In this article, I describe Rent The Runway Business Model Canvas and how they effectively solve their customer’s problems to make money. I also look at the infrastructure that Rent The Runway requires to create and deliver this value
Customers
Rent the Runway ( RTR) targets middle-aged affluent women in US coastal cities. The women are typically between 25 and 50 and have well paid professional jobs in cities like New York, Washington or San Francisco.
This customer segment was targeted because they spend a lot of clothes, Jennifer Hyman the founder of RTR mentioned spending $2,000 on a dress that she wore once. For women, far more than for men clothing is an expression of self, of identity and this creates a deep emotional bond with what they wear.
The RTR business model creates value for its customers in several areas. The customers work, often long hours, and despite being well paid live in a highly consumerist society. There is always more that they want to buy, and this exerts great pressure on their wallets.
The dresses are also strong symbols of status and traditionally they have been a Veblen good with the price being an indication of both status and quality.
Value Proposition
The value that Rent the Runways creates renting out Veblen gods is threefold. First, it gives customers access to top brands, or status symbols, at a discount. Second, it allows customers to be consumerist and shop frequently without suffering buyer’s remorse. Finally, it allows customers to spend less time shopping.
The core part of the value proposition is the rental of dresses. The customer who invests in a monthly subscription gets to wear dresses that are valued at more than 10x the value of the subscription. For example, a monthly subscription of $150 allows four $500 dresses to be rented at once. The customer saves significantly on the purchase price by renting.
This works because novelty is a key aspect of female fashion (witness the success of Zara which has focused on the fast production and distribution of clothing lines within a season) and items will often be only worn a few times before their value to the user decreases dramatically. Unlike a house which has a continuing and consistent value, a dress has a significantly shorter half-life.
For RTR this is exploited so that instead of an item being worm 3 – 5 times over 3 months (a 3% utilisation rate) the item is rented 150 times a year (41% utilisation rate – or 60% once weekends are excluded). RTR makes its margin by exploiting the arbitrage between these two utilisation rates.
Buyers Remorse
Buyer’s remorse is a key issue in consumer purchases, especially for big-ticket items. Consumers consider the opportunity cost of the purchase once the dopamine hit of the purchase decision has subsided and frequently regret their decision especially for big-ticket items like expensive dresses.
What RTR does is to make the buyer’s remorse irrelevant. It does this by reducing the cost and psychological impact of any decision. Decisions made with a subscription have already been paid for. They are also not permanent because the dress will be returned. As a result, ‘buying’ becomes far easier once these objections are removed.
[It’s worth noting that Amazon handles buyer’s remorse in quite a different way – it makes it really easy to return items]
Finally, because the financial and ownership consequences of the decision are reduced significantly customers must invest far less time in making the decision. If the decision is wrong the cost is several tens of dollars. It is not hundreds or thousands of dollars. This enables impulse decision making with confidence. As a result, customers of RTR can make significant time savings – up to 68% of customers claim that they shop less as a result.
This also helps RTR disrupt the traditional B2C shopping process. Because the decision has far less cost and consequence it is likely that the user journey from item to completed purchase is far faster than for traditional eCommerce stores or traditional retailers. The abandonment rate is likely to be lower as well.
Marketing & Distribution Channels
Rent the Runway is primarily an internet-based operation. Most rentals take place via its website. This is also the first place that customers interact with it. It also has a smartphone app and five stores. These are in the big coastal cities – where there are dense populations of its affluent customers. Whilst these stores are expensive they act as both brand ambassadors and market expanders for women who are not confident ordering online. They only serve a fraction of RTR’s 6 million customers.
Word of mouth and PR are the other major marketing channels.
Customer Relations
If you look at RTR’s website there is no ability to interact with the company via email, phone or chat. You can go to a shop or you can make an order. Customer service is limited to customers with orders or subscriptions. The low-cost insurance that RTR offers is a way of driving down the number of customer interactions enabling this to be a very low-cost part of the operation.
This provides an advantage against traditional and e-commerce retailers who have to invest significantly more in staff to handle customer service because choices and responses are far less constrained.
Revenue
The RTR business model has three revenue streams
- Rental
- Insurance & late charges
- Sale of dresses
The major revenue streams for RTR the rental of dresses. These are either done on a piecemeal basis or part of a subscription package. The date rental is more seasonal – peaking at times of the year such as Christmas and Eid when people dress up more. In contrast, the subscription model provides steady cash flow throughout the year, allowing greater stock levels to be carried.
RTR also offers insurance and charges late fees. Whilst these generate cash they are part of RTR’s process design. What they do is influence customer behaviour to increase operational efficiency. The insurance charge means that almost no time must be spent in the discussion if clothing is damaged. That reduces the number of Customer Service agents and decreases the conflict that could reduce retention rates, thus increasing the lifetime value of the customer.
Finally, old dresses are sold off. Any sale at this point will be pure profit as the rental will have covered the purchase and operational costs several times over.
Key Resources
The key resources that RTR has are its stock and the services that let it refurbish dress and get them back out to customers as quickly as possible. As a result, it has invested significantly in dry cleaning and in-house refurbishment to maximise utilisation rates. However, it has taken the decision to outsource its logistics to UPS an area where the company has decided not to build a core competence.
Key Activities
Whilst customer service and platform development are important the key activity in the business model that RTR undertakes is sourcing the clothes that it will offer. These need to be both attractive and robust enough to keep looking good after multiple short-term rentals. The first activity maximizes conversions on the website, whilst the second maximizes the ROI on the investment in the item.
Key Partners
RTR’s key partners are UPS which provides all the logistics. By using a single partner RTR is able to build a robust process that limits the time that SKUs are in transit and thus not available for rental. It also has partnerships with hundreds of fashion brands. Whist, it’s purchasing power gives it advantage suppliers also get a much wider brand presence in key markets which results in increased awareness and possibly sales.
Costs in the RTR Business MOdel
The largest costs in the business will be the inventory purchase and its maintenance. At $10 per item at retail rates, almost 30% of the top subscription package’ revenue could be eaten up before other variable costs are considered. With sales now at $100 million platform development is unlikely to be a significant cost though there will be ongoing efforts to resolve legacy code.
