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EPISODE 48

Increasing Customer Happiness Through the Manufacturer’s Input

With Jeremy Cai, the CEO of Italic

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What comes to mind when you think about the relationship with your manufacturers? Chances are you have the same picture in your head as so many other brands. You see a series of events that starts with opening a purchase order, and goes down the line of tasks including paying for your items, getting them shipped and then starting the process all over again. It’s a transactional relationship that has seen very little disruption through the years. 

But the times are changing, and a company called Italic is leading the charge when it comes to developing a new framework around partnering with manufacturers. Italic is a membership-based brand that gives customers access to products produced by the same manufacturers of the top brands in the world. 

Jeremy Cai is the CEO of Italic, and he likes to say that Italic is a marketplace-inspired supply chain. On this episode of Up Next in Commerce, he explains exactly what that means. Jeremy describes new and different kinds of partnerships with manufacturers that, for the first time, makes them true partners in business. Plus, he explains why that partnership is leading to a better end product and happier customers. He also dives into new ways you can leverage manufacturers that many aren’t aware of, and details the metrics and strategies that subscription companies need to be focused on to rise above the competition.

Main Takeaways:

  • Getting in on the Action – Traditionally, manufacturers have not had to put much at stake financially when working with brands. But, with a company like Italic, the manufacturers take on a financial risk. In doing so, they also become more involved partners which leads to a better end product.
  • It’s Deeper Than You Think – There is now a partnership opportunity between manufacturers and brands when it comes to designs and in-house pattern design capabilities t In the past, much of the design and pattern work was done solely by brands. But today, many manufacturers have high-quality design and R&D talent inhouse and create showrooms of products that brands can tap into.
  • Meaty Membership Metrics – For membership-based companies, there needs to be less value placed on the traditional metrics that have so often defined ecommerce companies. Tune in to hear which ones are crucial to pay attention to.

For an in-depth look at this episode, check out the full transcript below. Quotes have been edited for clarity and length.

Key Quotes:

“We have an interesting relationship with our manufacturers in which it’s not like a normal brand in which they’re a vendor and we’re a client, where we just place a PO and then we’ll mark up their products and then that’s how we profit…. Instead we actually have a financial relationship with our manufacturers in which they actually are taking on inventory risk and we’re taking on the marketing risk of this inventory in which their incentive is to take inventory risk for a higher yield or higher rate of return on the inventory that they’re producing and owning. Then our risk, of course, is making sure that we can sell that to our members at a price point that is still radically lower than the competition, but at a place where they’d be happy with the profits.”

“You really have to be aware of how manufacturing works, how to communicate with them, how to work with them, also how to partner with them. That’s not something that like the vast majority of American brands will ever understand and for good reason. They really have no reason to because the entire business model of commerce is built on markups, as opposed to us where you can basically just treat them as a vendor. If it’s not working out, if you need better pricing, you can always counter source and so on and so forth. The relationship there was always rather fragile, whereas for us it’s very strong from day one because we have to be in which we become basically financial partners immediately.”

“The incentive for manufacturers is to earn a higher than the normal profit margin on Italic sales because they’re taking on the inventory risk. We’re able to pay them out substantially more than they would ordinarily make. So I think they’re very in tune with our orders, sometimes even more than we are in terms of performance.”

“Historically, a lot of the design, development, pattern making, and so on and so forth were always done on the brand side. Nowadays, I really call it more of a partnership in which the design and R&D talent inhouse at a manufacturer is so great that sometimes, brand buyers and merchandisers or product developers or designers will walk into a showroom that a manufacturer has made for a season and they’ll pick like four or five styles from the manufacturer’s design books or pattern books and then say, ‘Okay, let’s make some small tweaks.’ But pretty much, it’s the manufacturer’s design that they’re iterating on….It saves a lot of time if you think about it because developing patterns from scratch is really time intensive. You have to ship samples back and forth all the time, whereas if a manufacturer already had a lot of these samples ready to go for you and you just had to tweak, let’s say, the material or stitching, it cuts down development time significantly.”

“The goal is for our members to be saving money on their first purchase. This oftentimes comes through the lens of product marketing. If we would do a great job of really letting the products tell their own story of saying how great quality they are…I think that actually helps sell the membership for us because we don’t really have to say, ‘Hey, with this membership, you’re saving all this money.’ instead it’s like, ‘Hey, this product is obviously really great and it’s really high quality.’ Then once you look at the price point, the perceived value is like, “Oh, I’m going to save pretty much the entirety of my membership fee in one or two purchases.’”

“We really were aware of the fact that if we capped our financial upside, the immediate short term would be that we’re limited to [making] $100 for the year, but the amount of utility and value that we could provide to a member would be so great that they hopefully stay for years to come, in which case our LTV would grow to a point where we would actually outperform our transactional type of behavior.”

Mentions:

Bio:

Jeremy Cai is the CEO of Italic, an online retailer that sells luxury goods without the brand names or prices. He was named to the Forbes 30 Under 30 – Retail & Ecommerce 2020 list and has previously founded the companies Fountain and Not Pot.

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Transcript:

Stephanie:

Welcome to another episode of Up Next in Commerce. This is your host, Stephanie Postles, cofounder of mission.org. Today, we have Jeremy Cai on the show, the CEO of Italic. Jeremy, welcome.

Jeremy:

Thanks so much for having me.

Stephanie:

I’m excited to have you on the show. I was mentioning earlier, but I’ve read quite a bit about you guys. I see you in a lot of the eCommerce newsletters that I follow, so it seems like you’re growing in popularity at least when it comes to people writing about you right now.

Jeremy:

I don’t know if that’s a good success metric, but we’re doing I think a good job on media coverage right now.

Stephanie:

There you go. I think it’s a pretty good one. Tell me a bit about Italic for anyone who hasn’t heard about it, doesn’t know what it is. I would love you to give a brief overview of what it is.

Jeremy:

Sure, so Italic is an annual membership that costs $100 a year and our members get access to hundreds of products that we design and develop inhouse, ranging from cookware to bedding to towels to apparel and accessory, footwear and many more coming soon, but the difference is we sell them at prices where Italic it doesn’t actually make a profit. This actually results in pricing that is dramatically lower than both direct-to-consumer companies as well as traditional incumbents, oftentimes in the 40% to 50% to sometimes 70% to 80% range. We’ve been around for about two and a half years, but we’ve only launched the membership about a month and a half ago, and so far, it’s been a pretty good start.

Stephanie:

Very cool. You have membership and you’re not making money on the actual products. Tell me more about what would be an example of something you’re selling and how are you encouraging people to sign up for a membership to get access to everything that you just mentioned.

Jeremy:

Sure. One example of the product that we sell, and this applies to all their products, is let’s just take our slumber cotton sheet set, for example. The sheet set sells anywhere from I think … Actually, I might have to actually look at this for cross reference, but I think it’s like anywhere from $80 to $120. Those are prices where we’re not actually making money. Those prices do include things like freight and warehousing and fulfillment fees, but generally it still comes out substantially lower than the prices that our competitors would set. Then in terms of how we’re actually attracting new members, really I’d say it’s from two general ways.

Jeremy:

One is I think the goal is for our members to be saving money on their first purchase. This oftentimes comes through the lens of product marketing. If we would do a great job of really letting the products tell their own story of saying how great quality they are, the same manufacturers of so and so brands are, which certifications these manufacturers have, what specific details of the products really sell the product itself, I think that actually helps sell the membership for us because we don’t really have to say like, “Hey, with this membership, you’re saving all this money.” instead it’s like, “Hey, this product is obviously really great and it’s really high quality.”

Jeremy:

Then once you look at the price point, the perceived value is like, “Oh, I’m going to save pretty much the entirety of my membership fee in one or two purchases,” which we see in the vast majority of cases. Typically, 93% of our new members will break even on their $100 fee in one order, but on the flipside on the membership, this is different than the standard transactional model in which you have to be a paying member in order to purchase anything. I think we do have do a fair amount of education in terms of showing to our members or showing to our audience who might become members, “Hey, this product, you can only buy it if it’s a membership. This is how the platform works. This is why it’s different than a brand. I think we have to put out a lot of content in terms of actually sharing like, this is how we were able to put together this offering that doesn’t really exist elsewhere.”

Jeremy:

We do a little bit of both, but I would say right now we lean a little bit heavier towards product marketing since we have a lot of new exciting launches coming up.

Stephanie:

That’s awesome. Talk to me through a bit about what was your thinking behind creating a membership program for because I think I saw you started out with it and then maybe you stopped doing it and they started again and feel free to correct me if that’s not right, but tell me about what was that journey like.

Jeremy:

It was not easy. I would say the way I like to view it is the first two and a half years of our business, we’ve really been focused on the supply side of operations, building out that product assortment, and exactly like you said, we did launch in 2018 with a membership product. Within basically a month or two, we decided very, very early on like, “Hey, we had three manufacturers in three categories at the time, handbags, scarves and eyewear. As you can imagine, those are not necessarily high frequency purchases to substantiate a membership value proposition.

Jeremy:

We actually never actually charged anyone for the membership. It was always a test to see how the response would be. Overwhelmingly, we saw that the product response was great, the quality was great, but I think the offering was too limited at the time. Instead for the following two years, we ran a transactional model in which we made money through marking up our products, albeit not as much as a brand would. Our products might be marked up two to two and a half times, whereas our competitors will mark them up five, 10, 15 times sometimes. That’s how we made our money.

Jeremy:

Really the incentive was, “How do we build a product assortment that’s large enough, so I guess wide enough and deep enough to attract the member to actually convert?” Around, I would say, Q4 of 2019, to be totally honest, I think we saw two things happen. One was the structural, I guess, implosion of the venture direct-to-consumer model in which a lot of brands, I think, who had been raising money and then going out with this one playbook that hadn’t been set maybe back in 2013 to 2017, I think suddenly realized, like, “Hey, we are not technology companies. We are a brand and we make money through transactional volume.” Basically, I’m just trying to say we saw the writing on the wall if we were to continue that model.

Jeremy:

Then in Q1, we also took a hard look in terms of our user behavior. We saw frequencies of purchases, our lifetime values get to a place, our product reviews, our NPS scores all get to a place where we felt confident in our product assortment to date. When we first started, we might have had maybe 30 or so skews. Now, we have over 1,000 skews. It finally got to a point where the product assortment felt mature enough to launch a membership product. We tested that, and then basically right when we started testing it, that’s also when COVID hit.

Jeremy:

We figured there’s either two options. One was we just pull that and just focus on building the transactional model again and getting it into a sustainable place which is still the goal, right? We don’t want to build an unsustainable growth model or alternatively stress test the model in the peak of, I think, consumer uncertainty in which we would see like, “Hey, does this value proposition of saving money resonate in the time when it would matter the most. Thankfully, it did and I think from April to May, June and July, we monitored our cohorts and user behavior really closely and wanted to make sure that the membership was something that we had conviction in.

Jeremy:

Eventually, we got to a point where we realized like, “Hey, this is …” I guess the way I like to put it is our customers always liked us, but our members absolutely loved us. We decided to go all in and then finally released the public version of the product in July.

Stephanie:

That’s great. That’s good seeing quick pivots and seeing like, “What is the market telling us? Where are things headed?” and trying out different models. How are you going about building out maybe a financial model because I’m thinking if you have only a membership subscription-type model, there’s probably only a limited market? You can’t scale indefinitely. There’s only a certain people who will be on that versus making profits off of each product. I’m sure those are two very different models. How to do think about it financially when trying the two different ones out?

Jeremy:

That’s a very valid point and I think we knew going into it that there is a lot of subscriptions out there and a lot of subscription fatigue and at least the states in the US in which everyone has a Prime membership or a Spotify subscription or Netflix and to add one more to that is always asking a lot. I think we knew going into it like, “Hey, this is all or nothing in which you can’t launch a half-baked type of membership product.” I think to the financial level, I think two things are worth noting before we decided to do this. One was the fact that we are capping our upside to $100 very literally for pretty much the extent of the year and the incentive in that case is, one, can we launch products and provide a service that our members love so much that they’ll stay for years to come in which our LTV or lifetime value in that case would become quite substantial and hopefully our churn would be low and retention would be high and so on and so forth?

Jeremy:

I guess that’s one area is we really were aware of the fact that if we cap our financial upside that the immediate short term would be that we’re limited to $100 for the year, but the amount of utility and value that we could provide to a member would be so great that they hopefully stay for years to come in which our LTV would grow to a point where we would actually outperform our transactional type of behavior. Then the second point, exactly like you said, memberships aren’t for everyone. We’re very well aware of that, but I think something that has been exciting for us to see is if we’re able to build this type of product, I think it is genuinely massively different than anything close to us.

Jeremy:

Whereas most of these direct-to-consumer brands, they’re basically providing products and a story to a customer which is an incredibly, incredibly competitive market. We have a product where it’s like, “Hey, for $100, you get access to all the products we sell at a price where we don’t make money. I think that’s a genuinely differentiated product in which we know it’s not for everyone, but we think value-driven commerce, it’s not sexy per se, but it is something that is very attractive to a very large segment of the American consumer base. I think we were willing to take that bet.

Jeremy:

Of course, we wanted to monitor really closely so that we weren’t losing money on transactions at least and at least that we were breakeven and we were able to accomplish that within the months of the pilot, so we felt confident in rolling it out more broadly, but I think to answer that more directly, if we didn’t see user traction, if we didn’t see members using the platform or membership or if we saw our NPS or product reviews drop or if we saw an increase complaint rate, increase return rate, etcetera, then I think we would have actually probably returned back to the transactional model, but it was something that we felt confident enough in just off of a couple months of data that we’ve decided to go all in.

Stephanie:

That’s awesome. I think that’s so great, because it really shows a longer term vision and commitment to be around where I think actually a lot of B2C companies right now are missing that. I don’t know if it’s because of the VC stage where it was like grow really quickly, but it seems like a lot of people are more ready to just quickly make as much money as possible, maybe sell the company off, see what happens afterwards, but I really like the idea of actually telling your customers, “Hey, we’re only going to make $100 profit for the year off you that essentially cover some of our costs.” I could see that really helping a customer want to also support you guys along with just wanting it because maybe it’s a very good service and some platform they use.

Jeremy:

Thanks. That was pretty much the bat. The reality of the business right now is if you’re a direct-to-consumer brand and you’re starting out nowadays, you might raise one round of financing, let’s say anywhere from $500,000 all the way to like $3.5 million or something of the sort if you want to pursue that route. That’s pretty much all you’re going to be able to raise or at least assume that’s the last capital you’re going to raise, and then subsequently, you’re going to try to sell. Nowadays, what I’ve seen whether it’s a PE firm or a conglomerate or a larger direct-to-consumer brand that might be interested in acquiring one of these assets, it’s now valued off of EBITDA, as opposed to revenues or run rates which is what we saw in between 2014, let’s say in 2019.

Jeremy:

I think the reality is nowadays if you’re trying to build a venture scale business in this model, it’s really, really tough. I think the actual advantage of doing so is doing so sustainably with growing off the business off of cash flow as opposed to equity raises and going that route. Then, I think for the companies that have already raised that are in this tricky spot where we were for sure, we had to look ourselves in the mirror and just say like, “Hey, what is something that would be significantly differentiated in the market that has technology scale outcomes that would be potentially accessible if we were to do everything perfectly right.

Jeremy:

I think that’s the only reality where we can actually like continue as a venture scale business. I think that’s what we had to really just operate with the mentality of. I think in terms of like the customer empathy too, we always knew that our prices were good, that we always came maybe 15% to 20% lower than the next direct-to-consumer brand, but truth be told, if you were to compare our products which were objectively great products next to a brand’s products that built all of their community messaging, advertising, copy, etcetera off of that single category, 15% to 20% off might not be enough to sway one of their customers to decide to purchase the value option, whereas nowadays to go much, much lower into the 60% to 70% range, that’s a lot more powerful sway.

Jeremy:

I think for us we knew that it was a risky bet, but I think the customer would ultimately like it a lot more and so would the investors and I guess, business community at large. I know the brands don’t like us, but that’s another story.

Stephanie:

Well, that’s actually a good segue. I wanted to hear some of the behind the scenes of partnering with these manufacturers and thinking about the psychology behind, “This is also bought,” or let’s see, “It’s manufactured at a factory that also produces Prada.” I saw that on your website mentioning like, “It also manufacturers this, this and this,” and I was curious to figure out like, “What was the process to partner with these manufacturers and then also be allowed to say, ‘These brands are also built or manufactured at this factory as well’?” It seems like that’d be a tricky area to play in.

Jeremy:

I can’t deny that. I think we have a unique value proposition in that case. That’s really what drove I think, a lot of our early interest in the brand over the first two years. In full transparency early on, I was personally quite nervous about it since it is a pretty radical statement, especially since like we position ourselves not so much as an individual brand, so much as, say, a platform or a marketplace or a retailer. I think in the early days we were very careful. All these things, it’s not to say that we’ve loosened up on this. We’re still very, very careful about auditing all of our partners, making sure that we’re working with the best of the best in each category, regardless of where they are in the world.

Jeremy:

Oftentimes, that comes along with saying, “Hey, this product is made in the same manufacturer as X, Y and Z brands.” That’s part of the selling points of the product. I think in terms of the tricky part was obviously on the manufacturer side. We have an interesting relationship with our manufacturers in which it’s not like a normal brand in which they’re a vendor and we’re a client, where we just place a PO and then we’ll mark up their products and then that’s how we profit. The best we can do in that case is like get letters of credit or Net30, Net90, etcetera.

Jeremy:

Instead we actually have a financial relationship with our manufacturers in which they actually are taking on inventory risk and we’re taking on the marketing risk of this inventory in which their incentive is to take inventory risk for a higher yield or higher rate of return on the inventory that they’re producing and owning. Then our risk, of course, is making sure that we can sell that to our members at a price point that is still radically lower than the competition, but at a place where they’d be happy with the profits. I think that was actually the tricky part because manufacturing, and this is actually my personal like family background is a really hard business and margins are already razor thin.

Jeremy:

On a final sale, a DTC brand might take like 80% of the margin and cost might be like 20% and the manufacturer might actually take like 5% of that cost. That’s honestly how it works. It doesn’t matter if you’re like a legacy brand or a direct-to-consumer brand. Manufacturers treat them all the same because it is the same for them. I think on the flip side for the manufacturer, they are not oriented to take capital risk. They have predictable revenue. If you place a PO, we expect payment certain date, whereas on Italic, there is no legitimate end date for a certain PO to be paid.

Jeremy:

It’s a little bit nuanced and that was actually the hardest part I would say of convincing these manufacturers to join. It really wasn’t the brand piece. The brand piece we’re always very careful of … We always do very careful audits to make sure that they’re factual claims. We always do audits with our general counsel as well to make sure that we’re making claims that are factual. On the trademark side and then on the copyright side, we have a development system when we’re merchandising that there’s at least a number of differentiating points on the product, but we’ve actually never really run into major issues on this.

Jeremy:

Perhaps that’s because we’re a smaller brand right now. As we grow, the issues might pile up, but at least for now, it hasn’t really been, that the legal side hasn’t been a big issue. I would say it’s actually more so convincing the manufacturers to take on this new type of model, but I think now that we’ve been around, we have over 50 manufacturers we work with. I think we’ve had a really good relationship with all them thus far. Yeah, I think other brands always come into question, but it’s never actually been like a point of contention.

Stephanie:

I could see that being really beneficial for you having the background in manufacturing for those manufacturers to also feel like, “Hey, this guy gets me he understands. He knows that we don’t have big margins.” I want to talk a little bit more about that piece. I could see a lot of the manufacturers really liking that you have a background in manufacturing because you understand that tight margins and you’re not trying to maybe push them too far. I was wondering, one, had they ever done this model before where they’re taking on inventory risk? Then two, were any of them scared to work with you because they didn’t want to make the brands that they work with upset?

Jeremy:

I can answer the second one first, which I think it’s actually pretty straightforward. That has never been a reason why a manufacturer wouldn’t work with us. I thought it would be, I guess in actual practice, I think it hasn’t been. The reality is most of these manufacturers have a number of clients and I think they will readily offer new clients the current client list and say like, “Hey, this is who we work with. You should trust us,” as part of the vetting process. What we’re doing is bringing that information that all the brands already know and offering that to a customer as well, so one more layer of information that a normal brand would never offer.

Jeremy:

The bigger issue with the manufacturer is actually more so just capital. It’s like, “Hey, you got to fund hundreds of thousands of dollars for this first run and you’re not going to see a payback until we start selling it, and depending on when we decide to launch it or decide to really invest in growing that category or product offering, the return might not be immediate.” I think that was actually the biggest problem. Every so often what we’ll hear that’d come up is like, “Hey, we prefer that not to happen,” but with regards to the brand names being mentioned, it’s never been a reason as to why a manufacturer wouldn’t work with us. It’s always been capital related.

Jeremy:

Then I think to the point of the model itself, I think people have tried different approaches to this over the years. In the States, at least, there is really no one doing anything like us right now because it is an extremely … I would say like you really have to be aware of how manufacturing works, how to communicate with them, how to work with them, also how to partner with them. That’s not something that like the vast majority of American brands will ever understand and for good reason. They really have no reason to because the entire business model of commerce is built on markups, as opposed to us where you can basically just treat them as a vendor. If it’s not working out, if you need better pricing, you can always counter source and so on and so forth.

Jeremy:

The relationship there was always rather fragile, whereas for us it’s very strong from day one because we have to be in which we become basically financial partners immediately. I think they haven’t necessarily … We work with manufacturers in Asia predominantly, in Europe, in the US and for the majority of them, these are not small mom and pop merchants or artisanal shops. They are pretty professional large scale production houses for very large runs. We work with like five different public listed manufacturers. I think for them, this model is, I like to call it like a private label as a service in which they can experiment very rapidly if it works.

Jeremy:

We do all the design and development in house, so we take care of pretty much all the heavy lifting on the stuff that they don’t have, but if it works, great. If it doesn’t, the downside is basically the capital that they put into it. We haven’t had that happen yet. I think it’s a new … We like to think of it as like a marketplace inspired supply chain which none of these manufacturers have encountered before, but it is something that I think has promise.

Stephanie:

It’s so interesting thinking about everything that’s going on behind the scenes and I honestly have not even gone deep into the world of manufacturing, so I have so many questions, but one that comes to mind which is probably maybe a more basic one, but how did you even go about finding out who manufactured what products? If I owned Prada, which I do not, I definitely don’t, but if I did, and I was like, “Hey, who makes this? This is really nice,” I want to find out what factory it’s coming from or who’s actually behind the scenes making it, how did you even start that process of finding that out and then finding the next one, the next one and maybe getting referrals?

Jeremy:

Well, you just named it. Sourcing is a weird business in which it’s still and this … Not just sourcing, but a lot of the supply chain is still heavily relationships based in which it’s like, “Who do you know? Who do you know? Who do you know?” and that’s who you’re able to work with. In the early days, I personally met and lived between China and Italy for the first year of the business and I met with hundreds of manufacturers, many of whom are now our partners, but in the beginning, were very skeptical, “Who is this guy? Who is this company?” I think the best way to put it, it’s like in terms of sourcing, the best way to do it is through referrals.

Jeremy:

We’ve tried everything from digital platforms to sourcing companies to even trading companies just to see what type of quality and price point we can achieve, but ultimately, we’ve always found the best option would be to do direct sourcing ourselves. We actually have an internal team coming from the likes of Patagonia, Arc’teryx, Zulily and Amazon, really focused on sourcing the world’s best manufacturers in each given category. Each time we want to enter a new category, we will always ask for referrals from our existing manufacturers. There’s digital products that help you find manufacturers through other sources but generally we found the best have always come through referral.

Stephanie:

I think I’ve looked online before looking into, maybe this is a 3PL that I was looking at. Either way, that whole world seems pretty behind the times when it comes to trying to find things online and get details about it. It does seem like referrals would be the best bet in that industry.

Stephanie:

I was going to ask when it comes to inventory risk, you were mentioning that the manufacturers take on the inventory risk, do they also have a say when it comes to the pricing of the product?

Jeremy:

Yup, they definitely do. We are hand in hand with their manufacturers at every single point in the development journey, from material selection, color dyes and sample reviews and so on and so forth in which if we are talking about cost structures and cost payments, or sorry, sample reviews, we’re always thinking about price and we’re always very transparent with our manufacturers in terms of what our research tells us. If we believe a certain price threshold is too high, we’ll tell them, and vice versa, they’ll tell us like, “Hey, this is getting expensive. Do you think your customers or members will still want that?”

Jeremy:

Ultimately, the incentive for manufacturers to earn a higher than normal profit margin on Italic sales because they’re taking on the inventory risk, so there, we’re able to pay them out substantially more than they would ordinarily make. I think they’re very in tune with our orders, sometimes even more than we are in terms of the performance. We’ve also built a lot of internal dashboards that we’ll share with all of our manufacturing partners for them to log into, review the performance. Sometimes, we’ll need to set price points that are lower, so that will encourage a product to move faster and they’re able to cut down on their margin, but still again, it’s at price points that are pretty much close to cost.

Jeremy:

It doesn’t really moving the needle too much nowadays that we’re past the transactional model. It’s easier to do that on the development side when we’re actually developing these products, or on the flip side, if a product is actually performing way too well, they might actually ask for us to develop a more premium version or a version that uses a high quality or a more expensive material, not necessarily higher quality, just a different material. For example, we started with cotton sheets. It was sateen. Now we offer percale and we’re looking into linen. Then we also offer eucalyptus lyocell sheet set as well. Those were examples of where we saw their consumer demand really expand what our manufacturers want to develop and as a result their price points were able to change quite a bit depending on the product.

Stephanie:

I was thinking about that these manufacturers probably have a ton of insights into what’s selling with their other brands, what consumers are interested in. I’m wondering, are they even allowed to share that and help influence your guys product designs and say like, “Hey, we see this plain shirt with like a lion on it and selling really well with Anine Bing,” which we just had on the show?

Jeremy:

I guess there’s two ways to look at it. One way really is from the lens of like, “Hey, the manufacturer has what I call like extraordinarily delayed insights into performance,” in which the only time the manufacturer actually knows about how well a certain skew or style is doing. We’re primarily talking about fashion and apparel and other soft goods and home for example. It’s a little less seasonal or trend driven, but in apparel for example, a manufacturer will only know the performance of the line after the season or after the client comes back and places the reorder in which their insight is already delayed by a whole, let’s say six to nine months.

Jeremy:

By then, it could already be out of stock or out of favor with the client. The second point is actually much more interesting in which this is the dirty secret of a lot of these brands is the manufacturers nowadays have significantly improved and really, really sophisticated design and development inhouse capabilities. Historically, let’s say 30-40 years ago, a lot of the design and development and pattern making and so on and so forth was always done on the brand side. Nowadays, I really call it more of a partnership in which the design and R&D talent inhouse at a manufacturer is so great that sometimes, and this is like extraordinarily …

Jeremy:

This is not just like startups. This is like huge multinational brands, all the way to brands just starting out in which their buyers and merchandisers or product developers or designers will walk into a showroom that a manufacturer has made for a season. They’ll pick like four or five styles from the manufacturer’s design books or pattern books and then say like, “Okay, let’s make some small tweaks, but pretty much, it’s the manufacturer’s design that we’re iterating on.”

Stephanie:

Oh, wow. I definitely would never have thought that.

Jeremy:

It saves a lot of time if you think about it because developing patterns from scratch is really time intensive. You have to ship samples back and forth all the time, whereas if a manufacturer already had a lot of these samples ready to go for you and you just had to tweak, let’s say, the material or stitching or whatever it is on apparel specifically that it cuts down development time significantly. It happens pretty much everywhere and really the designers at that point in time are not really designers, but they’re just iterating on the final versions of products. I think-

Stephanie:

That’s a good secret that I never knew about.

Jeremy:

[crosstalk 00:33:15].

Stephanie:

When you’re thinking about getting maybe inspiration though and you’re looking around at some of the more luxury brands, how much of that can you actually take and use? Because when I’m thinking about, there’s certain things that without a logo on it, you probably be like, “Is that from Walmart?” Sometimes the logo makes it where if it didn’t have that, I don’t know, personally, why anyone would ever buy it. I sometimes don’t know why they would buy it either way have you ever had an experiment like that where you’ve been trying to maybe let a brand or popular brand influence products where then you’re like, “Oh, actually, the logo kind of made that one.”

Jeremy:

I think the way I would respond, one thing we really care about a lot at Italic is having a data-driven sense of merchandising in which we’re using our customer insights to really drive the product decisions that we’re making, both on the technology front as well as the product development front for our physical products. I think what we realized is, to your point of, “Does a logo make a product or does the product make the logo?” which is actually maybe a good way to think about it, is the fact that logos matter to some people and it doesn’t matter to other people, but everyone has a specific category in their lives in which they care about having a logo and then vice versa like that same person might not care about having logos on other products that other people might.

Jeremy:

I guess a better way to put it is let’s say you really care about having a logo on your handbag, but you actually, and I don’t know if this is true or not, but let’s say you don’t actually care about having like the top of the line logo on your bedding or all-clad cookware or Le Creuset Dutch ovens or what have you, right? Let’s say that’s actually the mentality. On the flipside, I think there’s a lot of people out there who would actually have the alternative approach which is like, “I don’t care if I have a big fancy handbag, but I am really into cooking and I want the fanciest cookware and I need to have like X, Y, Z brands cookware in order to feel good about my purchase.

Jeremy:

What we found through a lot of our, I guess, our surveying is, one, the main reason why people buy from us is quality in terms of the product and the second is design and overarching, I guess, the main reason why you sign up is because you’re getting quality at cost. The price point and the value you’re getting out of your products is really, really high relative to pretty much any other option out there because we’re not making money on the products that we sell. I think what we found is the people who sign up, if you’re a fashionista for example, you’re probably not going to buy our fashion products, but you might actually sign up for your home goods and then vice versa, someone who really cares about that specific type of bedding or having really great towels or candles or what have you, but doesn’t really care about having a logo or the next trendy thing.

Jeremy:

The way we look at merchandising is really anti-seasonal in which we’re trying to find products that are always evergreen. They might not be always in style or in vogue, but we know that they’re consistent things that people will always want to buy. That’s why we try not to fall too hard into having a specific branded look on our products. The product should be able to stand for their own.

Stephanie:

I like that. I’m just going to say quality always matters, I would think and I’m definitely your person because I’m a logo-less person. I don’t care about the brand or where they come from. If the quality is good, it doesn’t matter to me who makes it as long as the quality is good and something lasts. I like that. When we’re thinking about metrics for subscription business, yours is very unique, of course, because right now, you’re like, “We’re not going to need more than $100 per person,” but how are you guys tracking things? What metrics are you looking at right now to see if things are going well?

Jeremy:

We’ve changed our metrics a lot as we transition from a transactional model into a subscription basis as you can imagine, but what was interesting for me is because we run this type of membership in which it’s not a … I guess before I get there, in my mind, there’s three types of consumer subscription products. One is you get something in a box every month and it’s on a set frequency that you can customize. Secondly is you’re paying a subscription for a discount. Then thirdly, as you’re paying subscription for access to a certain product, whether it’s digital or offline or whatever it is. I think we fall into the latter two in which you’re paying for Italic because you want a discount on your products, but you’re also paying for access to even shop those products in the first place.

Jeremy:

I think when we actually transitioned into this model, we realized like, “Hey, all this transactional revenue, metrics that we’re tracking are actually great indicators of engagement. Now, those are our leading indicators of, “Are these members happy? Are they getting the most out of their membership? Are they unhappy because they’re not using it? Are they logging back in? Is the conversion rate high for members? Is our average order value growing as we add new products or is that actually shrinking in which the products we’re adding are actually lower price points?” so and so forth. It’s a pretty sophisticated, I think, model that we’ve had to build in order to actually price these products at a price where we’re not losing money on each sale but also not making money.

Jeremy:

It’s on the engagement side all the things that historically eComm companies would track, your conversion rate, your LTV, your frequency of purchase, your contribution margins. These are all things that have now become like performance indicators on a membership basis as a cohort of how we track a certain cohort doing overtime, but now what matters on the company side is actually, “Are we adding new annual subscribers happily? Are they staying? What’s our opt out rate? We offer like a 30-day period in which if you sign up and you decide not to place an order and you want to get a refund, we’ll provide that, no questions asked. Right now, it’s 5%.

Jeremy:

I think like those questions or metrics that we’ve done a pretty deep dive in terms of like what we actually want to see. Now really that the core metrics are like, “What’s our new annual recurring revenue because it’s an annual plan?” and then secondly what is … We don’t have retention yet since our first cohort is still seven months out from renewing. The second indicator of that is like, “What are all the engagement metrics telling us? Does that suggest that they’re likely to churn or stay?” I think those are like the metrics that we’ve transitioned towards. There’s a lot more that I could dig in there, but that’s at a high level how we think about it.

Stephanie:

That’s great. Are there any methods right now that you’re experimenting with and seeing success around when it comes to keeping your users engaged or staying top of mind to them or even like different things that you’re changing for the website that’s connecting more with the customer when they’re coming there? Any tests overall?

Jeremy:

I think we aren’t great about testing and I’ll be really forthright about that. We don’t have much testing infrastructure built in. We don’t have the ability to test their pricing. AB test for us are really just like, I think, very, very incremental changes. I think the biggest [inaudible] which is the transition from the transactional model and I guess the best way to really put this is like for example, during our pilot, we saw behaviors and frequency and lifetime value that we would expect on a transactional customer at month 12. We saw that on a membership level between weeks four to six. It was a literal 10x increase in utility activity for that member versus a customer who would otherwise purchase the product as a standalone.

Jeremy:

I think that’s what I meant going back to the point of customers liked us, members really love us. That was something that we really saw. Then I think in terms of metrics that we’re looking to test or at least improve with our customer that can improve the experience for them or at least hopefully it will increase our retention rates, I think that really comes in the form of, “What are the products that …” The main four reasons why people opt out just for full transparency, one is it’s international and we only serve the US, so they actually sign up through eagerly and they’re like, “Hey, I didn’t know that it’s US only.” That’s actually the number one reason.

Jeremy:

Number two is financial. It’s like, “Hey, I got furloughed or I was laid off,” which happened a lot in the early days in April and May. Nowadays, it’s less common, but the last two are ones that we can directly address. One is, “The product offering is currently not broad enough. You don’t have a product that I want to see or a category that I wants to see.” Lastly, “The products that I want are out of stock.” This are directly in our control. For example, we’ll show now in the coming soon page like what products are coming next for our members and that keeps them excited.

Jeremy:

Secondly is what products are being restocked. We’re placing much, much larger orders, so that hopefully we don’t have these out of stock issues. Really the reason was like our members just purchase at a substantially higher frequency than the nonmembers did. We actually underordered prior to the membership, because we didn’t know what to expect. I think those are things that … There are certain features like that that we developed for that use case, but really the only thing that we can solve for in a long-term basis is just develop more products, order more deeply, and hopefully as a result, acquire more members.

Stephanie:

I love that. I think that’s a really good point too about how to keep people engaged and coming back to see like, “Okay, what’s coming next? What’s the new t-shirt that’s coming out that I can get really excited about?” because I could see a lot of members maybe, at least in my head, I would think like if I am in a subscription or a membership, I would probably frontload a lot of purchases right away to get that value and then I might forget. I think that’s really smart to find ways to keep someone like me engaged coming back maybe a couple months later if I forget, so that I will renew after the year.

Jeremy:

Exactly. I think for us really, the goal isn’t necessarily to make you buy more stuff if you don’t need it. The goal is to hopefully show that, “Hey, you’re going to get enough value out of this membership, so that you’re going to stay another year, or two or three or four or five in which there’s a constant drop of new or a constant allure of new products that will be down the line such as products in travel. For example, we just launched our jewelry line last month and that sold out in a week’s time. Now we know, “Hey, there’s a lot of demand for that. We should order much deeper in it” I think constantly testing on the product side is something that we do a lot, but now that we’re not making money on the transactions, we’re not trying to force you to use it unless you want to.

Stephanie:

Very cool. I saw that you guys had a signup list. I think originally it was over 100,000 or something along those lines. I was wondering, how are you going about acquiring new customers? What kind of channels are working well for you right now? What are you finding success in?

Jeremy:

The hardest question for anyone in eCommerce nowadays. In 2018, we had a strong waitlist going into the membership, and then once we launched, we were like, “Hey, the membership is not going to work. We dropped it in, and instead all those people on the waitlist became our email subscribers and we were … Fortunately, they eventually became customers as well. That was where a lot of that 100,000 original list went to. Then more recently, we actually had another waitlist. This time, it wasn’t for marketing purposes, but it was actually like a legitimate operational waitlist in which we simply didn’t have enough inventory to serve all of our members to a great experience in which if you’ve logged on in the third of all the products were sold out, that’s not something you want to see as a first time experience.

Jeremy:

We have the waitlist up for a while, up until we can restock more deeply to address those issues which we’ve recently done. In terms of the new customer acquisition, I’ll be like totally honest. It’s a mix of performance marketing and brand marketing. We internally separate our marketing team into two. One is brand which is everything nonpixel-based or nonattributable to a pixel. Everything growth is pixel-based in which it’s pixel through Google and the intention of growth is to grow the membership base. The intention of brand is to keep our cost per acquisition on the growth side low, so that hopefully it’s not the first time that you’re seeing, let’s say, an ad from us, but instead it’s actually a recall.

Jeremy:

Examples of that would be like influencer would be in brand. TV would be in brand even though I know there’s pretty good models for tracking nowadays and attributing podcasts we still put in brand. All these things … I guess I’m being hypocritical because those do have pixels nowadays, but really the intention of those is to get in front of you first, so that by the time that you see a Facebook ad or a Google ad, that you’re already aware of where we are, so your interest is already piqued.

Stephanie:

Cool. All right. We have a lightning round coming up. Before I move on, is there anything that you were excited to cover that I forgot to ask?

Jeremy:

Well, our basics are dropping tomorrow-

Stephanie:

All right. Well, tell me more about the basics.

Jeremy:

We’ve had a line of recycled t-shirts for a while and those were really, really popular through a lot of quarantine. The number one requested kind of products for us for years has been a line of just great Ts, plain really high-quality t-shirts. It’s finally coming out. I’ve been waiting literally a year for this. I’m super excited, but that’s all. That’s it.

Stephanie:

That’s great. I love a good t-shirt. Actually, maybe it’s always been a trend and I just haven’t paid attention, but now it feels like it’s really coming back to just wear a normal plain t-shirt or just something like simple on it. It feels like it’s coming back strong, but maybe it’s always been here.

Jeremy:

That’s not surprising. I feel like a lot of people nowadays … I’m sure there’s a lot more people out there who could speak much more eloquently on why basics are great, but basics are always in vogue and our members have been requesting it very actively, so I’m excited to finally get that out.

Stephanie:

I will definitely have to check into that when it drops. All right, let’s move on to the lightning round brought to you by our friends at Salesforce Commerce Cloud. This is where I’m going to ask you a question and you have a minute or less to answer. Are you ready, Jeremy?

Jeremy:

Yes.

Stephanie:

All right. What’s up next on your reading list?

Jeremy:

Well, I actually just got a copy … This is going to put me in a bad light, but I don’t always read business books, but I just got a copy of Reed Hastings new book. I’m excited to begin. I literally just got it right before this interview. That will be next.

Stephanie:

Cool. What’s the title of it? I don’t know if I know which one that is.

Jeremy:

No Rules Rules.

Stephanie:

I’ll go check that out. You have to let me know if you like it.

Jeremy:

Yeah, will do.

Stephanie:

All right, what’s up next on your Netflix queue?

Jeremy:

I’ve been actually watching The Legend of Avatar which is-

Stephanie:

I don’t know if I’ve actually seen that one.

Jeremy:

It’s an anime, cartoon that used to run on Nickelodeon as a kid and I forgot how good it was, so I just watched that again.

Stephanie:

That’s great. Netflix probably knows not to advertise that to me. They’re like, “You just probably won’t like that one.” All right, if you were to have a podcast, what would the podcast be about and who would your first guest be?

Jeremy:

I’ve actually been thinking about doing one.

Stephanie:

You should.

Jeremy:

It’s been on the list. That’s actually why I have this fancy bike here.

Stephanie:

You do sound great, though.

Jeremy:

I think I wanted to do like a podcast show where … I live in Park City, Utah. There’s a lot of great … I took up fishing during quarantine. I haven’t really caught anything, but it’s really relaxing. I thought it’d be fun to go out and go fishing and then do an interview at the same time. I think guests-wise, there’s so many people out there. One brand I’ve admired for a long time is the, and I like loosely know them, but I’ve really liked the Buffy team for a long time. I feel like they’re pretty unique. They have a lot of success, but they’ve still been humble about it and low to the ground. I think it’d be really cool to have them. My background isn’t just like eCommerce and retail. I think it’d be a mixture, but yeah, that’d be a cool one.

Stephanie:

I like it. I can only imagine you catching a fish while trying to interview and how that was found. Interesting. All right, what is the favorite piece of tech that is making you more efficient right now or that you’re enjoying?

Jeremy:

Oh, man, that is a tough one. I use a lot and the whole Italic team makes fun of me for it because I always add something new every week. I think the one that stuck with me for years is this company called Missive. It’s a collaborative email inbox that allows the entire team to work in conjunction on emails. Let’s say it’s an email with a vendor or an email with a YouTuber who we want to advertise with, we can collaborate in line without having to go to Slack or take it to another email thread in the same place. Missive and Front in the same vein does the same thing. I think those two products are ones that I really couldn’t live without.

Stephanie:

That actually sounds really good. Can you send it out? If I was one of your employees, could I say, “Send this out under Jeremy’s email because he gets better responses as the CEO than I will”? Personal question. This is something I actually want to know for myself.

Jeremy:

There’s actually a setting to do that in which you can share an address and other people, like let’s say an assistant can send it for you, so yes.

Stephanie:

I like that. I’ll check that out. Awesome. The last, slightly more difficult question, what one thing will have the biggest impact on eCommerce in the next year?

Jeremy:

I’m not going to give you the cliche answer and say COVID changed everything, which it did, but-

Stephanie:

We all know that now.

Jeremy:

I actually think it happened last year and then I already alluded to this earlier, but I think the biggest change will be the transition from … People have been talking about these like DTC waves. The first wave was like the Bonobos, Warby, Everland 2008 to 2012 era, and then, the second wave was like everything thereafter. A lot of the direct-to-consumer brands you see nowadays, it’s the category leaders per se, but I think now people … Let’s say from, I don’t know, 2014 to 2018-2019. I think there’s been a big change in the operating mentality of these newer brands in which if you’re a new brand starting out, you can’t go out and raise these massive rounds that these companies used to off of revenue growth because people have realized now, this is not technology revenue growth. This isn’t like an 80%, 90%, north of gross margin product.

Jeremy:

There is a saturation level to performance marketing. I know I’m sounding like quite cynical here, but I mean that actually in an interesting opportunity in which you can actually raise that money, but I think if you’re creative about cashflow and you’re creative about how you grow the business, you can build a huge business. I guess Gymshark would be a great example of this in which you can bootstrap to a really large volume without having to raise equity financing. I think you can do it through focusing on cash conversion cycle which is what Gymshark has with its founders or you can have in any case of owned supply chain like House or Buffy does.

Jeremy:

I think there’s different ways that you can frame the direct-to-consumer model that allows you to still grow, but I think the era of venture-backed DTC, getting into the series, A, B, C and onwards is probably over. I think that’s already happened and I think that will probably be the biggest impact on the ecosystem.

Stephanie:

I completely agree with that. If you sound cynical, then I think cynical too, because I completely agree with that. That’s a really good point. All right, Jeremy, this has been such a fun interview. Where can people find out more about you and Italic?

Jeremy:

Italic is on italic.com and I am @jjeremycai, J-J-E-R-E-M-Y, C-A-I on Twitter. I think that’s the easiest way, but we’d love to have anyone as a member.

Stephanie:

Awesome. Yeah. Thanks so much for coming on the show.

Jeremy:

Thank you.

 

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