Rue La La, and other flash sale sites, may have had their moment in the spotlight. These sites hold daily, time-sensitive sales of merchandise at a discount off retail prices. Typically the sites offer more high-end, expensive products from brands as luxurious as Fendi, Valentino, and more. Not all the products are at such a high price point, but the sites aim to attract shoppers who want designer labels at a reduced price. Examples of competitor flash sale sites include Gilt and HauteLook.
The network effects story here is more about indirect network effects. As a user, Rue La La does not become more valuable to me when another user joins. In fact, the value may even go down because now there is more competition for the same merchandise. An increase in the site’s user base, however, has strong indirect network effects. The more users there are, the more willing brands are to sell on Rue La La. If no one is logging into the app to buy, designers have other avenues for off-loading unsold merchandise. The indirect effects continue in a loop, because the more merchandise Rue La La has to offer, the more users it is likely to attract, and so on and so on.
The problem is that flash sale sites like Rue La La no longer create as much value as they once did. Rue La La and its competitors created a lot of value when they first launched during the Great Recession, a time when designers had over-produced given reduced demand and were stuck with large amounts of expensive inventory. Enter Rue La La: fashionistas could find designer items at reduced prices, and brands recovered some of the value of previously unsold goods (albeit at a discount). Today, however, brands are wiser and are more careful about how much they produce. This means there is less for sites like Rue La La to sell. As a user myself, I often have seen the same items advertised across sales on different days. This majorly reduces the “stickiness” of the site, which is a key ingredient in maintaining and growing network effects.
Even if one acknowledges that Rue La La’s ability to create value has not altogether disappeared, it is hard to argue that the company captures much value. The growth of the off-price retail segment, led by the likes of T.J. Maxx, Marshalls, Nordstrom Rack, and OFF 5TH, has been exploding recently. Companies are investing heavily in these banners, and as a result seem to be capturing much of the value. TJX’s and Nordstrom’s stocks have done incredibly well, for example, while the financial performance of Rue La La is less impressive. For example, Rue La La’s 2013 revenue was $440 million, while Nordstrom Rack stores brought in a whopping $2.74 billion.
If I had a crystal ball, I think it would say that flash sale sites are not as sustainable as they once seemed. Rue La La has enjoyed a positive indirect network effects loop in the past, but I can imagine that same loop’s unraveling in a chicken-and-egg story of decreased designer interest, leading to a smaller user base, leading to further reduced designer interest. If I were running Rue La La, I would think about how to create direct network effects. If successful, this could help Rue La La create and capture more of the value to be had in this space. Alternatively, I would figure out how to make the platform “stickier” for both users and brands. If it does not, the site may “rue” the day it decided to rest on its laurels.