Case Study: Rent the Runway

1. Case Study: Rent the Runway Minder Chen Professor of MIS California State University Channel Islands Minder.chen@csuci.edu Todd Heisler/The New York Times

2. Videos about Rent the Runway • **Rent the Runway: An inside look at the tech startup's success https://www.youtube.com/watch?v=cyvfsi3MX-M • The Business of Rentable Fashion | Jennifer Hyman https://www.youtube.com/watch?v=8ZLYWDxDvQI • ***The Supply & Demand of Rent the Runway | Jennifer Hyman https://www.youtube.com/watch?v=JYFWpJvq6DU(testing business ideas) • Working with Venture Capitalists as a Fashion Company | Jennifer Hyman https://www.youtube.com/watch?v=AlL32GUOqmI • Open Q&A about Rent the Runway | Jennifer Hyman https://www.youtube.com/watch?v=xjmSDeK4_x4 • Rent the Runway at The Cosmopolitan Las Vegas https://www.youtube.com/watch?v=6rAYqPXWfgE Rent the Runway Announces New Business https://www.youtube.com/watch?v=hc0RdVK-qK0

3. References • Nathan Furr and Jeff Dyer, The Innovator’s Method: Beginning the Lean Startup into Your Organization, Harvard Business Review Press, 2014. (read this introduction (Rent the Runway case is an great example illustrating Lean Startup principles) and Chapter 1 at http://innovatorsdna.com/wp-content/uploads/2014/09/Innovators-Method-Sample.pdf • “Chapter 12: Rent the Runway: Entrepreneurs Expanding an Industry by Blending Tech with Fashion” in Information Systems: A Manager's Guide to Harnessing Technology, v. 4.0 • S. Bertoni, “How Mixing Data And Fashion Can Make Rent The Runway Tech's Next Billion Dollar Star,” Forbes, Sept. 8, 2014. • S. Bertoni, “The Secret Mojo Behind Rent The Runway's Rental Machine,” Forbes, August, 26, 2014. 

4. Competitors bluefly.com, outnet.com,  bagborroworsteal.com, ideeli.com, WearTodayGoneTomorrow.com has been doing this for almost a year! WTGT loans nationally at 5 – 10% retail values, has had amazing reviews from Teen Vogue, People, InStyle, The Today Show and many more. Items arrive in 2 – 3 days, and they carry over 125 of the top designers including 3.1 Phillip Lim, Herve Leger, Matthew Williamson and more. They’re amazing! A Netflix Model for Haute Couture http://www.nytimes.com/2009/11/09/technology/09runway.html

5. Observation: Friction / Inspiration In 2008, Jenn Hyman, a second- year MBA student at Harvard Business School noticed her sister struggling to decide what to wear to an upcoming wedding. “Becky desperately wanted to buy a $1,500 Marchesa dress and she felt compelled to buy a new dress— because she knew photos would soon appear on Facebook and she didn’t want to be seen twice in the same outfit.” As she watched her sister wrestle with the cost of the dress ($2,000) (i.e., the pain point/friction), her sister’s emotion was a clue to an important job-to-be done for young women: helping them feel special and confident.

6. Related Experiences and Hypothesis Hyman realized that other fashion-oriented young women might have a similar challenge, an observation backed up by her years spent building a wedding event business at Starwood hotels and working in marketing and sales at Wedding.com Hyman’s insight led her to hypothesize a potential solution: instead of purchasing designer dresses, women might prefer the option of renting designer dresses online for special occasions.

7. Pop Quiz Imagine she came to you. What would you advise? • It has been done by someone already. • Write a business plan first. • Finish your MBA program first. • Have you done the SWOT analysis? • Nobody is willing to wear rented a high fashion dress. • Figure out a way to test your hypothesis. • That is a great idea and I will invest in it. Business Plan would identify the customer need, describe the product or service, estimate the size of the market, and estimate the revenues and profits based on projections of pricing, costs, and unit volume growth.

8. Pitchable sentence

9. Business Model Canvas

10. Value Proposition Canvas Customer Profile Value Map http://www.businessmodelgeneration.com/downloads/value_proposition_canvas.pdf http://www.franciscopalao.com/english/value-proposition-canvas-get-to-know-your-customers-and-improve-your-value-proposition/

11. Demand Side and Supply Side Demand Side Supply Side What are the risks for them? How can you mitigate the risks for them?

12. No Business Plan but a Business “We had an idea, we thought that it was fun, we decided to start working on it,” says Hyman. “We never had a business plan. We pretended that we had a business from the very beginning, as opposed to planning and strategizing as to whether it would work.”

13. First Experiment Hyman recruited classmate Jenny Fleiss to help her test their proposed solution. Hyman and Fleiss set up an experiment to answer two key questions: 1. Will middle- to upper-class young women rent a designer dress if it is available at one-tenth the retail price? 2. Will women who rent dresses return them in good condition? Then Hyman and Fleiss borrowed or bought 130 dresses from designers like Diane von Furstenberg, Calvin Klein, and Halston (according to the sizes of the two founders, just in case…) and set up an experiment to rent dresses to Harvard undergrads. They advertised around campus, rented a location, and invited young women. Of the 140 women who came in to view the dresses, 35 percent ended up renting one, and 51 of 53 mailed them back in good condition (the other two had stains that were easily removed).

14. Second Experiment But would women rent dresses they could not try on? To answer that question, Hyman and Fleiss set up another experiment, this time on the Yale campus, allowing women to see the dresses before renting but not allowing them to try them on. In the second trial they had more dress options, because the first pilot revealed that many women didn’t rent because they couldn’t find an option they liked. The Yale pilot showed two things: • women would rent dresses when they couldn’t try them on, and • the percentage of women who rented increased to more than 55 percent because they had more options.

15. Third Experiment Now Hyman and Fleiss were ready to test the big idea: Would women rent dresses they could not physically see? • The entrepreneurs took photos of each dress and ran a test in New York, where one thousand women in the target audience were given the option to rent a dress from PDF photos. • The final experiment showed that roughly 5 percent of women looking for special occasion dresses were willing to try the service — enough to demonstrate the viability of renting high fashion over the web.

16. Validation and Outside Funding https://www.youtube.com/watch?v=8ZLYWDxDvQI http://www.harbus.org/2012/rent-the-runway/ The testing validated their hunch. “Women would put on a sparkly gold dress, twirl around in the mirror, say ‘Don’t I look hot?’ and strut their stuff in front of all of her friends,” says Fleiss. “For us that was real proof that there is a lot of tangibility to this concept, there’s a huge stickiness factor, an emotional connection. We decided to build the concept of Rent the Runway around that feeling that fantastic fashion gets to women.”

17. Use Experiments to Test Interest and Relevance Priorities and Preferences Willingness to Pay

18. MVP and Product/Market  Fit Minimum  Viable Product, or MVP, a bare-bones offering that allows the team to collect customer feedback and to validate concepts and assumptions that underlie the business idea. Product/Market  Fit—the idea that they were crafting a solution the market wants, one that customers are willing to pay for, and one that’ll scale into a large, profitable business.  50% of clothing in your closet got worn for 3 times or less. The average American woman buys 64 pieces of clothing a year, and half of those items will be worn only once.

19. Why Designers Should Never Go to a Meeting Without a Prototype Link a project with Sesame Workshop to develop Elmo’s Monster Maker—an iPhone app that leads young children through the process of designing their own monster friend. They had an idea for a new dance feature in which kids could guide Elmo through different dance moves in sync with a simple music track. 

20. Tina Seelig: The 6 Characteristics of Truly Creative People (video) starting 13:40 for a smart quick prototyping example

21. The Customer Development Process More startups fail from a lack of customers than from a failure of product development Try many times before you get it right. It is OK to fail so plan to learn from it. Only move to the next stage when you learn enough and reach the “escape velocity” http://www.ctinnovations.com/images/resources/Startup%20Owners%20Manual%20-%20BlankDorf.pdf

22. The Lean Start-Up Steve Blank, "Why The Lean Start-up Change Everything," HBR, May 2013. (link)

25. Channel Hypothesis: Renting via Designer’s Websites So Hyman and Fleiss gathered data on whether designers would go for their idea and whether they could use designers’ websites as their rental channel. Less than two weeks after conceiving the idea, the two women cold-called Diane von Furstenberg, an influential fashion designer and president of the Council of Fashion Designers of America. The initial idea Hyman proposed to von Furstenberg was to set up a rental option on the websites of existing designers. Hyman’s start- up would take care of fulfillment— taking the order, shipping the dress, and dry-cleaning the returns. Von Furstenberg was intrigued by the idea and helped Hyman and Fleiss set up meetings with more than twenty designers.

26. Pivot to the Netflix Model The initial response from most designers was extremely negative. “We were going to designers asking to buy their inventory so we could rent it at the same time it’s available at Saks Fifth Avenue and Niemen Marcus for 10 percent of the retail price,” said Hyman. “In the first meetings their response was basically, ‘over my dead body.’” Designers were worried about cannibalization. Renting dresses instead of selling them seemed like a bad idea. Hyman and Fleiss realized that to make their idea work, they would need to have their own website and inventory. So the idea of Rent the Runway— using the Netflix model to rent a wide variety of high- fashion dresses from multiple designers— was born.

27. Vital Partners: Fashion Designers Rent the Runway needed to buy from designers in bulk, and at a discount, in order for the model to work. Designers needed to be convinced it was worth taking a risk on two women with an unprofitable fledgling business and little direct domain experience. Some designers were initially concerned that rental would dilute their brand. Many also feared that rental would cannibalize retail sales.

28. Designer Reactions Rather than cannibalizing sales, Rent the Runway is now seen by many designers as a vital partner: an experiential marketing channel that introduces high-end designer brands to new customers. Rent the Runway clients are about a decade younger, on average, than the typical department store patron. 98 percent of Rent the Runway customers rent brands they’ve never bought before.  Some designers are now even testing new looks on Rent the Runway, while others are developing exclusive lines for the site.

29. Link with videos http://youtu.be/iBptKACWNao Website demo

30. Push vs. Pull Technology Push Market Pull Start from a manifest customer job, pain, or gain for which you design a value proposition. In simple terms, this is a problem in search of a solution. Start from an invention, innovation, or (technological) resource for which you develop a value proposition that addresses a customer job, pain, and gain. In simple terms, this is a solution in search of a problem.

31. Lean Startup

32. Obtain Capital without a Business Plan Now that Hyman and Fleiss had resolved concerns about whether there would be demand for their product— and what their initial solution might look like— they were ready to launch. But the change in business model meant they needed capital to purchase inventory. The typical advice when you’re going for capital is to make sure you have a top-notch business plan and get capital as cheaply as possible. They didn’t do it.

33. Learning by Doing Hyman replied, “We’re anti-business plan people. We think that so many people just sit around all day and strategize but they don’t act.” Fleiss concurred, saying, “We had a bias for action, not business planning.” In fact, one reason Hyman and Fleiss chose Bain Capital, even though it wasn’t necessarily the cheapest capital, was the attitude of partner Scott Friend. “He shared our commitment to learning by doing,” said Fleiss.

34. Beta Version With a small team in place, the typical advice would be to carefully develop a flawless website and service with broad appeal, adding features that might attract a wider set of customers. They didn’t do it. Rent the Runway quicklylaunched a beta version of its service for 5,000 invited members on November 2, 2009. RTR started with 800 dresses from 30 designers— a relatively small inventory. “We followed the minimum viable product (MVP) approach,” said Fleiss. “At the outset we just wanted to provide the capability to rent dresses. Nothing fancy.” But with the help of a New York Times article titled “A Netflix Model for Haute Couture,” initial demand for the small inventory proved almost overwhelming.

35. Building a Team With capital in hand, the two women were ready to build the team. The typical advice is to hire experts to head each functional area, perhaps Someone who can leverage significant corporate experience to take the team to the next level. They didn’t do it. Use a fluid approach to allocating responsibilities and hire managers who can wear different hats without worrying about their titles. They make heavy use of unpaid internships to test whether employees have the same hungry jack-of-all-trades attitude.

36. Team What Hyman and her cofounder, Jennifer Fleiss, have built is the furthest thing from cute. Buzzing around Hyman’s cubbyhole-chic office in an old printing building in lower Manhattan are 280 employees with a strange blend of talents: data scientists, fashion stylists, app developers, apparel merchandisers. It’s as if MIT and FIT (The Fashion Institute of Technology) threw a mixer.

37. Netflix for Designer Dresses http://www.xconomy.com/boston/2010/01/08/subscription-model-turns-rent-the-runway-into-a-real-dressflix/ “Netflix for designer dresses” is the elevator pitch that everyone uses to describe Rent the Runway, the New York City startup that launched in November with Series A funding from Boston-based Bain Capital Ventures. The company buys dresses from top fashion designers, then lets customers reserve them online for a four- or eight-day rental period. When the time comes, Rent the Runway ships out the dresses (in two sizes, just in case) along with a handy pre-paid return shipping package. They even handle the dry cleaning.

38. Driving Forces There were serious problems in the fashion industry: Younger fashion fans were rabid for well-known designers but rarely could afford them. Designers wanted to reach the elusive younger demographic, too. They may be cash-strapped now but they also represent potentially lucrative lifelong customers. Social media "kills“ outfits: Social media was putting even more pressure on women to "wear something new" that hadn’t already appeared in their Facebook and Instagram photos, making the problem of a full closet with nothing to wear even more acute. Source: Chapter 12: Rent the Runway: Entrepreneurs Expanding an Industry by Blending Tech with Fashion Information Systems: A Manager's Guide to Harnessing Technology, v. 4.0

39. Key Takeaways The idea from Rent the Runway came from observing how an existing market was underserving a family member and other young women.  Many uncertainties existed, and co-founders Hyman and Fleiss addressed these by launching a series of experiments to test product/market fit. They did many of these experiments with minimum viable products: running popup rental shops on college campuses, sharing PDFs with potential customers to see how women would respond to the prospect of renting without seeing and trying on a garment. Many supplier uncertainties existed, as well, but the firm worked closely with suppliers and demonstrated that they could actually grow the market and create a channel for reaching customers with a potential for high customer lifetime value.  The co-founders have discovered that the model appeals not just to young, cash-strapped women, but to all women who seek convenience and value and who are interested in more broadly sampling high-end fashion.  Source: Chapter 12: Rent the Runway: Entrepreneurs Expanding an Industry by Blending Tech with Fashion Information Systems: A Manager's Guide to Harnessing Technology, v. 4.0

40. How It Works https://www.youtube.com/watch?v=Rj5CT1scV3w Customers browse the Rent the Runway site, select a dress (or other clothing accessory), and schedule a delivery date for a four-day loan (8-day rentals are available for an added fee). Rentals are often only 10% of a dress’s retail price. That’s like getting high-end designer garments at a fast-fashion price. Stylists are available for phone calls, emails and online chat. Rent the Runway will send two sizes, to make sure that you receive a dress that fits. Customers who are on the fence about a choice can choose a second style as a backup, for an additional fee. Items will arrive in a branded garment bag for shipping both ways. Source: Chapter 12: Rent the Runway: Entrepreneurs Expanding an Industry by Blending Tech with Fashion Information Systems: A Manager's Guide to Harnessing Technology, v. 4.0

41. Shared Economy Hyman and Fleiss’ idea emerged at the right moment. Millennials are leading a migration away from ownership to subscribing and sharing: Spotify invades our speakers, Netflix our TVs, Uber our curbs, Airbnb our entire homes. In an age where Uber, Airbnb, and Spotify change how we think about owning automobiles, homes, and music, Rent the Runway is going right after your closet. Rent the Runway wants to stream your wardrobe.

42. Challenges Source: Chapter 12: Rent the Runway: Entrepreneurs Expanding an Industry by Blending Tech with Fashion Information Systems: A Manager's Guide to Harnessing Technology, v. 4.0 This is a massive e-commerce company where 100 percent of the inventory is returned, needs to be inspected, cleaned, pressed, possibly mended, then packaged up for good-as-new send-out to the next precisely scheduled customer order. The firm “empowers women to feel confident and beautiful for the most memorable moments of their lives.” It is “fashion company with a technology soul.” Juliet de Baubigny, a partner at venture firm Kleiner Perkins, said: “We didn’t back [Rent the Runway] as a fashion start up. It’s the sharing economy meets the Facebook–Instagram generation.” 80% of customers post photo on Facebook or Instantgram 97% of new customers are from Word of Mouth (WOM).

43. Startup Metrics Average customer income is around $100,000. For these savvy, affluent consumers that value experiences ahead of ownership, Rent the Runway is the smartest, most convenient way to shop. High customer lifetime value (CLV, CLTV, or LTV) : Someone who has a good first experience at a prom rental will move on to college events, graduate to weddings and engagement parties, use the firm for holiday parties or society events, she may rent a bridal dress, and use the site for high-end maternity fashions when baby is on the way. CLV is often stated as the net present value (NPV) of future profits from the customer relationship. churn rate customer acquisition costs. Customer Acquisition Costs < CLV in NPV (future customer profits) Source: Chapter 12: Rent the Runway: Entrepreneurs Expanding an Industry by Blending Tech with Fashion Information Systems: A Manager's Guide to Harnessing Technology, v. 4.0

44. Subscription Model and Inventory Management Renting dresses by subscription could help with that problem by making demand more predictable, Fleiss says. Beta users of the subscription program have tended to reserve all of their dresses for the month or the quarter right away—which gives the startup time to think ahead. “The further out people are renting the dresses, the more we can plan inventory,” Fleiss says.

45. Data Analysis: What Data Will You Collect? “We’re very confident that we can get [the conversion rate] up higher; it’s entirely because of inventory being the constraining problem, as we see it,” Fleiss says. “We’re servicing those 2,000 customers with only 1,000 dresses. But the good news is that now, as we are purchasing for February, March, April, and the spring season, we have so much data about what’s renting, what sizes customers want, which designers fit best, and which things are wearing out fastest that we’re actually taking a lot less risk when we buy inventory. So in the long run, this conservative buy was really smart business, because we didn’t waste money on things we weren’t sure of.”

46. Business Model and Value Proposition The New York Times calls the firm “Netflix for Fashion.” 5 million plus members call it a fairy godmother that makes “Cinderella moments” happen. The firm has now moved far beyond the initial target of young consumers, delivering selection, convenience, value, and quality in a way that millions of women see as the best option for dressing to dazzle.

47. Rental and Subscription Model • But Rent the Runway members have to rent each dress separately at prices ranging from $50 to $200. • Starting Jan. 8, 2010, Rent the Runway is offering its own subscription-based pricing option: for $350, members can now rent as many dresses as they can wear in the course of a single month (with a limit of four dresses out at once). For $900, they’ll get unlimited rentals through January, February, and March. • Jennifer Fleiss, Rent the Runway’s co-founder and president, says customers were demanding a more economical way to rent lots of dresses in succession. “We’re seeing a lot of our really loyal customers renting a few times in one month, so they’re spending a lot of money,” Fleiss says. “We’re trying to find a way to enable that in a more cost-effective way.”

48. Subscription-based pricing option “This is our first bold step to really try to change user behavior,” says Fleiss. “Our belief is that you should rent anything that’s not a basic. For your basic black dress, you should absolutely buy that.  But for anything that’s seasonal or just once or twice, you should rent—the job interview, the date next week, the meet-the-parents dinner, the special night out. There is no occasion too small to have fun and pick out a special dress.”

49. Subscription-based Pricing Option

50. Netflix Model Rent the Runway Unlimited really is the fashion equivalent of the old Netflix DVD-by-mail service. It’s a flexible, subscription-based ownership model for accessories and clothing. “Closet in the Cloud“:  For $99 a month, women create a queue of requested items. Customers choose the items they want first and can keep them as long as they’d like. Send an item back and choose the next item you want. The firm started with handbags, leather jackets, and jewelry (less risky categories since there are no sizing issues), but has now also moved into everyday fashion (daytime dresses, skirts, tops, outerwear). Love an item you’ve been sent? You can also buy it from Rent the Runway.