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Building businesses around passionate communities of users

There is a great opinion piece by Lawrence Lenihan on Business of Fashion today arguing that we are killing many fashion startups by over-capitalising them relative to their market opportunity. Right-sizing funding is a topic that is dear to my heart, but the interesting point here is why over-funding is becoming a problem. Over funding is becoming a problem because the current generation of fashion companies are more niche focused than their predecessors. Here’s why:

The Internet completely changes the model of building a fashion company by enabling the creator of the brand to find customers first rather than finding a gatekeeper who controls the access to customers first. It removes the huge capital barriers to entry of building a physical store and the previous constraints around accessing a geographically diverse set of customers. It also provides a platform for community that enables a brand’s customers to participate in the building of the brand.

But, to stand out above the noise created by massive corporate brands, a new fashion brand needs to mean something more than the incumbents for a customer to switch. How can Nasty Gal succeed against H&M or Zara or Forever 21? By having a point of view! The brilliance of these new companies is that they recognised that people were craving for a point of view, something special and different and they gave it to them in a new form and in a way in which their customers participate almost as intimate friends rather than mere consumers…..

This sounds great except for one thing: by meaning something so much more to a given customer, they mean so much more to a far fewer number of customers (and might even alienate others who don’t share similar values, interests and aspirations). It has to be so: you mean more because you mean something more specific, something more special, something more intimate. Because they are so specific, by definition, the maximum market size for these companies must be smaller than the market sizes for traditional store-based concepts that must target more generally to survive.

This isn’t only true for fashion. There are also opportunities in other consumer industries to create intimate connections with customers by building community and having a point of view. Look at MakieLab in toys, Local Motors in cars, or DIY Drones in unmanned aerial vehicles. Success in this new world requires better products than of old and a passion or zeal that speaks to customers and that they can carry with them as part of their own identity. Authenticity and great communication skills have also become more important than they were before.

  • http://www.theequitykicker.com brisbourne

    :) Hope I’m not stealing your ideas.

    More seriously – do businesses like these have the same power-law type distribution of revenue per customer?
    I’d have thought they were more linear.

  • http://www.gamesbrief.com Nicholas Lovell

    Let’s try a thought experiment. Imagine that the KPI at a fashion house was not “how many frocks did I sell”, but “what is my average revenue per user”.

    I could imagine a strategy where High Street retailers are a sales outlet but also a customer acquisition outlet. The fashion house aims to build one-to-one relationships with the best customers, say 10% of them. Those are the ones that love the brand, not just an occasional frock. They will be receptive to email marketing, to offers, to buying something every month or something several times. Some will be *everything* in the new collection each time.

    I don’t know that it is a power-law, but I am sure that there is a way to increase revenue AND satisfy your biggest fans at the same time.

    But please, pick this argument to pieces. The more the better.

  • http://www.theequitykicker.com brisbourne

    They already work like that, albeit through retailers. Talk to a top fashion boutique (online and offline) and they will tell you that their top 10% or so of customers drive the vast bulk of revenues. Some of these newer community oriented startups don’t have enough products to make this work though, which points to a ability to extend the product range as an indicator of future success. Interesting.

  • http://www.gamesbrief.com Nicholas Lovell

    Hold. First you say they are linear businesses, then in the next comment you say they are Pareto business (more 90:10 than 80:20).

    So yes, they are Curve businesses :-)

  • http://www.theequitykicker.com brisbourne

    Yes. I was originally thinking of the one product companies I know in this space, but your comment reminded me of the fashion boutiques. So I think these can be pareto businesses if they have enough products.

  • NappyValleyNet

    Couldn’t agree more! I have a hyper-local mums community for South West London: http://www.nappyvalleynet.com. We’re self-funded and profitable and have struggled long and hard with whether we should seek finance. However we can’t reconcile the size of the business with what we’d have to achieve (even if we have eight NVNs across London) to make the process worthwhile. We have another business (in beta) which would definitely need funding but that is a totally different opportunity in terms of a) size and b) scale. It really is getting finance to “fit” as opposed to closing the big money deals.

  • http://www.theequitykicker.com brisbourne

    Good luck with the new business!

  • http://36creative.com/ 36creative.com

    This is why we stress the importance of good solid branding to all of our clients. If a company wants to build a community their branding needs to be strong and timeless.

  • http://www.theequitykicker.com brisbourne

    Great point