Rent the Runway – Value creation through fractional ownership

Exploration of whether RTR can continue to capture value amidst new competition.

Rent the Runway (RTR) is a web-based designer fashion company that allows women of all ages to rent designer dresses and accessories for a fraction of the price.

Rent the runway co-founder and HBS Alum, Jenn Hyman

 

Success of the RTR business model is highly reliant on the existence of network effects. The company purchases expensive dresses with retail prices in excess of $1000, and then seeks to recoup its heavy capex through multiple rentals of each dress – enter the consumer who rents the dress, take amazing photos of herself and posts them to RTR’s internal stylebook and then (hopefully) tells all of their friends about the RTR service. Evidence of RTR’s initial success can be traced back to its humble beginnings on college campuses, where RTR would target small, well-connected networks such as sororities, where the potential to convert a few “popular” girls on campus into RTR customers would lead to a domino effect across the entire campus.

Another element of RTR’s value creation for consumers is using networks to change behavior. Typically, consumers of high-end designer fashion do not advertise where and when it was purchased at a discount. However, RTR has created a social culture amongst its 5 million users in which sharing how you look, and more importantly, how you felt, in a rented dress is encouraged and rewarded. This sharing of emotion between strangers increases the effect of their networks and enhances the accessibility of its service.

Value capture for RTR is much harder to quantify. Its suppliers, designers who sell their dresses to large retailers like Bloomingdale’s and Neiman Marcus, already have access to datapoints similar to what RTR has captured. However, as 90% of its customers rent from brands they had never owned before, RTR has created an experiential marketing platform for both up-and-coming and established fashion houses, allowing some brands, and even celebrities like Beyonce, to expand into capsule collections created just for the RTR website. As it continuously grows its user base, which spans from high-school women up to Baby Boomers, RTR can begin to leverage its purchasing volume to request steeper wholesale discounts from both designers and shipping companies, creating additional value for the company through increased profit margins.

RTR has also sought to capture value through tweaking its business model to include a subscription-based component. For $99/month, its “Unlimited” program allows RTR to receive payment upfront from its customers, using both custom style profiles and order histories to influence future buying decisions.

RTR’s success in proof-of-concept has certainly attracted other players to the haute couture rental space. Couture Collective, launched earlier this year, providing its members the “right to buy” fractional ownerships of high-end designer clothing. Members of Couture Collective pay $250 for a full year of participation. Once a member chooses her favorite items from the collection she pays just 20% of the retail price which affords her five reservations with the item and unlimited last-minute-wears. Should a member fall in love with her rental, she can pay 50 percent of the retail price to buy the item on the spot or she can wait until end-of-season to purchase at 30 percent off the original ticket price.

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Excerpts from Couture Collection’s lookbook.

Couture Collective focuses on elements of the RTR business model that optimizes success on both ends. As RTR focuses more on the consumer who has never worn a couture dress and is open to social media sharing of their experience, Couture Collective is a private network targeting “New York’s Best Dressed Women” to who would prefer to anonymously rent couture clothing and are willing to pay the subscription fee for secrecy. Furthermore, Instead of having little control over inventory management, Couture collective limits the usage of each item and attributes revenue to each individual item. In order to gain market share in this industry, Couture Collective will have to focus on poaching RTR’s core customer – the woman who is willing to rent a dress for everyday wear in addition to special events. The company will also have to shift consumer network behavior away from the current tendency to overshare to a more reserved e-commerce demeanor. As both of these objectives are quite lofty, I do not foresee Couture Collective’s trajectory to be as dramatic as that of RTR.

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6 thoughts on “Rent the Runway – Value creation through fractional ownership

  1. Great post! Totally agree on that RTR has utilized network effects to change behavior especially as it relates to the social culture around procuring a high end dress and openly sharing that information with your network through social media, etc. What I think is interesting about this model is that there’s definitely a tipping point that happens where value derived from actually wearing the clothes probably decreases for a large subset of users as the rate of users joining increases — primarily from the quality of the garment, availability of most desired styles, etc. While Couture Collective is probably looking to directly address that issue by limiting the usage per garment, I wonder how they’ll address the higher inventory carrying costs as they scale up the business.

  2. Really interesting post – thanks for sharing! I feel that with Rent the Runway, indirect network effects are actually much stronger than direct network effects. As you mentioned, suppliers definitely benefit from a growth in Rent the Runway’s customer base, especially if they are gaining access to first-time buyers of the high end designer brands. In addition, the social media publicity also benefits suppliers in promoting their brand and latest styles. However, I think the direct network effects are a little harder to see. In my experience, Rent the Runway has relatively limited inventory that they refresh on a seasonal basis. As a result, several customers renting dresses for common events (e.g. summer weddings, winter formals, etc.) have a good chance of running into someone else at the same event wearing the same dress. I even noticed this happening at HBS’s Holidazzle last year. In that sense, and given the fact that people don’t always know whether a dress is from Rent the Runway or not – I think direct network effects can actually be limited.

  3. Thanks for writing! I have yet to try RTR, but have been excited by the concept. I have friends who are very religious users of the platform. It’s interesting to see how they will balance inventory carrying costs and the need for variety. I have heard one too many complaints about friends not wanting to use RTR for an event in the city among friends/networks, as it was very likely for another (2 or 3, at one event of a friend’s 4!) guests to be seen in the same dress (I definitely agree with Sherry and remember the Holidazzle fiasco) ! Not that it is a big deal, but there is something to be said about women wanting the RTR experience to be unique and aspirational, but that sentiment is dilated when it seems that the dresses there are commonplace and your friends are seen in the exact same ensemble. Perhaps they might experiment with models that might let users see what friends might be renting or note the occasion(s) around the city where a dress might be rented. All in all, great business model, but I think as more users use the network, RTR will probably have to see greater variety and carrying costs to keep up with its value proposition.

    1. Good point about the potential to undermine the “unique and aspirational” experience when someone shows up wearing the same dress. While this could happen if you are not renting a dress, it might be helpful to create a sub-network or community with your friends through Facebook login that prevents someone in your network from renting the same dress. This concept reminds me of the ability to post or see photos of people that are wearing the dress you might want to rent — I actually don’t like this feature. If I could see pictures of people in my own network, I might be more willing to share my own photo and would trust the photo more than seeing a random person wearing the dress.

  4. Great article!

    Although I have never tried RTR, I have heard of its superb service. A friend ordered a dress that came broken the day before a party. RTR sent her vouchers, an apology note, and a box of cookies simply to say “Sorry!” However, too often I have heard similar stories about lack of quality control and delayed delivery. Given how important WoM is to the RTR business due to network effects, I wonder how long before the company suffers financially for its messy operations management. Furthermore, how will the company ensure people don’t show up in the same dress at events? I suspect RTR is already trying to resolve these known issues… Thanks!

  5. Great post! I find this a very interesting business model, and I am impressed about how the founders managed to convince designers to provide products for the platform. I wonder if RTR will be a profitable business and how much it really benefits from network effects. You could argue that the more people use it the more commoditized it becomes and it ends up losing the aspirational part of its value proposition. On the other hand, if it becomes really successful, it could take away value from designers as people would only rent and not buy their products.

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