What happens when beauty, health and wellness products move from standardized to personalized?

Right now, if you walk into your nearest grocery store, drug store or department store, you'll find at least thirty different types of toothpaste, shampoo, conditioner, deodorant, mouthwash, sunscreen, moisturizer, makeup, lipstick, foundation and a litany of other cosmetics and daily essentials. Although there are dozens upon dozens of options on the shelf, finding the right one for each individual can be challenging, assuming that right one even exists. This is the current state of consumer packaged goods (CPG) brands in the cosmetics, health and wellness space. Lots of options, but little personalization.

In the past few years, two different trends have emerged to shake up this part of the CPG world. The first trend is simplification, which assumes that a single product is right for a large group of people. This is the technocratic approach, and companies like Dollar Shave Club and Bevel (razors), and Quip (toothbrush and toothpaste), as well as many others, have followed this blueprint. The thinking goes something like This is the single best razor/toothbrush/toothpaste you should use.

The other, more interesting, trend on the other end of the spectrum is personalization. On this end, three approaches have emerged. The first takes aim at the discovery process itself, making it easier for the right people to find the right products. I'll call this Phase I Personalization. Companies like Birchbox, Ipsy, Sephora (through its Color IQ service) are using technology to quiz customers on their needs and habits, store this information, and then point them to products that might be right. Although this line of thinking aims to improve the discovery process, it still deals with mass-market products and these companies usually have nothing to do with the products themselves. They are effectively brokers.

The second approach, Phase II Personalization, combines an improved discovery process with a layer of customization that the customer handles herself. Skin Inc., sold through Sephora, offers a custom-blended serum set along with a quiz so customers can mix their own compositions in the comfort of their home. Finding Ferdinand, a beauty startup in New York, allows customers to customize their ideal lipstick by mixing their own color blends. Like Phase I Personalization, Phase II is a definite improvement, but feels like a pit stop on the way to the real transformative approach.

This brings us to Phase III Personalization, which is the creation of entirely custom products that leverage the internet to get there. While Phase I and II were replicas of the previous paradigm, Phase III products are only possible in the new paradigm.

The most interesting company in the space right now is Function of Beauty, which offers entirely personalized shampoo and conditioner sets. Customers take a quiz to define their hair status and goals (up to five), choose their ideal color, add their name to the bottle, pick their fragrance, and receive their custom shampoo and conditioner in less than a week. Function of Beauty boasts that it can produce over 12 billion different combinations and that each product is made to order domestically. Other companies such as Curology, which offers a custom acne cream, and MatchCo, which offers an iPhone app that lets a customer take a picture of her skin and then creates a custom foundation, are hinting at this same trend, although Function of Beauty remains the most committed and well-defined.

Phase III products are betting that the billions of humans on this earth have different needs and they should be uniquely served, while Old CPG Products are built on the assumption that people have a set number of needs and a few dozen products can serve them. I'm not sure what the answer is, but I'm optimistic about fully personalized products both because it greatly improves the discovery process and creates the opportunity for a much more satisfying purchase since it's tuned just for the customer.

As we see more Phase III companies pop up, they will likely start entirely on the internet and sell direct to consumer. This allows these companies to have a direct relationship with their customers since the wholesaler provides no value in this scenario and only eats up margin. Interestingly, personalized products don't have to be that expensive. Function of Beauty, for example, charges $32 for an 8oz set or $42 for a 16oz set. Although this is not cheap, it beats many contemporary and luxury brands on price and also lasts for a number of months. The company has automated much of its fulfillment processes, which allows it to offer more combinations and fill more bottles in less time.

So what happens to retail if all future Phase III companies will start online? For personalization driven companies, retail might still make sense in limited quantities. A showroom model where customers could try, smell and sample different products might work, as some customers may want to be more involved than others in the creation of the final personalized product. This sort of setup is possible because these companies can lean on their post-internet cost structure and build retail experiences around it.

The more interesting—or worrisome—question, depending on who you ask, is what happens to all of the existing retail in the CPG and beauty industry, anywhere from drug stores to a brand's stores to department stores like Sephora? It's pretty clear that if CPG moves to a personalized world, there's no need for the massive retail footprints existing brands have. First, almost all of the personalization happens online and in fulfillment centers, not in retail stores. And the showroom model requires a fraction of the space compared to the stores that hold inventory from major standardized brands.

It seems plausible that Phase III personalization will impact most forms of beauty, health and wellness products. Toothpaste, shampoo, conditioner, deodorant, mouthwash, sunscreen, moisturizer, makeup and many other products make sense as personalized offerings. Some might exists on replenishment subscriptions, while others might not.

Finally, there seems to be a big opportunity to roll a lot of these companies up into a holding company that uses even more technology to synergize a lot of the backend operations while offering different brands and experiences on the front end. Conglomerates like this are increasingly defendable since they are integrating a strong relationship with the customer alongside proprietary technology and logistics. My guess is that none of the existing companies in the space will take this leap. They're too dependent on their existing business and don't have the skillset, which means the opportunity is ripe.