Why the fashion business is criminal too3 min read

Manu VollensBlack Business Models

Why is business model innovation important? How to design (new) business models? What are possible new revenue markets? Board of Innovation organizes an International Masterclass in Business Model Innovation on November 24, 2011. To get inspired; we will look to successful criminal businesses, and how they make their money.

I recently saw an interesting reportage by France 5: “ventes privees, le marche de dupes”, explaining the story behind the outlet stores. How is it possible that top fashion brands can sell their products for strongly reduced prices? Are we really talking about “over-stock” products, top quality and exclusive deals? Let’s get into this innovative, misleading business model of the fashion world!

More and more, outlet stores or “private shops” are popping up. They offer big brand names (e.g. Calvin Klein, Ralph Lauren, Tommy Hilfiger …) for strongly reduced prices. Of course, they found their way to the internet already. Some websites (e.g. privea.fr) even cover different online fashion outlets, so you really get the best price for a top-fashion piece. Selling discounted items over the internet brings some consequences to the classical outlet-model. When selling overstock-products to a broader audience, the normal available “stock” is not sufficient anymore. Online outlet-shop won’t sell  only a couple of XXL jeans or XL shirts. It is the power of many what makes them so strong, so they need many products. Therefore, top brands produce exclusive outlet products of less quality. They wouldn’t do so, if there weren’t some nice benefits about this:

  • Ralph Lauren’s, Calvin Klein’s, … yearly revenue exists for 40-50% out of outlet-sells. People buy the name, not the product. Customers like discounts; give them -30% and they buy it! This way, fashion brands enlarge their market with customers whom they normally never reach.
  • There is a big difference in quality between a normal store and the outlets. For example, an outlet polo of Ralph Lauren (which is  sold as an overstock quality item), has less fabric (200 gr. vs. 250gr. weight) & less details, compared with the normal one. If your selling less material, you can ask less money for it. Simple as that!
  • Special outlet manufacturers take over the low quality production. Doing so for several brands, they can sell large orders directly to the outlet shops! If you can make a productiondeal for 200.000 items, and you only have to pay a “right for production” to a top brand; you can make a lot of money. As visualised in the business model below, it is clear that fasion brands get rich from the current outlet model, if they sell many products.
  • This is not illegal, as top brands say! People buy online by seeing a picture of an item, and of course the brand’s name. As long as customers really get what they see, there is no legal problem. It’s selling what they think they see, what puts this industry into the grey-zone…

Inspired by this business model? Join our International Masterclass in Business Model Innovation on Nov 24, 2011. Check www.blackbusinessmodels.com