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Everlane: An Interesting Case of Radical Transparency

I came across Everlane a while ago when I was looking into fashion startups in San Francisco. I became interested in their business model once I learned about the transparency with which they share information with customers.

Everlane is a high-end/luxury online retail business for men and women clothing. The idea for the business emerged when its founder had a difficult time finding a good quality t-shirt without the hefty price. He wondered why a branded t-shirt would cost $40, while the cost of manufacturing, shipping and handling is significantly less. Turns out, it's because nobody is paying for the manufacturing cost alone, instead helping fund the overhead costs of brick & mortar expenses. Not to mention the mark up on a brand name.

For an online business like Everlane, however, that is not highly invested in property in prime locations (This might change for Everlane), it's much easier to have a lower retail price for the same quality product. But the cheaper, quality product is not the main reason I was drawn to their business model - radical transparency is. Everlane has positioned itself as a company that is highly transparent about its products. For every item on the website, the customer can find information about where the item is made and how much it has cost to make and transport.

"Know your factories. Know your costs. Always ask why." is Everlane's message to anyone who values the fair game.

I am impressed with this message for two reasons:

1) It is a basic corporate social responsibility code to know the source of your product and do your own research - where it's made and where it's coming from. Whether or not the factory is using high quality material to manufacture your product, whether the working conditions are fair and workers are being treated right, etc. Corporate social responsibility might not have a direct, apparent impact on the profitability of the company. However, it's the contribution any companies can make to the sustainability of the global communities which can benefit all.

By positioning itself as a socially responsible company, Everlane can win the hearts of socially responsible, conscious consumers.

In addition, Everlane is running campaigns for the greater good.

2) There's a cost breakdown for every single item. For any listed item, you can see the cost of material, labor, transport and custom tariffs. In addition, they provide a comparison between the offered price, that is always cheaper (as much as 50%), and the retail price. Why is it important to know the cost? Having worked for more than handful of companies in my lifetime, I know that the information about the products is always a secret. In general, companies are secretive about any information. There are even teams within the same organization that are hiding pieces of information from each other! Most public companies don't share any information unless it's required by the Street or SEC or any regularities. As a private company, Everlane has no obligation to share any information with public and yet they choose to do so. This company is trying to win the customer's trust by giving them all the information about the products. This communicates to their customer that they are not trying to cheat their customers into paying more than they should. 'Here's the cost breakdown and here's my asking price. You can compare the quality and price with anywhere else. It's a win-win deal.' Well, a lot of business school lecturers might argue with this logic. As the number one responsibility of any CEOs is to maximize the shareholders profits. However, from a strategic point of view, Everlane is doing a great job targeting and winning the niche audience that value this level of transparency and social responsibility.

The asking price seems to be about 50% more than the "true cost" or COGS. However, the true cost does not include any of Everlane's operating costs. So, we can assume the profit margin is much less than 50% of the asking price.

Other than the low profit margin, Everlane is facing the same challenge as other online businesses. Some people like me still need to touch and feel the product before buying it. Apparently, Everlane is exploring alternative ways to distribute their products through physical channels.

The last thing I wonder about is Everlane's plan to scale the business .According to CrunchBase, the last seed funding that Everlane received was in April 2012 for an undisclosed amount. Not sure if Everlane is profitable yet or not. Despite the great communities that Everlane has built, so far, with this rather low profit margin, it's still unclear if Everlane can scale the business and expand its market.

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