Betabrand: Too Much Open Innovation?

Betabrand, the online retailer has bought heavily into open innovation. Could it be too much?

Founded in 2009, Betabrand, a quirky online clothing retailer based out of San Francisco, stands out in its use of open innovation during nearly every step of its garment production process.1 In 2003, the academic Henry Chesbrough alerted the business world to the emergence of open innovation, the concept that valuable ideas can come from inside or outside a company and that external ideas and paths to market can be as important as internal ideas and paths. 3 Accordingly, Betabrand has been employing open innovation to design, prototype, and produce its products. 1 Betabrand has raised $35M in funding and has annual revenue of $35M (2017).2

Betabrand’s open innovation process:2, 5, 6

  1. Aspiring designers (or anyone who visits the Betabrand website) can submit a design idea for an item of clothing through the website.
  2. Betabrand employees vet the idea (some ideas are rejected due to requiring services that Betabrand does not have available) and put the idea up for voting on the website.
  3. If the idea receives a significant number of votes it moves into the crowdfunding phase.
  4. Betabrand’s team creates a prototype (often using 3D printing) or mockup of the item and display it on the website.
  5. Customers can then pre-purchase the item through the website.
  6. If enough people purchase it to cover its (mostly offshore) manufacturer’s minimum then the item is produced, and the customers’ credit cards are charged.
  7. The item is shipped to customers (production time of days to weeks plus shipping time)

Betabrand has sold hundreds of distinctive products (including items such as the “dress pant yoga pant” and “sons of britches” pants) which were developed in this way. 6 In 2016, it opened one brick and mortar store in San Francisco’s Mission District. The open innovation model has proved advantageous to Betabrand as it reduces waste in the clothing sampling process, eliminates the problem of excess unwanted inventory, and reduces production time to a matter of days to weeks.

Though open innovation has become a megatrend, only retail companies with the following characteristics are likely to benefit from the extensive use of open innovation:

Demand Uncertainty

First, the company’s products should face uncertain demand. If it is in a market where trends change quickly, customer participation in open innovation can be particularly useful.7 Betabrand’s market is those who seek functional, quirky, in the moment designs, and it has done well in catering to its audience thus far.1 For products which have more predictable demand (e.g. staple items such as T-shirts), Betabrand should consider using a more traditional top-down production model, which would appeal to a broader customer base including on-demand purchases (i.e. inventory available). While it appears that BetaBrand has done this with a few popular items, they could benefit from a more considered stage-gate model to evaluate potential ‘staple’ items.

Consumer Engagement & Incentives

Second, consumers should be interested in co-creating the product, and the company must incentivize these contributors to participate in the co-creation process. 7 Betabrand currently does this through: giving designers 10% of sales of the product for a year, and a offering a 30% discount for customers who vote for the product prior to the crowdfunding phase. Betabrand must be wary about the effectiveness of its current incentives; as its current customer base ages and Betabrand loses its novelty, discounts may no longer be enough to draw in customers to serve as co-creators. Betabrand should continue to carefully monitor the effectiveness of their incentives and customer participation in the co-creating process in the coming years.

Loyal Customer Segment

Third, the company should be able to gather a group of loyal customers or connect with an existing customer segment or group.7  Betabrand currently has a substantive customer base, but the open innovation in online retail space is crowded. Its competitors include online retailer Threadless, which predates Betabrand; it also relies heavily on open innovation in its product creation process. Further, Betabrand’s sales are 97% domestic. The company hopes to go international but must conduct research as to whether a domestic following will translate to an international customer base. 2

In the short term, Betabrand increasingly faces competition from more traditional large retailers (e.g. Adidas), which are beginning to adopt open innovation processes to serve niche customer segments. Given they have more financial reserves, and are better known brands, this is a significant risk to Betabrand’s novel value proposition. In the longer term, Betabrand should consider whether it should become more of hybrid retailer, intelligently using traditional and open innovation processes to reach a broader customer base and decrease fad-risk.

As Betabrand looks to its future, some questions Betabrand might consider include:  Will Betabrand lose its customer base as open innovation becomes less novel a concept? Should Betabrand increase its brick and mortar presence?

(799 words)

(1) Hollis, Sam. How Betabrand Used Crowdsourcing to Build a $35 Million Business. 20 Sept. 2018, jilt.com/upsell/betabrand-crowdsourcing/.

(2) Peterson, Eric. “Betabrand.” CompanyWeek, 23 Oct. 2018, companyweek.com/company-profile/betabrand/california.

(3) Chesbrough, H., 2003a. Open Innovation: The New Imperative for Creating and Profiting from Technology. Harvard Business School Press, Boston.

(4) Laursen, K., Salter, A., 2006. Open for innovation: the role of openness in explaining innovation performance among U.K. manufacturing firms. Strategic Management Journal 27 (2), 131–150.).

(5)Binkley, Christina. “Crowdsourcing Opens Up Fashion Brands.” The Wall Street Journal, 27 Apr. 2016, www.wsj.com/articles/crowdsourcing-opens-up-fashion-brands-1461778931.

(6)“Betabrand: How It Works.” https://www.betabrand.com/how-it-works

(7) Open innovation in creative industries. Part II: The case of Threadless. S Avasilcai and A Bujor 2018 IOP Conf. Ser.: Mater. Sci. Eng. 400 062002

 

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23 thoughts on “Betabrand: Too Much Open Innovation?

  1. Thanks for writing this piece. Something additional that I wonder as I consider Betabrand is whether their model is scalable. I mean this both in terms of variety (how many different products can be experimented with at a time), and in terms of quantity (what is the production capacity of suppliers, and once a production run has ceased (e.g. preorders all fulfilled), how feasible is it to restart production of a popular product? Would some products be kept in production long term?

  2. I think this idea is fascinating. Three thoughts that came to mind for this concept are:
    1) this company has huge potential to generate very successful startups, and has space to partner with venture capital firms when a concept is deemed worthy by meeting the crowdfunding and minimum order requirements. The company could even buy equity in the successful companies and generate revenue to invest in other successful ideas.
    2) the company is an incredible platform to test low-risk startup ideas to see if they take off. The difficulty will be in determining idea placement to ensure candidates get sufficient visibility to even the playing field for true crowdsourcing.
    3) they will have to be very careful about establishing the boundaries for the types of ideas they can successfully place on this platform. For example, if they move to clothing-only, they have the opportunity to partner with clothing manufacturers and be a connector for the entrepreneurs using their platform. But, if they allow the ideas to become too diverse, I am not sure they can deliver on their promise to produce based on the requisite votes and funding.

  3. Great article on the use of open innovation in fashion. I’m actually less concerned about losing the customer base than about losing the co-creator base. I think generally of the customer base, only a small percent will serve as co-creators (say ~5%). There’s a good possibility that these are aspiring designers, who hope to use Betabrand’s products as a proof-of-concept when applying for positions at well-known fashion houses. If those fashion houses themselves start using open innovation, then the aspiring designers will likely switch to creating on their platforms instead.

    I agree that Betabrand should find a better balance between the open innovation approach and the traditional top-down production approach. I don’t think this necessitates opening more brick-and-mortar stores (expensive), at least not soon – they could probably utilize lower-cost marketing to drive customers looking for quirky fashion to their website, at least while they are still one of the pioneers in the fashion open-innovation space.

  4. Great article. I do not think a brick and mortar store is necessary quite yet, but if their novel open innovation concept can weather the competitive threat from established fashion titans like Adidas, shifting to the store might be a competitive advantage. To handle the competitive threat of more open innovation I would continuously iterate ideas to differentiate the platform of open innovation – perhaps utilizing open innovation and crowdsourcing to take risks on riskier and different trends that come from the consumer base. I think they might lose some portion of their customer base but by iterating and continuously improving it should make their consumer base even more loyal to their goods and drive engagement in the experience. If this is then translated into a brick and mortar concept a key would be to translate the experience and engagement of crowdsourcing and open innovation to make sure it is present in the brick and mortar experience. Similar to how brick and mortar stores focus on translating their customer experience in the store to their online platform – Betabrand will need to translate their novel open innovation concept to the store.

  5. Thanks for the great read Aparna. I agree with Sarah that the concern is more with attracting the right co-creators vice trying to maintain the customer base. In very simplistic terms, creating value comes first, customers come second. My biggest concern is managing the stream of co-creators. You want to attract as many as possible, but ideally you want to identify the high quality creators and make it a point not to lose them to larger, more established companies (as Sarah pointed out). In other words, this open innovation is less about trying to match as many product ideas to curious consumers and more about trying to identify untapped talent. With that being said, building a tiered system that rewards top designers with a higher cut of revenue might be a way to start. Perhaps better is to offer employment to these star designers in order to build portfolios from the grassroots up. With proper marketing, these star designers will establish company brand, create sticky customers and minimize customers turning to competitor entrants.

  6. Hi Aparna! Thanks for the interesting article – I had never heard of Betabrand before. From my perspective they actually have a fairly solid business model that gets more robust over time. I don’t think they will lose their appeal for as long as they can draw in the designers that continue coming up with products that their customer base love. What Betabrand truly has is a unique process that they’ve kept on refining over the years and a process for sourcing projects that are exciting and drives their sales. I think such businesses are extremely hard to build because you need a degree of scale to make the unit economics work, however, once set in motion this innovation machine can just continue producing for as long as the customer wants overlap with what the open innovation process creates.

  7. Aparna, this is a really great example of open innovation! I was left with a few thoughts. I think crowdsourcing for fashion grants Betabrand great access to unique designers with great perspectives. I would also echo the concern about whether the incentive is enough to attract promising designers. Are there other avenues that are more appealing to these new designers?

    For the designs that are submitted to Betabrand, is there a protocol for the designs of new designers that gain traction? Does the designer still own that design?

  8. Talk about taking open innovation to new heights! This was an amazing piece in which I learned quite a bit about this firm’s use of open innovation as a means of value creation and competitive differentiation in an industry where the last truest innovations (to my knowledge) are 3D printing (as you identified with Adidas and Nike) and fast fashion supply chain efficiencies. I would have never envisioned this approach to product development to be possible due to limitations in production speed. The retail industry has long believed that “fashion-forward” designers are the crown sources of what is fashionable and what is not. Betabrand flipped this model on its head and grants the power to the customer who ultimately uses the products they manufacture. What better way at predicting demand than by asking those what they want, and what quantities? Genius.

    I do not believe that this use of open innovation will alienate its base since the buzz created in user-generated and user-voted design process builds strong customer loyalty for the business. Consumers will be engaged in the community that Betabrands has created, in a similar way that Indiegogo and Kickstarter have created communities that look forward to and supports entrepreneurs.

  9. Thanks for the article. I love this idea but have 3 main concerns. 1) How easy is it for others to replicate? Can Betabrand keep a unique set of users or designers to stand out in what is likely a competitive space? 2) What is the product cycle-time? Depending on there responsiveness, is it possible for things to be out-of-season or demand by the time people actually receive them? and 3) How does this become a fashion brand which is supposed to be forward-looking? Can users see and drive that or does it stay more personal and functional? Can and should Betabrand do both and if so, how would open innovation support this?

  10. Betabrand needs to combine their open innovation with a more traditional form of commercializing products. It is wonderful that they can get great designs that people love at very steep discounts (just their revenue sharing with designers), but creating long term value in the clothing space is about having a strong, consistent brand and scale. I do not see how they can achieve success if they do not have flagship essentials that customers can consistently buy from the company. This is how you both achieve scale and brand loyalty. If a customer loves a product, they will come back to find that same product or something similar. When these customers become advocates and there are enough of them, more people will begin to buy the products. There are very few people (relative to the entire clothing market) that exclusively wear quirky, distinct clothing every day. A staple is necessary.

  11. I liked this article and I think that this company is using Open Innovation in a very clever way. The only challenge I see is the very low barriers for any competitor to do exactly the same. Since it looks like Betabrand has no traditional design, all is coming from outside. Therefore, if another company decides to open a similar platform where the customers are the ones designing and buying the products, then I dont see what the benefit would be of using Betabrand over the other company. Therefore I do think that incorporating some more traditional design could help the brand. Maybe this traditional design could leverage AI to analyse past designs and come up with new designs that are not necessarily those proposed by the customers.

  12. Interesting read. One thought while reading this is the potential use of machine learning in tandem with open design innovation. Particularly, as the company continues to source and test consumer designs, the data generated from doing so (e.g. popularity, sales) could be used to run predictive analytics regarding both evaluating and tweaking future consumer designs, or even coming up totally data driven designs trained on consumer design data.

  13. I love the way Betabrand uses open innovation in order to design it’s products. It’s very reminiscent of the Valve case, where Valve allowed outside users to create modifications (mods) to their games and sell them on their virtual store. In doing so, both Valve and Betabrand essentially have millions of designers working for them at no cost at all. This means no health care, no vacations, no salary. In addition, by allowing other users to vote on these products they have an automatic filter on the thousands of designs that come in. They have to deploy very little manpower in order to select the top choices and through small redesigns they now own a right to the design of the clothes they sell. In addition, by forcing users to commit to the clothes and only making clothes that have minimum number of customers, they ensure that they will never incur a loss on any product they sell.

    I agree, however, that Betabrand should worry about retaining it’s current customers and, more importantly, retaining it’s top designers. I think Betabrand needs to track top designers on their site and bring them in-house and give them full-time employment (this is exactly what Valve has done and has had tremendous success with). In addition, Betabrand needs to differentiate themselves from competitors that are bound to pop up. If they can continue to grow and build a sizeable user base, then the risk of someone replacing them will be small. Therefore, I think it’s important for them to drop prices (even if it means they are hemorrhaging money to start off with) in order to maintain healthy user growth and it will eventually lead to their success (very similar to what Amazon did in the 2000s, and what Netflix is currently doing).

  14. Really enjoyed learning about this company, Aparna! I was previously unaware of Betabrand, and find this to be an extremely interesting business model, relying on open innovation throughout the entire product development process. I think the point you raise, though, is exactly right: how can Betabrand maintain its differentiation as more traditional retailers invest in Open Innovation processes?

    My recommendation on this question would be that Betabrand does begin investing in a hybrid retail model. It seems that they have already begun to take license with products like the yoga pants dress pants, expanding the product line to several different cuts (e.g., bootcut, straight) and material types (e.g., jeans). This is a step in the right direction with next steps being things like taking some ideas straight to production without voting and order taking, creating full product lines out of a single successful product, and hiring their own designers to create designs based on market research versus only submissions.

  15. Really enjoyed reading your piece about open innovation! I wonder how sustainable this type of retail model will be over the years. You touch on a lot of great points and concerns in the article. I am similarly skeptical about how they will be able to maintain an engaged community of co-creators while staying trendy and continuing to appeal to a younger generation. I wonder if they could (or maybe already do) recognize the aspiring designers that come up with the ideas so that they can use it as part of their portfolios or even do some of their talent acquisition based on serial aspiring designers that have contributed to the brand.

  16. Really enjoyed this, Aparna! I actually just walked by the San Francisco BetaBrand store this past summer, and have been intrigued by the concept since hearing about it.

    I appreciate your skepticism around BetaBrand’s success, especially given it can be seen as “trendy” for the moment and may not hold long-term appeal and viability. However, I actually don’t agree that the companies you mentioned, Threadless and Adidas, are competitors, so also don’t buy the argument that open innovation in clothing is becoming widespread (at least not the way BetaBrand is pursuing it). BetaBrand is for the fashion-forward and fashion-conscious, and part of the appeal is in it being “special” and rare. My understanding of Threadless (mostly just t-shirts) and Adidas (athletic/athleisure) is that these are mass consumer brands. BetaBrand can capture and keep a more specific and selective portion of the market that wouldn’t be lured away by Threadless or Adidas products; I believe these consumers wouldn’t even be considering a decision to spend their dollars there. The downside is that this market can be quite small; the upside is they could choose to continue playing at higher price points (and I believe they should!) so they can make up for small volumes.

    The real question for me is whether this is sustainable beyond the early adopters. It sounds like BetaBrand has been successful in attracting many early adopters who buy into this open innovation model, but I’m curious to what extent other consumers will be interested in trying this out. I don’t believe Betabrand should increase its brick & mortar presence, since the open innovation process can all happen online and also since I’m not sure the capital investment for more in-person stores would pay off. I’m intrigued by your idea of how they could make this “hybrid” retailer model work; it seems to me that once they incorporate more “traditional” retail and start appealing to mass consumers, they may be well on their way to losing their competitive advantage.

  17. Thanks for a great read Aparna! I think this company is a great example of the extreme end of open innovation, where the company’s entire innovation process (from idea generation to selection) is opened to input from external forces. My big concern with this business model and approach to innovation is how can Betabrand create and capture value in this ecosystem, and what should it get paid for (and by whom). Since it has outsourced idea generation to designers and idea selection to customers, it almost seems more like a platform business to connect designers and customers than a fashion company itself. If that’s the case, perhaps the company’s true value-add is its ability to manufacture designs and I wonder if this should be an area where the company should invest to decrease production time, increase quality, and/or reduce cost, and thereby create and capture value. I think another potential area where the company is adding value is its ability to introduce buyers and sellers interested in a specific type of product (ie. connect makers of rain boots with rain boot enthusiasts). Perhaps it could focus on acquiring and matching designers and customers as another way to create and capture value.

  18. Very interesting!

    One of the key takeaways for me was that for open innovation to be effective in retail, cost of prototyping / small batch production needs to be very low. As such (and as alluded to in the post), access to 3D printing which enables a high level of customization and small batch production at reasonable costs seems like a requirement for open innovation to drive product development. I would be interested in looking at the minimum volume required to cost effectively transfer a new product from 3D printing for prototyping / small batch production to conventional manufacturing, which is still most cost effective to scale a product. In addition to SKU management, managing the manufacturing asset base through these transitions seems key to effectively leveraging open innovation to make an attractive financial return in addition to avoiding product stagnation / spur innovation.

  19. I loved this article. Betabrand is a unique company and I loved learning about the open innovation strategy that it uses. I appreciated the way the author highlighted the risks of this strategy. I agree with these risks and also wonder whether Betabrand will be able to create a consistent brand image through its outsourcing of innovation? Does this create inconsistent brand identity? Ultimately, barriers to entry in the clothing industry are low (especially with open innovation!) and brand loyalty is probably the only real sustainable competitive advantage. I can see band loyalty coming from quality but also from brand image and style. Is Betabrand handicapping itself through its open innovation? Does it have a unique style? Does it create brand loyalty? They will always be connected to the latest fad which is certainly an advantage but can a company survive on the cutting edge (reliant on outsourced innovation) without a stable business to provide cushion? Maybe this is possible but it seems risky. I am excited to follow Betabrand and see how this goes.

  20. While I agree with many of the concerns you lay out I still think this could be an interesting case for engaging customers that aren’t necessarily professional designers- at least not yet. At the very least this could be an interesting way for them to build a portfolio while still making money as they develop or seek work at larger fashion houses. I also see that while the clothes themselves might not necessarily follow fashion trends as closely as other brands might, this strikes me as something that would be sold more on the crowdsourcing notion than the actual style. I suppose that could be both a bad and a good thing though. Either way interesting way to attract talent and potentially develop it if someone becomes a regular bestseller

  21. Thanks for the interesting read on Betabrand! I definitely hear the concern that Betabrand is at risk of losing its customer base as open innovation becomes less novel of a concept. However, I think the company is doing some smart things to combat this loss of novelty. For instance, I really like that the company is providing incentives to customers for engaging in the co-creation process, e.g. by offering a 30% discount for customers who vote on the product prior to the crowdfunding phase.

    I agree though that the company needs to do more than simply offer financial incentives. To build the brand, I would try to create Betabrand “open innovation” communities where consumers engage regularly with the brand and with fellow customers. This can be achieved, perhaps, through select brick and mortar stores where consumers have “innovation meet ups” and chat together – socially and in person – about fashion concepts they’re excited about. This would deepen engagement with the brand, create a user community that’s excited about contributing to innovation at the company (and will hopefully remain loyal to it), and create a point of differentiation versus competitors who miss out on this product ideation process.

    With all this said, this article made me think about the powerful combination of open innovation and 3D-printing and the potential for the big players to win over the long run. While Betabrand may not have the scale to invest heavily in the high setup costs of 3D printing, I think a larger, well-capitalized player such as Adidas (mentioned in the article) would be able to marry customized, small-order production via 3D printing with the concept of open innovation, where product ideas are crowdsourced from customers. These two megatrends can work hand-in-hand, as companies that listen to consumer demand preferences can then quickly create tailored products that meet this demand, thereby developing a potentially more loyal customer base who trusts the company to design the products they want. It will be interesting to see how these smaller upstarts fare in this changing competitive retail environment.

  22. I am hesitant to embrace this trend in clothing manufacturing using Open Innovation. Although Bertabrand has done well so far, the process is to easy to replicate (as Bertabrand itself did to Threadless) and the customer base may not be lasting and fickle in their choices. I do, however, agree with you that the company needs to re-evaluate its longer term strategy and how it will respond to competition from the larger brands as well as how it will be able to show that it is actually creating value relative to the other options out there for custom crowd-sourced clothing items beyond just giving a small discount to the early voters.

  23. Great article. I like your presentation of the different steps in Betabrand’s open innovation process. However, one major concern I have is the ownership of the design ideas. Currently, Betabrand collects designers’ ideas from its website and gives designers 10% of sales of the product for a year if the product ends up being displayed on the company’s website. In short, Betabrand buys the idea after it has been submitted and developed. The paradox here is that the value of an idea cannot be assessed until it is revealed, but ideas on their own cannot be patented (the Arrow paradox) [*]. This paradox can prevent talented designers from participating for fear of having their ideas copied unfairly. As a consequence, the quality of design submissions to Betabrand would suffer, because open innovation generally works best with a healthy number of contributors. To overcome this challenge, it is critical that Betabrand continue to build on its reputation for fair dealings with designers.

    *Andrew King and Karim Lakhani, “Using Open Innovation to Identify the Best Ideas,” MIT Sloan Management Review, September 11, 2013,
    https://sloanreview.mit.edu/article/using-open-innovation-to-identify-the-best-ideas/, accessed November 18, 2018

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