Hot areas in venture capital: customization

Elizabeth Knopf of Sorced recently started a vibrant discussion on Quora on the topic of ecommerce and VC investing trends; “why is ecommerce such a hot area in VC investing right now?”

Here are some excerpts that pertain to mass customization, personalization, and co-creation.

Current landscape and drivers:  Consumer psychology

Design/UX: This is under appreciated but is actually a crucial element in ecommerce. You have ‘transactional’ (ie less experiential shopping excursions through Amazon—where people typically shop due to price or utility). However, an interesting or pleasurable shopping experience has been rare to find on the web. The focus and emphasis on design has only recently taken shape. This is one reason why a lot of brands had not engaged in ecommerce as extensively as one would expect. They need to represent their brand well, and if the medium cannot communicate a brand’s philosophy and potentially compromise its integrity, a brand will most likely not utilize that avenue. This historically was one of the factors for brands staying away from actually having an online presence (this combined with concerns around seeming ubiquitous and thus less ‘exclusive or scarce’). If they get online, the whole world not just a few block radius will see them. Thus, online risks could substantially damage a brand, so the adoption has been relatively slow. . Beyond the brand, sites are making sites much prettier and aesthetically appealing as well as functional. New forms of buyer engagement is taking form . It is no longer browse and buy but rather consuming, creating, and sharing opinions, content and media that surrounds a shopping experience.

Elizabeth Knopf

New business models: Customization

Problem: Uniqueness, fit, personal taste
Ex: J. HIllburn, Zoora , Fitted Fashion, Solosso, Proper Cloth ( Founder – Seph Skerritt), Gemvara , Blank Label, Taylor Stitch

Overview:
Because the web adds a level of ubiquity to the presence of a product and brand, luxury brands need to find new ways to maintain their sense of rarity through customization. This is a bit more complex model. Historically you had Threadless or the white label Zazzle or Cafépress dominate this space.   New entrants such as high end brands like Prada is exploring this.  Luxury goods want to maintain exclusivity, scarcity, and uniqueness.

Opportunity:

  • Uniqueness- Thus, customizing items makes sense. You can create unique or ‘tailor made’ items for your customer. ‘Customized’ always has the value connotation because it is one of a kind.
  • Brand enhancement– This adds a new way to engage with a brand. You are creating a direct relationship with the brand because you have an impact on the product.
  • Traffic- Creating a new experience for a consumer will drive traffic to an otherwise low traffic site. If you can only get this offering on a company’s site, consumer have a reason to go.
  • Experience and Financials- Build-a-Bear is the best example of this. They have been able to create an interesting experience where they actually get their customers to do the work and labor involved in creating the product; kind of genius! They make a commoditized teddy bear more expensive with lower costs to them because they cut out the labor and allow you to have a personal teddy.

Challenges:

  • What will it look like- Sometimes when I go to Cold Stone creamery to make my ice cream, something that in theory would taste good turns out pretty disgusting. Thus, I wish I just chose from a menu because someone else took the risk and figured out the right recipe. Even though you can preview the item before it’s created, there’s always that risk.
  • Effort– I probably will not go and always buy customized X partially because I’m lazy and want to buy what is already packaged.
  • Paradox of Choice- Companies need to make sure the number of choices is just right, otherwise, consumers get overwhelmed.
  • Expensive: This is an expensive model to execute. Thus, to what degree is it custom and how to the costs play into it. There’s a trade off or the consumer to pay extra for the customization, but if it’s just selecting a certain color in a certain place, this value might not be there. However, if the product is completely unique, I might be more willing to pay–but that is more challenging for a company to produce.
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A business plan for product customization

Custom Week product variety

As demonstrated by the showcase of participants at the first annual Custom Week, new retailers that feature product customization are sprouting up in a broad range of product categories.   Most popular categories of configurable products include apparel, jewelry, handbags, gifts, and shoes.  But, there is no limit to the breadth of purchasable items that will be sold online via visual product configurators.   For example, this year’s Custom Week featured newcomers that offer everything from custom beef jerky to custom women’s bra’s.

The next wave of customization start-ups will find new ways to build strong consumer brands, innovate the online shopping experience and capture market share.  Each entrepreneur with a dream to sell custom products online will have to address the pillars of any business plan.

The problem: 

What problem does customization address?  As discussed in a previous post, customization often addresses the core problem of fit vs. style.  Or both.   Fundamentally, shoppers don’t get precisely what they want for the price they want it.    Most ecommerce experiences feel like stale searches that lack brand interaction, social validation, and fun.  Furthermore, when presented with too much choice, customers freeze up and get frustrated.

The solution: 

What is it about your strategy that addresses these pain points? Product configurators create a more interactive shopping experience by offering shoppers the opportunity to tap into their own creativity when engaging with your brand.  Personalized, fast, gratifying shopping applications reduce the pain points associated with the paradox of choice.  Here are 5 customization use cases to consider:  Get the right fit, thoughtful gifting, self-expression, pride of authorship, and personalization.

Additionally guided product configurators protect customers from making mistakes, increase the average cart size, self-educate the shopper, and help cross-sell related products.

Keep in mind that offering customization in itself is not a sufficient business strategy.  Many online retailers sites suffer from common weaknesses of a customization strategy.   Customization needs to be part of a larger integrated marketing strategy that intertwines seamless discovery, social media marketing, and brand building.  Customization has become a critical component in a complete marketing mix.

Marketing mix

Market size:

What is the addressable market?  Here are few recent data points that address the viability of customization.

  • CaféPress IPO:  CafePress is filing for an $80M IPO.  “In 2010, Cafepress had 2 million customers, 2.7 million orders, with the average order size around $47.”
  • NikeID sold $100M of custom shoes in 2010 and has seen double digit growth year over year.
  • Spreadshirt recently celebrated its 1 millionth order in the US.   “Over 15,000 customized products are produced every week in Spreadshirt’s Greensburg, Pennsylvania production facility—with the U.S. representing the company’s fastest-growing market. Order fulfillment in the U.S. is up 80% over last year—an indicator that the co-creation and customization trend is gaining in popularity amongst consumers, according to Forrester research.
  • Also from Forrester: “interest in customizable products is mounting. More than 35% of U.S. online consumers are already interested in customizing product features or in purchasing build-to-order products that use their specifications.”

More business plan basics to be discussed in future posts:  Customers, revenue model, marketing plan, supply chain, competition and team.

Customization defines next generation ecommerce

Hot new online retailers that feature product customization are currently in the spotlight.  Recently, Indochino, FashionPlaytes and Gemvara all recently announced investment rounds to fuel their efforts to disrupt shopping categories like men’s suits, apparel for tweens, and jewelry.   What do these vendors have in common?  Customization.

How big is the emerging user-generated product market?   “We were inspired by (Gemvara CEO) Matt Lauzon’s far-reaching vision of future e-commerce, and his team’s deliberate execution to date,” said Mark Evans, Partner at Balderton Capital. “We believe that Gemvara can become the world’s first billion-dollar user-generated product company.”

Also part of the next-generation of online retailers are Bonobos with an $18.5 million dollar round, and BetaBrand with a $1.3 million dollar round.   These new brands are focusing on changing the online shopping landscape by reinventing how consumers interact with their brand online.

From the TechCrunch write-up on BetaBrand: “So what’s Chris Lindland’s take on a VC firm investing in what is essentially a clothing company?  ‘E-Commerce is such an exploding area, and there aren’t really companies failing at it. There will be a ton of online clothing brands that pop up over the next year. The next Quicksilver or the next Patagonia is going to start on the Internet.’”

So why is there so much opportunity in the new wave of online shopping?

Ecommerce is mature

First-generation ecommerce has matured to the point where the majority of Internet users are comfortable submitting their credit card to online vendors.  Additionally, Paypal boosts trust by adding another layer of confidence.

The past 10 years have seen ecommerce giants like Amazon, eBay, Zappos, and Walmart.com establish themselves as trusted ecommerce leaders.  According to Comscore, Ecommerce is growing at about 12% and generates over $100B in sales in the US annually.

Ecommerce 1.0’s biggest challenge was trust-building.  Consumers needed to believe that they were getting what they saw on their screen, to know that their payment was secure, and that their shipment would arrive on time.   Next-generation ecommerce vendors are building on that trust and reaching new customers.   Matt Lauzon of Gemvara tweeted that 45% of Gemvara’s customers “trusted us with their first online jewelry purchase they ever made.”

Demand for digital customization

We can all learn from the successes of these ecommerce 1.0 juggernauts: Customer service, free shipping both ways, and a seamless discovery are paramount to the shopping experience.   Now that the ecommerce framework is mature, users are demanding interactive, social, shopping experiences that tap into their creativity.

Due to increasing adoption of customizable digital experiences like Pandora, Netflix, and Facebook, users expect equally personalized, visual experiences when they shop online.   Forrester cited customer demand as a primary catalyst in their market report on the topic; “Mass Customization is (Finally) the future of products.”

Customers expect a “curated” presentation of products based on their product selections on the site.   Retailers need to integrate targeted suggestions as users navigate their product line.  The goal is to present personalized, curated product suggestions by guiding the user to a sales conversion.

Evolving social marketing strategies

According to a post by Internet Retailing “(Customization) is as much about a way of social marketing as it is about what is being sold.”  Brands often implement a visual product configurator to encourage design contests, brand engagement, and social sharing of creative product designs.    The configurator is not just a sales tool, but also an engagement tool that is critical component in a broader community engagement strategy.

To this end, customization has grown beyond just a niche market focused on delivering highly specialized products to a small group of customers.    Customization fuels mainstream social commerce and defines next-generation shopping experiences.

Product configurator vs. online design tool

Customization thought-leader Carmen Magar has been posting a series of industry definitions on her mass customization blog.   Her most recent post focuses on defining “create your own.”    Along the same lines, this post will shed some light on the difference between product conigurators and online design tools.

Product configurator

A product configurator, as Carmen points out, walks a user through a flow of product selections.  Typically, the customer chooses product attributes like size, color, and functionality.   The configurator serves to empower the user while protecting him from making incompatible selections.  The configurator ensures that the final solution is a supported configuration (ie can be built).  A price tally updates as selections are made, and a list of selections are passed to the shopping cart.

Traditional configurator

Originally, product configurators were built specifically for technical sales people that needed to build an accurate sales-quote for industrial or technical products like tractors and computer servers.   The configurator runs a rules engine (ie compatibility engine) that applies inclusion and exclusion rules as the user makes selections.

The configurator supports a mode of customization that Joe Pine refers to as “modular customization.”  Product attributes are treated as components, and these components are compiled like Lego™ building blocks.

Today, customers demand highly visual product configurators.   Consumers love rich and accurate visualization.  Displaying a crisp representation of the custom product increases consumer confidence and increases the probability of a sales conversion.  Be wary, however, of over designing visualization.  Consumers have no tolerance for slow loading, bloated websites.

In the case of the product configurator, the user is actually making functional and aesthetic product selections.  A configurator is an ideal tool for walking customers through a product that has a lot of flexibility, ie many configurable options.  Some customizers support trillions of combinations!

Visual product configurator

Online design tools

Online design tools typically offer free-hand design.  Much like desktop publishing applications like Photoshop, online design tools include text overlay and image upload.  These online tools are commonly offered by online print-shop vendors like Zazzle, CafePress, or CustomInk.   The user selects a base product like a t-shirt or a mug, then chooses from a library of stock artwork or draws his own design.  The user can also upload images, then crop, rotate, or resize them.

Here’s an example of a soda can koozie that I designed on CustomInk.    I chose the product type, the base color, the artwork, the artwork color and size, and then stylized the text.    Online design tools support product personalization, ie aesthetic customization, which differs from modular customization in that an infinite number of one-off designs are supported.

Personalization tools

Of course, some online product co-creation experiences include both a product configurator and personalization tools.   The two tools can be neatly integrated to provide a full customization experience.

In both cases, the user is provided with a design tool that allows them to tap into their own creativity, both by making selections and by free-hand drawing their own masterpiece.

How to buy custom clothes online

I recently bought some custom clothing from Indicustom.   Indi offers both custom dress shirts and custom jeans.  Here are some notes on the purchasing experience, from a customer perspective.

Fun

Much more interesting than basic online shopping, visually customizing clothes is fun.  It’s easy to experiment with different style and color combinations.  That said, it’s critical to have a fast and visual website that can keep up with the speed of the curious shopper.   The visual configuration process replicates the offline shopping experience much better than searching through an online store catalog.

Measuring yourself

The biggest barrier to buying custom fit clothes online is the task of measuring yourself.  First, you need a tailor’s tape measure, then you need to be sure you are measuring correctly.   Then you need to correctly enter all the measurements into web forms.  The stakes are high.  If you are off by an inch or two, the garment won’t fit and will need to be returned.   The lack of ability to try on the garment causes more anxiety as you complete more and more steps in the shopping flow.

Too many choices

Customization is fun but after a few steps it starts to feel like a chore.  More complex questions like “what size hem do you want?” could be avoided all together.  For many advanced questions, defaults to “the standard” are good enough.   For the majority of shoppers, asking too many detailed questions makes the fun start to feel like work.

Customer service

Indicustom

When doubts do arise, it’s important to have an easy way to contact the vendor directly.     Chatting with customer service can lift your confidence level enough to want to commit to a purchase.    This is also true throughout out the purchase cycle; pre-sales and post-sales.   If the first purchasing experience goes smoothly, you could win a customer for life.

Style decisions

Another challenge in shopping for clothes is making style decisions.   As a neo-fashionable male, I could not have completed the purchase without the help of friends and family who are more fashionable.  One tip I heard from my personal fashion support team was “dark jeans look too girly for men’s jeans.”   And, for women’s jeans, “baggy is fine, skinny is fine, but in between is not OK.”   I would have never known these things if I didn’t have my own fashionista team by my side at the computer.  The product configurator itself needs to include style tips and guidance, so the customizing process feels like a dialogue with a personal shopper.   Don’t let the shopper feel like they are designing alone.

Order….and wait

Custom jeans from Indicustom take 4 weeks to arrive.   This lead-time makes sense considering each pair of jeans is built to order in Asia, but 4 weeks feel like an eternity compared to picking up a pair of jeans at the local Gap.

Easy to return

One of the two garments I ordered didn’t fit, mostly due to a measuring interpretation on my end.   A “Zappo’s-like” return policy is a nice touch, but I can’t help thinking that the self-measuring and ordering process should be more foolproof so that neither the customer nor the vendor need to deal with a return.   Protect the customer from himself.

Overall, I’m very happy with my Indicustom clothes.  They are, after all, exactly what I wanted.  And, I do feel extra satisfaction from the “I designed it myself” effect.

More signs that mass customization is going mainstream

I recently posted an article on VentureBeat about how mass customization is heating up.  Here are a few more examples of personalization and customization is rearing its head out in the mass market.

Walmart offers over 1,000 customizable items Enter your name in a text field to personalize an item like a Christmas stocking or a doormat.   As you would expect, Walmart’s prices are very competitive.  There is no extra charge for personalization.

Speaking of free personalization, Apple offers free iPad / iPhone/ iPod engraving from the Apple Store.   Here is a great discussion on why Apple offers free engraving.   Is it just a nice touch or is it a strategic move?   The Apple iPhone iOS ecosystem is already the most customizable platform in the world.  Each of the hundreds of millions of iOS devices shipped is uniquely customized to the users preferences with apps, pictures, phone numbers, messages, etc.

Puma iPad design tool

Puma announces an in-store iPad based shoe-builder. “Puma is passionate about tapping into the creative energy of our consumers and we want our products to stimulate and enhance that urge to create,” said Adam Petrick, senior head-global brand management at Puma. “The new Creative Factory for iPad is a great in-store platform for facilitating co-creation between Puma and people who love our brand.”  This is a great example of retail and online co-creation experiences merging with the emergence of interactive touch-screen devices like the iPad.  The iPad replaces the conventional kiosk and becomes an engaging in-store design tool.

Custom NFL jersey

The NFL offers a custom shop so users can customize a jersey’s style, fit, and color.  The shopper can then personalize the jersey by entering a jersey number and their name name.

Is there anything more mainstream than Walmart, Apple products, Puma shoes and the NFL?

Customization: The New Fashion Trend

NikeiD custom sneakers

Gone are the days when consumers relied on retailers for fashion instruction, choosing from pre-prescribed design and size ranges.  In today’s world of instant information and online personalization, the consumer has a stronger opinion of what they want than ever before.  The Internet has empowered us to easily compare, create and customize.  Nike’s NIKEiD customizable sneaker is just the beginning.

Previously, the world of fashion was ruled by monarchy.   Looks were dictated by King Designer, and fabric and fits were standardized by cost cutting codes.  However, from shirts to shoes, one size rarely fits all.  As new technologies allow customization to become mainstream, fashion becomes democratized.

The Wall Street Journal recently coined a phrase “Me-tailers” to depict the new phenomena of “customers hyper personalizing their shopping experiences.”   From head to toe, new e-commerce companies are giving consumers a role in the design process.  In Wednesday ’s Personal Journal, Amy Maniatis, vice president of marketing at CafePress.com speaks to the new trend. “We are so used to customizing the world around us … to being able on Facebook to customize our wall and to create who we are, and technology has powered that.”  Customization has quickly spread from digital media to soft goods; from Facebook to fashion.

Solosso is an example of an innovative online garment vendor.  They are capitalizing on the “me-tailer” customization trend in men’s dress shirts, allowing customers to select the design, fabric, and collar sizing.  The customer’s design is then sent in to an experienced tailor for hand production, ensuring the best quality possible.

Severin Jan Ruegger, Solosso’s CEO, explains the power of personalization a recent Fast Company article.  “Co-creation is the future of retail. It is inherently interactive and collaborative, and empowers consumers beyond anything seen before.”

Australian based Shoes of Prey offers co-creation options for the “well-heeled.”  Using Shoes of Prey’s customization platform, a woman first chooses her desired shoe type from stilettos to ballet flats.  She can then select all the features of the shoe’s design, including materials, embellishments and heel height.  Four and a half inches of black python? Who says you cannot hand pick your ‘sole’ mate?

As more retailers offer customization platforms, fashion will become increasingly tailored to each individual’s unique size and sense of style. Homogenization is so 2008.