Going head to head with online retailers like Amazon.com (AMZN) can be a life-ending experience for e-tailing startups. Amazon can sew up markets at the expense of short-term profitability. To survive, smaller sites have focused on social online-shopping tools such as the pinboard-style comments section on Fancy’s retail site, or have pursued a niche such as moms-and-kids outfitter Zulily. Retro geek-chic site ModCloth, which sells new clothes in vintage styles, has done both, using customer feedback to decide what items and apparel lines to stock. It’s used that information to develop smartphone and tablet apps that are driving traffic and sales.
Mobile devices account for 42 percent of visits to ModCloth, up from 27 percent at the beginning of the year, say co-founders Eric and Susan Koger, the husband-and-wife duo who founded the company as high school sweethearts in 2002. IPhone and iPad customers buying ModCloth’s offerings, such as soda-fountain dresses and retro-print skirts, through apps released earlier this year visit six times as often—and spend more than twice as much per purchase—as those using traditional websites, says Eric, the chief executive officer. He says ModCloth’s sales hit “well over” $100 million in 2012 and will rise more than 40 percent this year, as the company adds about 100 employees to the 450 working in Pittsburgh, Los Angeles, and San Francisco.
The Kogers credit their success to a clear division of labor: He’s tech; she’s fashion. “What really sets us apart is this marriage of art and science, left brain and right brain,” says Susan, the chief creative officer. Most e-commerce companies “don’t really get the fashion,” she says, while many gifted clothing designers “don’t have that analytical background” to compete online. She and Eric launched the company from their Cooper City (Fla.) childhood homes the year they left for Carnegie Mellon University.
Since then, ModCloth has become a top shopping site for young women. The company buys dresses and other women’s clothes from designers, then stores the items in its Pittsburgh warehouse and promotes them online using twee names like “Olive Your Dress” and “Sailor Swift Skirt.” (Puns are big on ModCloth.) Even before it had mobile apps, it used data collected from visitors to its website and on social networks such as Pinterest to evaluate which clothes are popular enough to keep restocking. Customer feedback has pushed the site away from backless dresses, elastic waistbands, exposed zippers, horizontal stripes, and especially short skirts, and it started stocking plus sizes.
ModCloth’s “Be the Buyer” program, started in 2009, encourages users to give detailed feedback on newer pieces offered in the store, which designers may then incorporate into future products. “A customer might be saying, ‘I like the print, but I don’t feel like the silhouette is flattering,’ ” says Trisha Kiblinger, a national sales manager at Tulle, which has sold goods to the site since 2007. The fashion label adjusts designs based on feedback from ModCloth users, Kiblinger says.
Eric says ModCloth’s profit margins are comparable to those of Asos (ASC:LN), the U.K.’s largest fashion-only online retailer, though he declined to say whether ModCloth is profitable. (Asos reported a gross margin of about 50 percent last year.) Investors including Accel Partners, First Round Capital, and Norwest Venture Partners have put $40 million into the Kogers’ company. Norwest led the most recent financing round last year, helping the company put off an initial public offering or a buyout while it focuses on growth—and on sifting through its user data and comments to spot trends. “ModCloth had such unique products that weren’t available elsewhere, and it’s on a site that understands how to use social better than any other retailer I’ve seen,” says Joshua Goldman, a general partner at Norwest. “It gives them enormous advantages.”