Selling at cost in exchange of a yearly fee: does it create “thick” value?

Zara is the poster-child of an agile and inno­v­a­tive retailer com­pany. Yet, a small French retailer has estab­lished a model I’ve never seen in the wild before: it sim­ply sells at cost to mem­bers of its “club” who paid a fee.

Clu­bat­cost’s founder is a well estab­lished entre­pre­neur who is man­ag­ing Orches­tra, a chil­dren cloth­ing retailer. Pierre Mestre’s video on the home­page of Clu­bat­cost is self-explanatory, but in French only. He describes the con­fu­sion of cus­tomers faced with reg­u­lar dis­counts of –50%, –70% online and never know­ing if they are hav­ing a deal or not. He also takes aim at the accu­mu­la­tion of mark-ups charged by inter­me­di­aries. His propo­si­tion is sim­ple: he will use its exist­ing man­u­fac­tur­ers network—well estab­lished through Orches­tra; and by hir­ing a team of 20+ styl­ists to cre­ate exclu­sive designs, he will offer cus­tomers all arti­cles at cost. New sets of items are released weekly for a lim­ited time (usu­ally a few weeks).

To build trust, all the arti­cles pre­sented are accom­pa­nied by an item­ized break-down of the cost to pro­vide cus­tomers with the goods (screen­shot below). A dis­count com­par­ing to the usual price of the item in reg­u­lar stores is indi­cated. To be able to buy at cost, you need to buy a yearly mem­ber­ship, with dif­fer­ent pack­ages. These fees are the sole rev­enue of the com­pany. Last point: to avoid gam­ing of the sys­tem and hav­ing groups of peo­ple order­ing through just one pay­ing per­son, there are lim­its to the amount of arti­cles you can pur­chase on a sin­gle mem­ber­ship. If you reach the limit, you just buy a new one and con­tinue. Finally, a show-room has been opened in Paris, where you can try the arti­cles, and the com­pany seems to be plan­ning one in some Euro­pean cap­i­tals, but cer­tainly noth­ing more.

This is the model in brief, and if you read French, you can see that they are aim­ing at a very high level of transparency.

What is remark­able here is the pric­ing model: the rev­enue made by the com­pany is not increas­ing with each sale, their rev­enue is fixed per cus­tomer. If you buy 1 or 10 items (and stay­ing within the lim­its of 1 mem­ber­ship), their rev­enue stays the same. That is a rad­i­cal depar­ture of the clas­sic “the more you buy, the more we earn”.

The future of this com­pany will be fas­ci­nat­ing to watch. For one thing: Orches­tra Group is listed on Euronext (link). With this move (and though the cap­i­tal struc­ture of this sub­sidiary is not all clear), it is evolv­ing from a clas­sic tex­tile retail­ing model into a rad­i­cal com­pany chal­leng­ing many dog­mas. Do you think investors will cor­rectly antic­i­pate the fate of this new model?

To suc­ceed, it will also have to cre­ate strong rela­tion­ships with its cus­tomers and prospect base. How they will use social media and crowd­sourc­ing in par­tic­u­lar will be inter­est­ing. I am per­son­naly puz­zled by the lack of any form of crowd­sourc­ing, and would be inter­ested in know­ing why they have not used it (yet?). Rec­om­men­da­tions based on past pur­chases is also an obvi­ous fea­ture they will most likely launch later, along with indi­vid­ual reviews on each arti­cle (trust build­ing again).

Imag­ine Thread­less sell­ing at cost in exchange of a $120 yearly fee, and you’ll get an equiv­a­lent with Crowd­sourc­ing. The rev­enue growth and hori­zon is dra­mat­i­cally dif­fer­ent, but which model is pro­vid­ing the “thick­est” value, in Umair’s terms?