Subscription Model Turns Rent the Runway into a Real “Dressflix”

1/8/10Follow @wroush

“Netflix for designer dresses” is the elevator pitch that everyone uses to describe Rent the Runway, the New York City startup that launched in November with Series A funding from Boston-based Bain Capital Ventures. The company buys dresses from top fashion designers, then lets customers reserve them online for a four- or eight-day rental period. When the time comes, Rent the Runway ships out the dresses (in two sizes, just in case) along with a handy pre-paid return shipping package. They even handle the dry cleaning.

But the Netflix comparison isn’t quite accurate. Netflix customers don’t have to pay for each individual DVD rental. The beauty of the model is that you just pay your $9 to $24 per month, and then you watch as many DVDs as you want, limited only by the number of discs your plan allows you to rent simultaneously.

But Rent the Runway members have to rent each dress separately. Or they used to, anyway. Starting today, Rent the Runway is offering its own subscription-based pricing option: for $350, members can now rent as many dresses as they can wear in the course of a single month (with a limit of four dresses out at once). For $900, they’ll get unlimited rentals through January, February, and March.

As before, members can still rent individual dresses, at prices ranging from $50 to $200—the more haute the couture, the higher the one-time-rental cost. But Jennifer Fleiss, Rent the Runway’s co-founder and president, says customers were demanding a more economical way to rent lots of dresses in succession. “We’re seeing a lot of our really loyal customers renting a few times in one month, so they’re spending a lot of money,” Fleiss says. “We’re trying to find a way to enable that in a more cost-effective way.”

Put another way, Rent the Runway is trying to make the decision to reserve a dress as hassle-free as possible. Just as Netflix members don’t have to worry about whether to add a new DVD to their queue, subscription members at Rent the Runway can pick out as many dresses as they want without worrying about the incremental cost. They also don’t have to worry about whether the dress they’re reserving is a $75 Diane von Furstenberg or a $200 Herve Leger—they’re all covered under the flat subscription fee.

Rent the Runway's subscription program description

“This is our first bold step to really try to change user behavior,” says Fleiss. “Our belief is that you should rent anything that’s not a basic. For your basic black dress, you should absolutely buy that. But for anything that’s seasonal or just once or twice, you should rent—the job interview, the date next week, the meet-the-parents dinner, the special night out. There is no occasion too small to have fun and pick out a special dress.”

But there are several other reasons behind the subscription program—reasons that relate as much to logistics and finances as they do to marketing, and that reveal a lot about Rent the Runway’s business model.

First off, there’s the seasonal nature of the fashion business. January, February, and March are traditionally the slowest months of the year for clothing retailers and design studios, so any program that boosts business during those months will help to smooth out Rent the Runway’s revenue stream, Fleiss says. (The startup will probably continue the subscription plan past the end of March, but may tweak the pricing and other details, she says. For example, during the high season—meaning the Halloween-through-New Year’s holiday rush—Rent the Runway might need to charge more for subscriptions to avoid losing money.)

Second, there’s the inventory issue. It’s been two months since the company’s November 9 launch, which has given Fleiss and her co-founder Jennifer Hyman time to learn that the biggest constraint in their business model is the supply of dresses. Rent the Runway has only 1,000 dresses in its warehouse, and 750 of them were out on rental on New Year’s Eve, Fleiss says.

“It was crazy,” she says. “It’s a great problem to have that there is so much demand. But we do have a wait list to join the site, and it’s mostly because of the inventory problem. We don’t want customers browsing the site and seeing that there’s hardly anything left.”

Renting dresses by subscription could help with that problem by making demand more predictable, Fleiss says. Beta users of the subscription program have tended to reserve all of their dresses for the month or the quarter right away—which gives the startup time to think ahead. “The further out people are renting the dresses, the more we can plan inventory,” Fleiss says.

And getting a handle on inventory could ultimately increase the company’s conversion rates, which have been surprisingly low so far, according to Fleiss. Some 150,000 women have signed up as Rent the Runway members, but only 2,000 of them have ever rented a dress, Fleiss says. By tracking users as they browse the website, the company can tell that the main reason members leave the site without renting is that the dresses they’ve chosen aren’t available on the dates they want.

“We’re very confident that we can get [the conversion rate] up higher; it’s entirely because of inventory being the constraining problem, as we see it,” Fleiss says. “We’re servicing those 2,000 customers with only 1,000 dresses. But the good news is that now, as we are purchasing for February, March, April, and the spring season, we have so much data about what’s renting, what sizes customers want, which designers fit best, and which things are wearing out fastest that we’re actually taking a lot less risk when we buy inventory. So in the long run, this conservative buy was really smart business, because we didn’t waste money on things we weren’t sure of.”

Rent the Runway co-founders Jennifer Hyman (left) and Jennifer Fleiss (right)Fleiss says Rent the Runway plans to quintuple its inventory to 5,000 dresses over the next three months. But that will cost money—and Fleiss says the startup is already having conversations with investors about increasing its capitalization. “It looks like we’re going to be raising our Series B in the next few months,” she says. “The model is constrained by supply, so the more money we can pump into purchasing, the more demand we think we can get from customers and the more sales we can generate.”

Bain Capital Ventures has been “a great partner, and we look forward to working with them” on additional funding, Fleiss says.

Bain, for its part, is bullish on the designer-rental concept, and on “the Jennifers” in particular. Both Fleiss and Hyman are 2009 Harvard Business School graduates, and Bain partner Scott Friend told me in November that he was impressed by the advance research they’d done even before leaving campus.

“What was super compelling to me was the effort they made, without any funding, to validate the idea for themselves,” says Friend. “Without any help from anyone they found their way into the offices of Diane von Furstenberg and signed her up as an adviser. They ran several pilot dress rental programs with sororities, to validate that women would rent these things and how big of an issue sizing and fit and damage were. All of those questions that would have been the obvious ones to ask, they had asked and had found clever ways to get answers. They’d been scrappy and creative—and all of this while they were still in school, going to class and passing exams.”

Interestingly, while Fleiss says Rent the Runway erred on the conservative side in its first round of purchasing, Friend says its inventory might have started out even smaller. “We’ve been extremely hands-on from early in the process, helping the Jennifers determine the right level of inventory,” says Friend. “And I think the answer we all arrived at ended up changing the funding requirements significantly. We could have easily underfunded the business and then had a false negative. But in my mind, I said ‘Let’s do it right, and figure out if there is really demand for this thing,’ and then go from there.”

The next three months will be crucial ones as Rent the Runway tests whether adding to inventory raises conversion rates, and whether it can keep ahead of demand. The startup has shrunk its wait list from 50,000 down to the 5,000-10,000 neighborhood, and inventory is now growing fast enough that customers are being let into the site after no more than a week’s wait, Fleiss says.

And now that it’s launched subscriptions, the company plans to expand in other ways, she says. Starting in April, Rent the Runway will offer designer accessories such as bracelets and necklaces. In May, it will introduce bridal rentals—aimed not at brides (a big market unto itself) but at bridesmaids, who will be able to get package deals. And by the fall, the company hopes to offer maternity clothing. “The more we talk to customers, the more we see there is all this enthusiasm for all these different verticals,” says Fleiss.

And the company has also seen unexpected demand from flyover country. “We had always intended to focus very much on the East Coast for our first few months, because the shipping is easier, we can turn around inventory faster, and we know the target market better,” says Fleiss. “But we have seen a ton of demand on the West Coast and throughout the country.”

About 35 to 40 percent of Rent the Runway’s orders are coming from the East Coast, and about 20 to 25 percent from the West Coast—but the remaining 35 to 45 percent have come from everywhere in between. “It’s girls on college campuses or in places like St. Louis where you don’t have access to a lot of these designer brands,” Fleiss says. “The geographic dispersion has been really interesting, and it gives us confidence that this is not just for trendsetters in major metropolitan areas, but it’s a mass market.”

That’s what investors like to hear, and that’s what could build the startup into a true “Netflix for dresses.” So keep your eye on the runway.

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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  • http://www.dailygrommet.com Jules Pieri

    It was really fun to read this nearly real-time analysis of the learning curve of Rent The Runway. These founders are moving fast, confronting the right issues, and responding well. If they can pull this off in a still-rough economy, imagine what it will be like after the real rebound.

    I like the “green” aspects of this story…”re-use” rather than buy.

    If anyone wants to see a video of the “Jennifers”, and our review of Rent the Runway, here is our Daily Grommet story: http://tinyurl.com/yeo2jdt

  • Mary

    If you poke around the website you’ll see absolutely nothing that describes the range of sizes this outfit makes available. Apparently if one needs to ask, one is probably too large.

  • Fashionista

    I am a member of the site and I love it! The waitlist sucks though. You can bypass the waitlist if you’re invited by another member. If you want me to invite you, just respond to this. No biggie.

  • felicity

    do you mind inviting? thanks in advance

    felicity fernandez

    felicityfernandez@gmail.com

  • Suzie

    @Fashionista
    I’d really appreciate you inviting me :)

    suziekloss@hotmail.com

  • blake

    @Fashionista
    could you invite me please ide appreciate it so much

    lordess83@yahoo.com

  • keelin

    fashonista-
    please invite me?! prom will be here soon!
    it would be much appreciated!

    keelin_shelbyx3@hotmail.com

  • http://www.somymom.com Jennifer Litz

    I don’t get it. You can buy these name brands at Nordstrom’s or Sax, on sale, for $200 or not much more, many times, if you just do a little hunting. $200 to rent a dress? No thanks.

  • Nikki

    FASHIONISTA,

    PLEASE INVITE ME!

    NIKKI

  • Fashionista

    Sure Nikki, what is your email addy?

  • lori

    @Fashionista
    i would super appreciate it if u could invited me!!! I need a dress for my parents wedding!!! thanks in advance!!!

    montes88laura@hotmail.com