crowd space. However, Tony Wright, CEO and founder of Rescuetime.com, a time tracking and management startup, thought of a creative way to let his startup stand out from the competition.

He built buzz for his brand by using the anonymous data collected from its user base. From the data, he can share surprising real news like:

  • The average IM user shifts to an IM window 77 times per day (avg of 11.5 times per hour or once every 5.2 minutes).
  • Average number of unique web sites visited per day is 40.
  • 26% of time was spent inside a browser.
  • 61% of time was spent on internet dependent stuff.

Media love these kinds of interesting numbers. His company and product turn out showing up in New York Times, BBC, BusinessWeek, PCWorld and other major media outlets. Eventually, RescueTime closed their Series A round of funding for $900k in September 2008. Not bad for a two and a half years old startup!

Taking FULL Advantage of Your Users (aka: word of mouth)

When it comes down to it, it is very difficult to attract continuous attention unless you do it through your own customers. If you could convince thousands of passionate users to promote your products on their blogs and social network profiles, it will be the most scalable and cost effective way to get your customer’s attention.

However, this approach has not been without its complications. It is difficult because marketing through social media is a process, not an event (source: Seth Godin). Companies are good at events (e.g. putting up a trade show booth, working on freelance projects, open a Facebook page or Twitter profile) because it’s easier to manage.

On the other hand, social media marketing is a process. So is dating, losing weight, and building a company or brand. Events are for short term attention and processes build long term results.

Want a good role model? Take a look at Kogi BBQ which are two little korean food trucks serving tacos throughout Los Angeles. They drive around the city all day long and tweet their locations. So if you want to try their tasty food, you have to follow their twitter account. And then you will get a message like this:

LUNCH RUUUN! 12-3PM: *ROJA@Brentwood (Lot Behind Bldg, 12301 Wilshire Blvd); *VERDE@Market Lofts (645 W. 9th)

Brilliant!!! This new food truck is such a big hit that they even get praise from the famous venture capitalist, Fred Wilson. They not only have a twitter account but also a blog, Flickr account and Facebook Page. Most importantly, they are all ACTIVELY managed by this little company.

This is what social media is all about. It’s not about the medium or tool. It’s the conversation you generated with potential customers inside those media. Result: people often need to wait more than an hour for one of their tacos 🙂

Social media marketing can be both powerful and free for getting attention but you just have to earn it.

As you can tell, there is no one solution or one path that can guarantee your customers’ attention. Yet finding a way to continuously gain attention is a critical job that a startup needs to do to succeed.

Without attention, no one will know about how cool your product is. If it doesn’t connect with users, why bother building it in the first place?


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