How are companies taking advantage of the rental economy?

Takeaway

  • Rent the Runway dresses are rented around 30 times at prices ranging from 10-20% of their retail price. Renting allows them to gross 3-6x the price of each item, compared to a one-time purchase.
  • Retailers are taking notice of the successful rental partnerships Nordstrom and Neiman Marcus have established with the Black Tux and Rent the Runway, which are bringing younger shoppers to their stores.
  • Renting does not need to diminish brand value or exclusivity, which is best maintained by keeping the associated brand and its aesthetics intact.

Case Studies

Rent the Runway, The Black Tux, Le Tote, Uber.

Audio Edition

The move towards sharing and using instead of direct ownership is often called the Sharing Economy. People are increasingly comfortable using items that others have used before. Specifically for younger populations, owning seems like an expensive burden they don’t want to take on when they can just rent something for a fraction of the price without having to make a lasting commitment. Why buy a ton of movies and songs when they can just be streamed or rented from a large library for a flat, monthly fee?

It is now cheaper than ever to own a proliferation of material possessions and having a ton of “stuff” is no longer a good sign of adulthood or considered evidence of middle class status. Instead of having pride in being a family that owns two cars or a large house, millennials place higher value in having an engaging and fun lifestyle. More than that, people are now aware of the process that goes into making this excess of material goods and concerns about the environment, international worker rights, and not finding fulfillment among their possessions has guided people to feel more secure in buying less material goods and renting more often.

The rental model is most common as a viable business model for cars, homes, machinery, and other highly durable items. While Mom & Pop tuxedo companies and the mass market “Men’s Wearhouse” have traditionally rented out tuxes to men in the past, the rental market has been rather limited within fashion and apparel otherwise. In the last few years, however, renting has taken the fashion market by storm as it becomes a relatively new way to sell consumer goods.

This piece explores the pillars, benefits and pitfalls of a rental model for consumer goods companies. As more brands explore implementing renting as either a core part of their business or as an experiment, there are a number of important factors to pay attention to.

The core of the rental model

Determining the viability of a rental model comes down to three main factors: 1) how durable the goods are; 2) how many cycles the products can last for; and 3) what is the best way to make money from the products. Companies must also take consumer behavior into account and ensure that there’s a group of people that are willing and able to rent out their products.

Durable goods

Durable goods are crucial for the viability of a rental business model, and are often defined as items that can last three years or more. With fast-fashion brands having a hegemony over young-adult fashion, clothing as a durable good has taken a backseat as consumers purchase more disposable apparel products instead of investing in lasting pieces. When renting out a fashion item, however, the item must be a durable good that could be used multiple times and by multiple people, much like fine jewelry or quality leather jackets.

Interestingly, when asked about their perceptions of products, both Millennials and Generation X’ers choose “durable” as the word that described high-quality products best, followed by premium, craftsmanship, and luxury, according to Mintel. The connotation of high quality given by the word “durable” suggests that people aren’t only attracted to high-status luxury items for their closets, but they also want fashion items that are strong and long lasting. This helps to explain why a market exists for retailers like Everlane and L.L Bean, whose most recent commercial strongly intimated at their quality guarantee with the voiceover stating: “When did we stop valuing things to get better over time? When did disposable become our default?”

Promoting the long-lasting and strong, quality materials that clothes are made of has proven viable because consumers are starting to become “ingredient-focused.” In the same way that some consumers want to know every ingredient and process that goes into the food that they consume, many are starting to take this approach to fashion and turn their nose up at the artificial materials and cheap fabrics many clothing items are made of. Fast-fashion retailers can’t play in the space for durability and therefore quality, where the material that an item is made from is less important than the trendiness of their pieces.

In the rental space, Rent the Runway Unlimited and Le Tote have started to promulgate a revolving closet of quality clothes that people can pay a monthly fee to access. The goal is to give every consumer a huge closet of high-quality clothing they can wear year-round. However, these services have yet to become mainstream. There are some consumer pain points that they haven’t figured out how to solve yet such as keeping quality high, finding the ideal number of outfit rotations a month, and increasing adoption rates. There is still space for high-quality items to get consumer attention, especially if brands can show that their products are durable and good investment pieces.

Depreciation

Depreciation is the second important factor in a rental business model. Brands must strategize around how quickly an item will go down in value after being used by multiple people, and if its value will stay flat or even increase with time.

While renting and leasing cars is known to bring the value of the product down the moment someone drives off the lot, and then every day after, renting out music and digital goods is absent from this classic deteriorating process. The internet unleashed the premise that digital goods can scale infinitely with zero marginal costs. Netflix, at a high level, benefits from this reality. The shows it produces in-house have a fixed cost and then can scale globally.

The depreciation on high-quality fashion goods falls somewhere in between digital and traditional physical goods. For most consumers, it is often difficult to tell how many times an item has been used or worn since there is no definite way for the consumer to count. Companies that rent out clothing or fashion items don’t usually reveal this information and consumers usually don’t demand it. With no mile reader, these items must retain their quality by being durable to begin with, undergoing successful dry-cleaning processes, and being cared for by the people that rent them. The more an item retains its value through the rental process, the more times it can be rented out while commanding high rental prices.

With Rent the Runway, for example, the number of times a dress has been worn isn’t shared with the consumer, creating the ability to rent at the same price throughout the process. The average Rent the Runway piece goes to customers around thirty times before it is sold at a sample sale and deemed too used to be rented out anymore. Rent the Runway goes through extensive dry cleaning processes, hiring only the best “spotters,” who are paid upwards of $30 an hour, to clean the clothes and make sure they don’t depreciate in value or someone that rents the dress spots something on it that they don’t like.

Extracting Value

While the rental model might not work for cheap, commodity items like socks and t shirts, it holds promise for more durable and lasting goods. As such, there is a chance to extract more value from it using different marketing techniques and business models.

Renting or selling a used item creates a new market for people who aren’t willing to pay full price or are more price sensitive than those who purchase new and shiny full-fledged products. For example, durable goods such as the latest smartphones are usually sold to the relatively small population of people that are willing to pay their full retail price. Then, when a newer item comes out, these items are sold by the original purchasers in a secondhand, open market where people willing to pay less than full-price can purchase them. This not only puts products into more hands but also incentivizes the original purchasers of the phone to upgrade to the newest model. Original purchasers can offset the price of their new phones by selling the old phones to more price-sensitive consumers and then buy an expensive, new product, ultimately putting more money into the company’s coffers.

Renting out fashion products has this potential to extract extra value from items that either the least price sensitive consumers have already used or that people who are willing to pay less can use. Rent the Runway dresses are typically rented at prices ranging from ten to twenty percent their retail price and as mentioned above, are rented out about thirty times. This indicates that RTR can stand to gross three to six times the price of the item if purchased at full price. After this cycle is completed, the brand then sells the pieces at sample sales or on their website, garnering even more value from them. With the right rental model, margins and topline revenue can be much greater than selling wholesale and even direct to consumer in one-off transactions.

Similar to low price schemes used by the likes of Uber to hook people to their app, renting out fashion items has the potential to increase brand affinity, awareness and topline sales. When Uber puts out a new service like uberPOOL or uberCOMMUTE, they start by charging a very low price that makes it easy for people to choose to use the new service. After people use it a few times or for a few weeks, some people become reliant on the service and stick with it even if the price goes up, which even chips away at the price sensitivity for some as the app becomes part of their routines.

By charging less for a fashion brand via renting, a brand can resonate more as it reaches a larger number of people who now have the chance to experience it first-hand, in addition to noticing how they feel and look when they wear a higher quality item. The more they wear and rent from a certain brand, the less likely some people are to be satisfied with the low-quality goods, which are a constant threat for middle and upper market brands today. Similar to how Uber can make people feel like getting on the subway or walking home seem like a chore once they’ve gotten a taste of the good life, shoppers can grow familiar with wearing high-quality brands, which can extract more value from the products in the long run.

Benefits

While purchasing online, showing pictures of regular people wearing luxury goods, and renting fashion items might have been unheard of in the past when luxury goods were meant to be the pinnacle of fashion and exclusivity, new behaviors and ways of thinking have entered the consumer conscience. This is unearthing possibilities for new business models that can be both viable and profitable. When surveyed where they purchased their first luxury goods eighteen to twenty four year olds were the most likely to have made their first luxury purchase online, by far the highest percent of people sampled at fourteen percent, according to eMarketer.

With Nordstrom and Neiman Marcus starting partnerships with the Black Tux and Rent the Runway respectively, retailers have spotted something in the rental and digital-first model that can help out their businesses. Both retailers are trying to get younger shoppers into their stores as the average Rent the Runway and Black Tux consumer is twenty nine, much lower than their current shoppers. These partnerships and forays into renting are helping stores become more relevant to the younger set as they start competing with digital-first companies and other more-relevant stores.

Renting can also be a tactic that brings potential buyers closer to a brand. Retailers that have traditionally used cheaper items in their lines like phone cases, coin purses, or key chains to get their brands on the radar of younger consumers can use renting as a similar tactic, getting the brand into the hands of people who wouldn’t have purchased the item otherwise and upping brand recognition and even future sales. Instead of trying to ladder up to the core brand using these cheaper items, renting allows brands to cut to the chase and have consumers experience their brand in its pure form. According to the founders of Rent the Runway, they had to explain to the designers they were working with that renting wouldn’t take away from their own sales but rather, they would be competing with fast-fashion retailers like H&M and Zara that these younger consumers were buying their dresses from. In this way, renting out items gives new life and opportunity for these brands.

Pitfalls

While there are lot of benefits and untapped opportunities with renting, there are some challenges that brands need to control for. Having a brand try out the rental model can result in changing consumer expectations, something that can be dangerous for brands if not treated correctly. Expectations on the future price of a product play a large part in a customer’s decision to buy or rent out a product, according to Duke business professor and rental-market expert Debu Purohit. The brand must ensure that the consumers who are willing to pay the retail value of a product aren’t stopped from doing so and that renting itself is not a discount, but a new way to try and purchase items. This is a thorny issue that retailers often deal with when thinking about their sale and coupon cycles. Brands must be careful to ensure consumers that the price of their products will remain high so that consumers don’t think they are getting a bad deal and convince themselves to forgo their purchase.

It is also important to think about the timing of when a product comes into the rental market. Renting out items as soon as they hit the runway might not be prudent for a brand that wants its consumers to retain a sense of urgency for purchase. Alternatively, there is also the possibility of giving out the most exclusive items for rent, so that multiple people can experience it at first before there’s a chance to mass produce them. According to Karen Katz, CEO of Neiman Marcus Group, “part of the problem (of sales going down) is the desire of shoppers to buy what they see on runways or written up in blogs right away, rather than the months it takes for such clothes to get to stores”. This is similar to the thought movie studios have to put behind the “windowing” process, when they figure out the right timing of when a movie is released first in theaters, then to video on demand, and finally to Netflix and iTunes and how consumers are starting to grow more impatient as they can’t immediately see a movie that was out in theaters on their Netflix accounts. Brands need to navigate these changes when exploring the rental model, which is entirely possible with explicit consideration of the possible challenges.

Wrap up

As renting continues to become part of the business models of new and mature brands, it’s important for companies to go back to the fundamentals of the renting process in order to ensure that items remain valuable and the business remains profitable. Companies must also explore how they can take ideas from other profitable industries (like the tech industry) to create strong brands that attract consumers of all ages. Finally, they must adapt to the changing consumer conscience where sharing is okay and owning a multitude of items is no longer considered tantamount.

The Cut Ticket

The Cut Ticket provides tactical questions that help you take action.

Brands

  1. Think about your brand, its core customers, and customers you would like to have in the future. How would the rental model get your brand closer to this audience?
  2. Map out all of the brands and product categories that exist within your company. Does creating a new place for young adults to come in contact with your brand make sense, or could it be incorporated into your existing offering?
  3. What is the level of depreciation of the items that you sell? Can you extract extra value from any of them by renting them out or doing different things with them?
  4. Could renting replace sales or excessive markdowns?
  5. How do you currently get more price sensitive consumers introduced to your brand? Can you create a process that makes their price sensitivity decrease after continued use?
  6. What are the biggest barriers for consumers utilizing your brand? Can getting closer to rental models fix any of these barriers?
  7. Can you partner with any rental companies that can bring a larger audience to your retail store, learn from them, and then launch your own model in due time?

Financial Investors

  1. When looking at a company with a rental model, how are they planning to keep their items in top notch condition?
  2. What processes are they using to do this and how could they affect margins?
  3. How is the company branding their rentals? Are they ensuring that the consumer feels like the items are upmarket, clean, and durable? Or does the branding and imagery give a poor connotation of the quality?
  4. What logistical processes do the companies have in place? Do they seem good enough to successfully rent out their items and scaleable over time? Is the team known for their logistic expertise?
  5. What is the turnaround time for each items that gets rented when it comes back to the warehouse? Is the brand extracting enough value from each piece?
  6. Has the company built a community of people that care about the items they are renting and are inclined to respect the quality of the pieces?

Real Estate Investors

  1. How could you fill existing vacancies with rental-based stores and fulfillment centers?
  2. How could renting, which shoppers interact with much more frequently than normal transactional buying, boost both the amount and frequency of foot traffic?
  3. If tenants offered renting, how could you make the experience easier for shoppers by integrating parking, drop off and pickup?
  4. What additional infrastructure do you need to make renting possible for your tenants?
  5. Are there ways to bundle existing commercial square footage for renting operations alongside retail square footage to give companies the infrastructure they need to make renting a success?
  6. Could some of this infrastructure be shared among multiple tenants or a competitive advantage to attack new tenants?