Mastering the Businesses Behind Our Business

I recently had the privilege of sitting down with Reid Hoffman to record an episode of his Masters of Scale podcast, and I’m excited to share it today (click here to download the episode).

As Reid and I discuss the series of “Aha” moments that led to the birth of Rent the Runway, as well as the communities of customers and partners that have since fueled our business, Reid propounds his theory that “you need to master the business behind your business — it just might be the critical factor that lets you break out.” I couldn’t agree more. The business(es) behind Rent the Runway’s business, which range from our operations, to our technology and data, to our deep understanding of our suppliers and the associated fashion industry, are critical factors that have enabled Rent the Runway to pioneer a shift in consumer behavior. 

When I co-founded Rent the Runway in 2009, neither my co-founder nor I had experience working in fashion. We knew, however, that in order to build a designer clothing rental business, we would have to understand the inner workings of the fashion industry so that we could build a business that was of long-term value, not only for customers, but for our designer partners. Many disruptive companies focus primarily on their customer value proposition, but it is the combination of our customer and industry value proposition that has led to the longevity and continued innovation of Rent the Runway. 

The backdrop to creating our industry value proposition was the timing: it was the height of the recession in November 2008 and designers were suffering. Because retailers were sitting on too much inventory, they advertised dramatic markdowns, like Saks’ notorious 80% sale. Retailers were diluting the brands that designers had spent years, sometimes decades, cultivating - and thereby caused enormous friction with their designer partners. 

Recessionary environments often breed innovation and this one was no different. It precipitated the rise of the flash-sale industry and later, the secondhand economy that Rent the Runway pioneered. Businesses such as Gilt, RueLaLa, and Hautelook raised venture capital and leveraged the difficult inventory positions that designers were in to buy significant amounts of off-price product (often 50-60% off wholesale) and then mark it up to flash-sell it to customers with glitzy merchandising and product features, such as starting a sale at noon every day. 

Flash sale companies understood part of the business behind their business - they knew designers had an inventory problem and they offered them big checks to solve it. But their solution only created short-term value to their partners; as soon as the economy and the industry regained strength, the flash sale model’s price dilution and unfettered distribution caused designers to suffer, leading them to stop selling as much product to Gilt, Rue, or the dozens of other copycats who emerged during this time period. And there went the flash sale economy - with limited access to great brands, customers no longer had a reason to log on at noon to buy something. 

Every popular business has a story that becomes folklore. For Gilt, it was that their Christian Louboutin sale brought down their site due to all the inbound traffic from shoe-obsessed women (myself included) who interrupted their day to nab a pair of $1,000+, red-bottom shoes on sale. What is edited out of the folklore, however, is the fact that the Christian Louboutin sale happened only once in Gilt’s 10-year history. Once Louboutin was back in good health, they returned to their regular points of distribution. This is not a knock on Gilt - they were the very best of the bunch - it is just that the flash sale industry didn’t create a solution for designers that provided long-term value for them.

It was in this context that we started meeting with designers and retailers to co-create what the designer value proposition of Rent the Runway would be. We knew that in order to survive for the long term, we would need a designer value proposition that was just as strong as our customer value proposition. From Diane von Furstenberg, we learned that designers’ followers were gradually getting older and that the industry was struggling to attract younger customers. From Jim Gold, the then President of Neiman Marcus, we learned that customers had been “renting the runway” from department stores for years by buying dresses, wearing them to special events, and then returning them to the stores with the tags still on. Once these dresses were returned, however, they were unsellable to the department stores - creating both a headache and a highly negative margin business. 

At the same time, I observed two important trends. First, my own peers and younger women were spending hundreds of dollars each month at fast fashion businesses like Zara and a whole generation of businesses that had come to disrupt fast fashion like Lulus, Boohoo, and Asos, which offered trendy, designer copycats for very low prices. Designers were seeing their intellectual property copied, produced by innovative supply chains months earlier than they could get their product into the market, and sold for pennies on the dollar. In other words, the competition for designers had shifted from competing against one another to competing against H&M. Fashion was, and is, only getting faster: in 2019, the average fast fashion brand released 62 new products per day whereas luxury brands only released six. In other words, if the customer wants variety, they shop fast fashion. And if they want quantity, they shop fast fashion - because who can afford to buy variety at luxury prices?

I also recognized the influence of social media. I believed that how we look and how we present our personal brands via photos on Facebook, Instagram, and Snap would change more about how we shop than any trend had before. My earliest observation was that with the introduction of social media, women felt even more self-conscious about repeating outfits, therefore fueling the desire for even more variety in their wardrobes. I also believed that visual platforms like Instagram would favor fashion that was more fashionable, i.e. pieces that were trendier, more colorful, and more of the moment. No one wants to post pictures on Instagram of themselves wearing basics. Yet selling basics (i.e. utility items in neutral colors, such as blue jeans and black tees) had been the bread and butter of the industry’s revenues for decades. We had a suspicion that this would change.

Rent the Runway was born out of our realization that designers needed to 1) find an evergreen platform through which to introduce new customers to their brands 2) compete with fast fashion on price 3) maintain designer quality and 4) offer the most fashion forward, Instagram-worthy styles. 

When we introduced the concept of RTR to designers, they were often suspicious and scared, which made sense. We were encouraging customers dress more sustainably - to wear more but to buy less. Specifically, we wanted customers to wear more of the real thing. 

Over time we built trust with the industry, and designer brands came to view RTR as a long-term partner that would provide them with extremely powerful new customer awareness and acquisition channels, richer customer and inventory data sets, and distinct rental-based revenue streams. We have worked with thousands of brands over the past decade and over this time, we’ve maintained 100% brand loyalty - meaning that once a brand decides to work with Rent the Runway, they continue to. We continue to innovate on behalf of our suppliers, which are the designer brands, and power them with data that helps them improve their overall businesses. We recognize inherently that designers’ success is a prerequisite for Rent the Runway’s success. No one wants to rent, let alone pay for, clothing they don’t aspire to wear.

Rent the Runway is proof that not all disruptors need to be the enemies of their industries. By working hand in hand with the fashion industry, Rent the Runway has established a new ecosystem in which designers and retailers can utilize rental as a critical growth lever. And, as the sharing economy becomes more prolific in all categories of our lives, we believe that the closet into the cloud will see enormous growth over the next decade. As a corollary to Reid’s thesis, I would add that “mastering the business behind your business” is a critical step toward “disrupting the business behind your business.” And, by understanding the business behind your business, you just may end up serving many others besides yourself.