“The Plan Was Always to Go Back to Membership”

Phillip: [00:00:00] Hello and welcome to Future Commerce, the podcast about cutting edge and next generation commerce. I'm Phillip, and Brian is out for today, but that's OK. That means I have our next guest all to myself, Mr. Jeremy Cai, who is the CEO over at Italic, one of my new favorite brands and a brand that's doing something completely different to what they were doing, I think maybe even just a month ago. Welcome to the show, Jeremy.

Jeremy: [00:00:23] Oh, thank you so much for having me. It's a real honor.

Phillip: [00:00:26] I feel like maybe I just don't pay enough attention to the podcast circuit, but I'm going to go ahead and make a bombastic claim that this is the biggest get that will get all year. I don't know how many of these you've sat for, but...

Jeremy: [00:00:38] Oh wow. Zero. Actually zero.

Phillip: [00:00:40] Hey, all right. {clap} I like it. I appreciate it. And I don't expect anybody to have any back knowledge of who you are or what Italic is. So maybe you can catch our listeners up and we'll dive into a little bit of, you know, some of the interesting things that I think Italic represents in this opportunity right now.

Jeremy: [00:00:58] That sounds great. Where would you like to start?

Phillip: [00:01:01] Yeah. What is Italic?

Jeremy: [00:01:03] Oh, yeah, you know, I've had to change that answer a couple of times lately. Yeah, so Italic is a membership that's one hundred dollars a year paid up front. And in return, our members get access to shop all thousand plus products that we designed and developed ourselves at a price point that basically is what we pay for the products themselves. So we're not actually profiting on the products. As a result, our members are saving a lot of money relative to both traditional and direct to consumer brands because we're again not profiting on the products. But in return, we can use this membership to develop a lot of products, more so than the standard brand would, across a number of categories, we've changed that model, as you alluded to. Previously, we were for the past two years, we were a standard direct to consumer affair. So we sold products, a lot of products, at a markup, and that's how we made money. But with this change, now we're not profiting on the product sales, but only on the membership fee itself.

Phillip: [00:02:11] Oh, Ok...

Jeremy: [00:02:12] There's a lot to unpack there.

Phillip: [00:02:14] There's a lot there. The obvious question that I would be remiss if I didn't ask is why the change? And was this in the game plan and what spurred the change?

Jeremy: [00:02:28] Yes, so actually, back in 2018, that's how we originally launched. We launched in November with a a membership platform and at the time it was ten dollars a month. We never actually charged any members. But very quickly we realized, hey, if we want to build a membership that's compelling enough for our members to stay a long time, our product assortment really matters. And at the time, we were selling basically handbags, scarves and eyewear, which, frankly speaking, you know, probably doesn't justify a great membership experience. Those are things that you might purchase one time every couple of years. And really for the next couple of years, we worked towards developing a product assortment that would be compelling for a member to sign up. So really, the plan was always to kind of go back to a different vision of eCommerce. You know, we didn't want to just be doing what everyone else did, which was selling products at a markup, but instead doing something innovative. But at the time, it felt premature. So we pivoted back into the standard, like I mentioned, the standard directory to consumer business model. We ran that for a couple of years. And really this year, I would say two things happened. One, in Q4 of 2019 in my opinion, like we saw the implosion of a lot of the category leaders in direct to consumer.

Phillip: [00:03:58] Yeah.

Jeremy: [00:03:58] And I think for venture backed companies that the kind of the writing was kind of on the wall. And then I think on the second, of course, we had COVID happen. So I think what happened for us was in Q1, we took a hard look at the business and said, like, OK, we have a much larger product assortment now than we did back in 2018. That was basically what we were really vying for for the past couple of years. [00:04:26] And with COVID specifically, I think people are more value driven than ever before. So the value proposition of buying products at cost I think becomes a lot more alluring now. And plus we also wanted to distance ourselves from basically the rat race of direct to consumer venture backed companies. And [00:04:46] I think if we didn't, you know, we'd probably have to try to become profitable and become a lifestyle business. And there's nothing wrong about that. I think it's just not what we set out to do in the beginning. So I think that prompted us to accelerate the change. And we tested it first in April and then the next couple of months gave us the conviction very clearly that this was a much stronger business than we were operating previously. And we fully committed, and we made the change in July.

Phillip: [00:05:17] And what a change it is. It seems like a notable change, not just in the format of the business, but it's gotten a lot of attention. It's the thing that actually spurred me to become a member. So full transparency, I'm a member. I signed up when it was Italic Black and then later it changed over.

Jeremy: [00:05:34] Awesome.

Phillip: [00:05:34] I like the idea myself, although I am the brand whore. I'll just admit it. I'm the person who likes to be recognized wearing the sneaker, you know. But I think that there's a really interesting thing here. When you look at your series A, just kind of I'm going off Crunchbase, so I don't know how accurate is... Thirteen million back in 2018, I think, was what you raised in your series A. And you look at some of the folks that were signed on, I think Heartcore Capital, Comcast Ventures... The landscape was quite different back then. Right?

Jeremy: [00:06:10] Very.

Phillip: [00:06:10] And as you said, you sort of followed it through a couple of transitions. And you mentioned a couple of DTC darlings that sort of fell from grace on the total other, like polar opposite end would be like a Brandless, which has a similar sort of ethos, it seems to me. Unbranded goods, but on the like lower expensive, disposable, consumable end. And you're on quite a different end. How do you see the membership model sort of changing the way that you're trying to deliver on that original promise that you sold on your series A? Like I'm sure you do pitching. Right?

Jeremy: [00:06:47] Yes.

Phillip: [00:06:47] Like how do you kind of approach that in partnership with your investors and get in and rally support around the change of strategy?

Jeremy: [00:06:55] Yeah, there's a lot to unpack there, so I think just to take one step back and talk about the landscape itself and how it's changed. I think, you know, part of the, I guess going to the backstory a little bit about Italic... The original reason why we started Italic, and then I'll answer you very directly, is my background in manufacturing. And I think from basically 2008 onwards, with the whole crop of direct to consumer brands, many of whom have raised hundreds of millions of dollars in venture capital...

Phillip: [00:07:35] Sure.

Jeremy: [00:07:35] Like you mentioned. I think the original promise back in the early 2010s, and this was like Bonobos, and Everlane, and Warby, it wasn't really about like pitching a compelling narrative around the community or sustainability or ethical manufacturing, all of which, for what it's worth, matters a lot. And it's stuff that we care about. But the core premise of direct to consumer, at least the way I see it, is at least back in the day, it used to be all about cutting out the middleman or democratizing luxury or whatever.

Phillip: [00:08:05] Right. Right.

Jeremy: [00:08:06] And I think that was incredibly powerful. But I believe and really back then, it was about cutting out the retailer. Right? So instead of paying 30 to 50 percent of your margin to a Nordstrom's or a Target, you're paying at that time Facebook or Google, but you could do it profitably. And at that time, you could go pretty quickly as a result. And back then, I think the tech investors were willing to value, you know, commerce companies not off of EBITDA, but instead off of trailing 12 month sales, which has changed drastically lately. {laughter}

Phillip: [00:08:40] {laughter} But that's a whole other show. But yes.

Jeremy: [00:08:43] Yes, yeah. And I think that was incredibly exciting.  [00:08:47]But I think the premise of direct to consumer really was about, OK, how do we get quality goods, like better quality, faster shipping, lower prices to a customer? And that's by cutting out the retailer. I think over the years that's really morphed into something that's more like, hey, you know, all of these new direct to consumer brands... Like everyone has one. And it's basically like, hey, we're going to put this thing that we developed online and we're going to sell it to you basically at the same price as what you would find it in store. But in our case, we have pretty branding, a pretty logo, you know, a really nice website. And that's all great. But I think there's something that was lost with the original promise, which is like, hey, you're supposed to get this high quality stuff, like a lower price point. And I think that has changed a lot. [00:09:37] So I think in terms of Italic at least that was always the goal. It was like returning back to that original promise of like getting really high quality goods at a price point that you couldn't match offline. And really, we started as a supply chain company, first and foremost, not as a... We're not like a cool New York brand, unfortunately, although I'd like to be. And I think the reality of that is I think in terms of the company, we haven't experience like massive explosive growth from day one. I think it's really been a data driven grind of developing products slowly, taking the time to really learn about our customer segments and cohort data. We invested in reporting very early on, as opposed to just focusing on earned media. And I think that the results of that is, at least going back to your original question, is really twofold. One, I think positioning wise in the market, we know where we are. Frankly, we can't compete against the direct to consumer brands head on off of a product alone or a story. These are brands that have built their entire company around like one category. And for us to solely rely on quality and price point, I think only goes so far. And then I think the second point is in terms of the investors, I think because we're a fairly you know, we're very lean company, we're fairly financially conservative. We we operate at more so as a non venture backed company than a venture backed one, I think, in the first couple of years. I think that's bought us a lot of trust. And in terms of the transition, I think we really have two paths to follow. One was we continued to operate as a standard brand, trie to become profitable, and maybe in five to 10 years we would sell and exit or we should really shoot for the moon and go for what we originally pitched, which was going back to building a new retail supply chain. And then I could go into that a lot more. But I think that bought us a lot of trust. And in terms of the category itself, I think our strategic positioning really isn't off of building a brand. Frankly, like we are a brand, but we're not. We don't operate in the same way that a brand would because we're not trying to develop all this content around like a single product or category. But instead, it's a cohesive... It's a true lifestyle business in the sense of... Or it's a true lifestyle assortment in the sense of we do cover you from the second you wake up in our bedsheets to what you shower in, which you've bought our towels, so thank you for doing that, even though we didn't make money on it. So really it's trying to develop a kind of this assortment around a product... Sorry... This assortment around a customer who is very specifically, for us, value driven more so than logo driven. So and that's I think that's in a number of categories in your life. It doesn't have to be just like what you wear or what you sleep in. I think people have different preferences on... They could be particular about what they what brand of bedding they use or what logo they have on their bags. But I think for us, it's really about creating an assortment in which, you know, if you have an incentive to purchase anything and you want to be rational about it and you want to save money on it, then that's how we really fit in. It's not about like... We're not going to be a first choice that anyone would have it in a category. So I think in terms of that, it was a pretty logical, rational, I think, pitch to the investors. And they understood. I also think in terms of distancing ourselves, that was one of our goals for the membership itself. We're now kind of valued and also focused on subscription revenue. Now, our transactional revenue, which is what we previously really looked at on a cohort basis, is now formally GMV. So that is, that's not what we're really focused on. For us, it's like a vanity metric. It's a leading indicator to how engaged our customers are. It's an annual membership. So we're still, I'd say, nine months out before our first cohort comes in in showing retention data. But really for us, it's like, OK, now we focus on subscription. And as I think a lot of the subscription businesses out there, I think it becomes a lot more exciting in terms of what we're able to do to offer our members and ability to convert them at a lower price point, but also retain them over the long haul. So, yeah, I think... Sorry for the long answer, but I think...

Phillip: [00:14:35] No, it's my job to keep you talking and me not talking.

Jeremy: [00:14:39] Ok. Sounds good.

Phillip: [00:14:39] So I think that's so fascinating. And I'm sort of venturing outside of our prepared list of questions. Sorry about all this, but I think... Brian usually keeps me in check, just so you know. Yeah. I think it's such a fascinating thing. You mentioned the supply chain sort of being the core, having relationships or manufacturer partner relationships, I think is the thing that would be difficult to replicate if someone were to decide to try to attempt what Italics is doing right now. I think that in itself is extremely fascinating. Maybe you could speak a little bit about that and tell us how you approach that as the problem to solve here, because it sounds like anybody could partner with a factory and say, hey, Le Labo comes from here, so...

Jeremy: [00:15:26] Right. Right.

Phillip: [00:15:27] But maybe it's just not as easy as it sounds.

Jeremy: [00:15:30] Yeah. So you kind of struck at basically the secret of our company and it's not something we talk about publicly very much.

Phillip: [00:15:37] Oh, well, uh... Great. Well, at least I won't get an email saying I didn't ask the obvious question, which is my new goal.

Jeremy: [00:15:45] Yeah. So I mean, I think if any brand were to try to do what we were doing today and take the logical step of trying to copy our product assortment and then offering a membership on it, it would be extremely expensive to do so. We have a thousand SKUS, if you're talking about, you know, our average sales price might be like between $80 and $100 now, which is discounted from what it used to be. That's not our average order. Our average order is a couple of items, but across a thousand SKUS, across like let's say one hundred MOQ per... Like that's a very, very large investment for a normal brand. And it also typically would take a brand many years to design and develop all of these assortments and categories at once. So I think the secret behind our supply chain and the reason why I think we are able to do this in a pretty efficient way is the fact that we don't actually treat our manufacturer partners as vendors. We're not like a vendor client relationship. We actually spend a lot of time up front actually building a financial partnership with them, so this doesn't mean we're skimping on the quality or the design or development process. We do everything just the same as a brand does. We have like three to four samples per product. But really underneath the hood, though, the way our supply chain works is we partner with our manufacturers. They actually invest in the inventory alongside us. So we're getting basically an inventory flow. We're designing and developing our products. And then they're producing it. Again, the inventory risk is on them. And as a result, we basically can have a custom Italic product that we're not paying for upfront. The incentive to the manufacturer, of course, is typically... And this is, I guess, coming from decades of family experience in the manufacturing world, you might be lucky as a manufacturer if you're taking home 15-25% of profit on top of cost of goods. And you'll sell, let's say, something that costs you $16 for $20 to a brand who then sells it for five to 10x, so let's say $100 to be conservative. So on a $100 sale a manufacturer is making $4 to $5, which to me like coming from the manufacturing world never really felt fair. And then I think on the flip side to a customer, you're now paying $100 for something that in reality cost $16 to make. So the way Italic works is we're basically doubling or tripling their profit margin. So instead of making, you know, instead of making like $4 or $5, they might make, let's say, $8, $10, $15 dollars on that product, which to them is very exciting because now they're making like legitimate profit versus the $4-$5 per SKU, sorry per item. And then on to a customer, you're no longer paying $100, you're paying $16 plus whatever the profit is, which is still substantially lower than the branded price, whether you're a direct to consumer or an incumbent. So that's not something we talk about publicly very much. But I think the reality is that is our probably our biggest financial moat. We've built really deep ties with our manufacturers. Each of them had to basically invest like hundreds of thousands of dollars into inventory up front, which, as you can imagine, was not an easy thing to do. And we had to play a pretty heavy game of chicken and egg, which we needed manufacturers to sell products. And we also needed customers to sell to in order to convince manufacturers to develop products for us. So really, that was the past two and a half years in terms of like, you know, playing that balance. But I think we're in a pretty good spot now. Each manufacturer that we've taken on has become a lot, I guess, easier because we have case studies in the past with others that allows for a lot of different things, including much more efficient financials, a negative cash cycle and other things like that. But that's pretty hard to copy.

Phillip: [00:20:01] I don't know if you are familiar with the story of Michelle Cordeiro Grant's founding of Lively, but it's something she went into a lot of detail on at the end of our first season of Step by Step, which is giving a plug for a little mini series that we run quarterly at Future Commerce. And she was talking about her strategic opportunity, very interesting too. Their series A was a 15 million raise. I think most of it came from a couple angels. Harvey Sanders I think was involved in that. And has a deep background supply chain as well. A lot of that inventory risk went on to the suppliers. A lot of the value that they built in that business or what she self described as like their moat was being able to produce closer to on demand and in greater assortment of sizing with a higher quality of output, because the manufacturer saw, like the actual factory saw the upside in having a greater return on that investment because they have skin in the game effectively, which worked out OK for her. You know, after I think three years, it was in eighty five dollars million acquisition by Wacoal, which a lot of people I think we're calling as early. I'm not a venture capitalist and I don't play one on TV, so I have no idea what I'm talking about on any of this.

Jeremy: [00:21:27] {laughter} Ok.

Phillip: [00:21:27] But what's really interesting to me is this is now the second time I've heard a similar story. I appreciate you, you know, leading with that transparency, too. [00:21:36] I know you've not told the story much on other podcasts, but I like hearing that approach because it really talks to sort of the strategy and nature. And I hear a lot of folks on this show talk about community and story and I'm of the mindset that you have to be really strategic, brilliant, skilled operator and a good partner to... I mean, you can only set a table. You can't expect people to sit down and eat the meal just because you're saying, hey, there's a community here. There has to be something additional there. [00:22:11] And I think that's... Anyway, the other thing for me is I'm literally draped head to toe right now in Italics. So I have the the Pulse performance tee on. I've got the weekend jogger's on. I've got the black currant geranium candle in the background. I'm so curious as a consumer, I'm not this person. You don't know me, but I am not that person. It's very, very curious for me. I wear Lululemon and, you know, Outdoor Voices and I've got, you know, Tracksmith in my closet and all these other brands that I would typically buy and perceive as premium and be proud that I bought it. So I find it an interesting thing for me as a consumer to be looking for excuses to purchase products from you now that I'm part of the membership. Do you think that others are sort of seeing the same kind of value? And are they following suit as I am, in really trying to test the limits of how much value they can eke out of the membership with Italic?

Jeremy: [00:23:20] Yeah, I mean, I can answer that, like quantitatively and also just anecdotally as well. I guess before I answer on the numbers side, what we realized over the years is really we have two core customer sets. One is your very classic direct to consumer audience in big cities that are 25-35 millennial, high income, middle to high income, well-educated, means liberal, et cetera. So no surprise there. And we also have about 40 percent of our customers, and this was on the transactional model, so for what it's worth, it might have shifted. But a very large chunk of our revenue came from suburban, what I call tier two, tier three cities. Much older. So skews like 50, 60, 70, you know, parents, grandparents. And for them, really, the incentive isn't to buy an online brand, but it's like, really, I don't care about the logo, I just want high quality products, and this seems like a great win/win. So I think in terms of what we've noticed is like really... And we do a lot of customer surveys. But what we've noticed really is like there's three primary reasons why people purchase from us. And this is actually respective to both. So number one really is it's all about value. And this is like by far the majority. And you hear this across like buy it for life. You hear this from minimalists. And these are people who self describe themselves as that way. And really the incentive there is, "I want high quality products. I want it at a good price, and I want to feel smart," is what they're really telling us. The second reason why the purchase is because of design. So we're not trying to push the boundaries on design. As you could probably tell, all of our products are fairly evergreen in terms of design. We're more classic than we are trying to do anything innovative. So they like that. A lot of the direct to consumer brands, I can say with confidence, do not do that actually. It's always I mean, they have to differentiate somehow, right? Besides great branding and design.

Phillip: [00:25:41] Sure.

Jeremy: [00:25:42] But that's how they do so. I think for us, like people actually like the classic designs. And then I think thirdly, it's actually a mixture of like ethical manufacturing, sustainability, all the things that I call like what other brands might call their primary driving value or mission or whatever for us really is secondary. So there's secondary benefits of our supply chain, which is lower inventory runs because manufacturers are financially incentivized to produce only as much as they believe will sell. For us, like we do very heavy audits of all of our manufacturing companies. We have a team in Asia full time. We have a team in Europe kind of making sure that QC is legit. But really, I think like those it's a mixture between a lot of different things. But for us, like, that's not what we're trying to stand for. You know, frankly speaking, like we don't really have a clear set of values. It's like we're saving you money and, you know, you're going to feel good about that. But like we're not trying to shove down, like this is XYZ, that should make you feel guilty if you don't buy it.

Phillip: [00:26:50] Which is kind of a breath of fresh air, to be honest with you. But I digress. Yes, carry on.

Jeremy: [00:26:57] We're just not that type of company, if it makes sense.

Phillip: [00:26:59] Don't feel pressure to respond, by the way, like we're extremely principled on this show. And we think all those things are very important. I think I'm becoming cynical in that there's so many brands who have been proven to not really live up to that marketing speak. But I'll let you carry on. As a redirect, too, by the way, in that way, I think no one bought into Amazon Prime a decade ago because they thought Amazon was going to fix something systemically wrong with the world. And nobody's bought Costco for the same sort of set of reasons. It's because it's come down to value in money and selection and price. Right?

Jeremy: [00:27:42] Exactly right. And just to, I mean, confirm my stance, I do one hundred percent agree. All of those things are important. We do things that are more so for internal purposes, just that we feel good about what we're doing. But it's not necessarily something that we tell our customers. So, I mean, having said all of those things, like I think on a quantitative way to view the transition, really, there are a couple of metrics that we looked at very closely. So the number one, of course, is revenue on a transactional basis. But because we're no longer profiting, that's not a profit center for us, we actually use that now as an indicator of just engagement, and we touched on that, but really the more like specific metrics that we look at are like frequency of purchase, you know, on a cohort basis, your lifetime value. For us again, it's not going to be a profitable... Like now we have to lifetime metrics. Now, one is subscription and of which we only have small data pool of because it's annual. And then secondary is transactional. And then lastly, it's like AOV. So average order value, conversion rates, things like that. So essentially what happened with the membership conversion was all of these things we had guesses as to what would happen. So we thought average order value would drop, for example, because logically you would expect these members to be purchasing less... Sorry, smaller orders more frequently to make their membership useful. We thought, you know, your frequency of purchase might increase and so on and so forth. So in reality, all those three things increased substantially. And that was really what we were looking for during the pilot. Our average order value actually stayed the same, if not increased by 10 percent. Our lifetime value typically, we would see maybe like a 1.5 frequency by the end of this, maybe like 8 to 12 month mark, depending on the cohort and seasonality. But that actually got accelerated massively to basically the four to six week mark. So the behavior we were expecting to see happen over the course of your shrank to basically happening in one month. And then same with the transactional lifetime value as well. So the amount that people were spending, especially on the first order, and then I'll get to answering very directly in a second, really became about, OK, I want to get as much value out of this membership as possible and that had a lot of positive consequences. So as you can imagine, we believe that this is a positive signal for engagement, and we believe that if you save enough money with us, you'll stay with us for years to come. And that's a bet that we made financially because we're capping ourselves at one hundred dollars of revenue no matter what, whatever you buy or don't buy, we hope to retain you. But I think the unintended consequence was because people were purchasing so much more, our planning cycles and demand and also supply forecasts like basically got thrown into the garbage, frankly. So now we're placing orders that are literally 10 to 20 times larger than our orders in the past. And part of that is in anticipation of new members signing up and our current members continuing their purchase cycles. But it's also just a change that we believe is going to happen since our members want to get more value out of the membership. So I think in terms of like the reason why people purchase, really it's two fold, in my opinion at least. One is I guess this is a core concept of the company, but we believe customers are smart. I think there's a lot of brands that will say that, but I think think otherwise. And I think people are smart in a rational, logical way in which if you're paying one hundred dollars for something, you want to get your money's worth and you're going to spend basically as much of that as possible to the degree that you still think it's like something that is rational, I think. So, for example, I think I alluded to this. I used to think that we would get in trouble with the big brands because we say, like, it's the same manufacturers as XYZ.

Phillip: [00:31:59] Yeah.

Jeremy: [00:31:59] And I could go into that if if you'd like. But the reality is like people who buy a know I won't name any names, but XYZ handbag, are never going to buy an Italic handbag. And that's perfectly fine. But I think that same person, what we found is a logo chaser, as some people call them, would be perfectly fine sleeping on unbranded sheets or buying unbranded cookware or so on and so forth. And the other case, like someone who really, really loves, like some French cookware brands like the Dutch Oven or whatever, maybe they don't care at all about having a logo on their shirt or their bags or what have you.  [00:32:41]So really, I think Italic appeals to the value conscious part of your shopping behavior. It's really not about the brand. If you want the logo, you're never going to buy the Italic version of it. But we might appeal to you in some other categories. And that's really the strategy as to why we've got that large assortment. [00:32:59]

Phillip: [00:32:59] That's really fascinating. Sorry, I just had to exclaim, and in the middle of your sentence. Like that is fascinating.

Jeremy: [00:33:05] No worries.

Phillip: [00:33:05] I think I've seen a little bit of like Twitter thread sort of think pieces on who Italic is for. And they've tried to segment it into this, like, value centric shopper. I've seen people draw comparisons to the TJ Maxx sort of model, and I've loved the way you've dealt with some of that criticism. And this is really fascinating to me in that you do have a larger, total addressable market than you're being given credit for, because there are other categories where they may value premium and be the logo chaser in one product or one category, but not in another. And in that case, they are still an Italic customer. So I'd love to hear some of the product development there that's helping you make those kinds of decisions.

Jeremy: [00:33:56] Yeah, I mean, and for what it's worth, I do think a lot of the criticism is valid in the sense of like, hey, this is an unproven business. And I think the biggest challenge that we have is convincing someone that a membership is worth it. Memberships aren't for everyone. I personally have subscription fatigue. So I think that is, it's a very valid point. And we have to prove that we can convince people to join. But our way of proving is through inventory and through our product assortment. So really, I think the way I look at it is... And this is as a larger company, this is what we kind of think about internally. You alluded to Brandless, but we wanted to always start high and then go low, whereas Brandless, I think took the alternative...

Phillip: [00:34:41] Started... Right. Right.  

Jeremy: [00:34:42] Started very low and then wanted to go into higher ASPs, which for anyone that is extremely hard to do and is very, very rarely done well, not just in consumer, but like in general. So I think for Italic, over the years we've transitioned from a focus on what we call luxury goods. So soft goods, leather goods, apparel, cashmere or things like that into what I think are more generally deemed as quality goods. So this is why we introduced bedding very quickly. This is why we entered into cookware. And those were, I think, intuitive guesses at the time being, when we were still early, but now we're a very data driven, actually I hate saying that because I feel like everyone says they're data driven. But for us, like we make merchandizing and product development a data driven work mainly because we do so much surveying. We have a Facebook group. And I do believe it's like a legitimate... It's like, hey, have 61% of the requests are coming in and it's for like outdoors and home goods for COVID, which is exactly what happened, then we should really go into those and go in fast because the data is very kind of telling us very clearly that's what we need to do. And thankfully we have the flexibility to do that because had we not done home goods earlier and we were only in fashion, which is where design and logos matter a lot more, frankly, COVID would have hit us much harder, and we probably would be in a much tougher spot. But thankfully we diversified early. So in terms of productivity assortment, I think the way we look at it is really twofold. One is just in terms of the like, I guess I tend to use the word data, in terms of the data do we believe this will be a conversion lift? Meaning we will be able to acquire new members more easily or profitably. Or is this a retention lift in which this is something that our members have been asking for for a long time? And these are requests from current members and basically are we going to be able to improve our one year retention? And that's still to be determined. But I believe our way of addressing that is through constantly delivering products that people actually want to see. And then I think the second way we look at it is I think it's our merchandizing criteria really is one, is this a category that does not have a lot of technical constraints around it? For example, like we probably will never... We looked into subscription products such as like razor blades. That is something that I think we'll probably never touch because of the subscription element. And it just requires a lot of customizability and competency around subscription, which we know we are not. Something we've looked into as well is like furniture. You know, that is something that requires a lot of shipping and logistics complexity, which right now we're not able to handle. So that's one. Secondly is the margins on the products. So to the Brandless example, again... You know, CPG in general, like you might see a 3x markup, which all things considered, is not that bad, considering the retailer might take a third, and then you might take a third, and the product actually might cost a third. So I think CPG is something we avoid, but we look at the competitive landscape in the margins that they take. And if it's we're talking like five to 10 and sometimes beyond, then it's a pretty good category for us to enter. We want I mean, the main reason why I think people are interested is because we can offer a comparison pricing. And it's like if we're selling our knife set, which is a recent example for 80 bucks and a comparable set goes for like $250 and beyond, that's very quantifiably... That helps a member kind of imagine how they're going to save money very quickly. And then I think the last one is just like the maturity of the categories. So, for example, apparel is a brand ocean in terms of maturity. It's like very, very competitive. And the good news is we can be price competitive. So we look at the maturity of an online segment. Cookware is now kind of blossoming. Bedding's been around for a long time. Apparel has been doing great. Categories that we've been looking into are things like fitness, outdoors, jewelry, travel. You know, these are all categories that we don't have to explain to someone. Someone's already done the homework of explaining to a customer why this is a good buy online versus buying it like from Ace Hardware or something like that. Just as a random example.

Phillip: [00:39:27] Right, sure.

Jeremy: [00:39:28] So, yeah, I think those are really the two kind of approaches we take internally. One is like on the merchandizing lines, why we want to enter one from an internal standpoint. And the second is just like on a purely conversion and retention lens, which is like, are we going to make more money from this or is this a waste of time?

Phillip: [00:39:47] I think there's a really interesting model that you're building, too, in setting an expectation with your shopper, your customer, in that you have products that are launching every month. And sort of the category that you're dabbling into isn't something that you're having to make a long term investment in, is that when you stock out you stock out, and next month there's something else coming. I'm looking on the site now. You have you know, there's sort of like an ephemeral quality of like the needle's kind of moving to what's in vogue or popular right now. And Italic might be able to deliver on those things if you're sort of reading the market correctly. Earrings, jewelry you mentioned is something that I think is fairly new to Italic. I haven't been a customer that long, but it looks like that's a thing happening here in August. Leather sneakers, looks like it's coming up in September. So it's like a calendar you can sort of see this roadmap or this thing that's being developed as like always expect something new for Italic which makes it very sticky and it's not old. And not just in that where the apparel options are going to change with the seasons or we're going to have an edit to change over with the seasons. It's something deeper than that. I think that that communicates a whole lot without you having to wave your arms around about it.

Jeremy: [00:41:07] Right, right, yeah, yeah, I mean, that's exactly right. I think product launches has been a big part of our, I would say, our revenue strategy for the past two and a half years as a direct to consumer model. And I think we have the benefit of having a lot of products to launch and a lot of categories to do so in. And I think it always builds excitement around our customer segment. But I think the reality is like we can't keep this up forever. But I think for the next two years it's going to be a big part of why people are going to join is they see what we have today and then they see what we have upcoming and they get excited about that. So and I think the other part of that is like once you buy the product, it's kind of a weird sometimes we get the like, hey, this is too good to be true type of response. And we have to somehow get over that hump and someone has to transact once, and once they purchase like some product they know, like, OK, the claim is legitimate. This is like a luxury quality product at a price point that is more mass market. And then they basically continue to purchase. And really, I think we have to get over that hump first. And there's a lot of different ways that we do so, which is through like better photography or better copy. But again, like we're not a standalone category brand in which all of our messaging is focused on, let's say, like lawn care, for example. And we're known to have technically great lawn care products. We just have to build a modular like consistently high quality. We can't miss, if that makes sense, on the quality mark.

Phillip: [00:42:46] I guess I would... I feel like I could spend hours with you. I'll be respectful of your time. We usually ask our guests to think about what the next 18 months is going to look like. If you could look out a ways and see like what are the challenges you think you'll have to overcome? I sense that the more that people are at home, the more that we're all kind of cooking more at home, sleeping in our beds more often, you know, getting tired of the decor. It seems like you have some tailwinds, at least in the kind of product and selection you have now. But outside of that, what are the kind of challenges you'll have to overcome in the next 18 months to sort of get that consumer to buy into the membership and keep them coming back?

Jeremy: [00:43:31] Yeah, I think there's the consumer side and then I also think there's the supply side. So on the consumer side, I think I can be very transparent about this. Thankfully, we have low churn. So we offer 30 days if you want to sign up, and you don't make a purchase, and you regret your purchase, then feel free to cancel and we'll do it, no questions asked. And we're pretty liberal about that. But thankfully, we see that happening very like at a sub 2% rate right now. So but when people do, we always ask why they do. And it's always like a survey. And then we also have a survey which is like upfront when you're getting off the waitlist and you decide not to convert, what is the reason why? And consistently across both surveys, there's four primary responses. Two are kind of like nice to hear. One is people signed up by mistake. And they're actually living in like Germany or Singapore or something, which is happening surprisingly way more than we thought.

Phillip: [00:44:34] Wow.

Jeremy: [00:44:34] We are US only. And people just signed up not knowing that it was US only. So number two is financial reasons. So a lot of people were furloughed. We hear that a lot, especially over the past, I would say from May to June that happened very frequently. And then the last two are ones that we can tangibly help. So one is we have the products that they wanted aren't in stock or number two, the products that they want we don't currently offer. So those would basically be like other categories or products that we're missing in our current categories. So I think on the consumer side, really the way I see it is like our greatest challenge right now is getting our inventory straight and making sure that we can increase both the products that we offer as well as the depth and supply of the products that we currently offer, so that when we're onboarding new members, we can do so in a way that gives them a great first experience. That's why we have the waitlist right now. It's like a legitimate waitlist that's controlled by inventory levels. It's not by, OK, let's let people off.

Phillip: [00:45:41] It's not just a hype engine? Because that's...

Jeremy: [00:45:46] {laughter} I mean, for what it's worth, like we did try that in 2018. That is how we launched. So I can't say that's not a bad idea either, but currently it's like a technical waitlist. And then I think in terms of the more like customer facing piece, I think it's really about like education and content right now. Our two biggest channels for growth consistently over the past two and half years have always been a mixture of basically either direct traffic or Facebook and directly, now we kind of think of as just word of mouth happening. So and we do that from post purchase surveys from like attribution sources as well. So and attribution is a whole nother conversation we can get into. But generally we believe those two are probably going to be the ways we scale our information. We're not almost certainly not going to do offline retail anytime soon. And we never had planned to as well. It's just not part of our marketing strategy. We might experiment with new channels. Honestly, I think the hardest part, like, for example, when an investor asked any direct to consumer brand, like, OK, this is great, you are converting like a 30 CAC and you're LTV is like 100. Great, great, awesome. How do you scale? Like that is the hardest question anyone in the industry has to answer right now.

Phillip: [00:47:04] Right.

Jeremy: [00:47:04] I think. And so many things happen like brands plateau at hundred million, plateau at one fifty. And those are all like numbers we're far away from. But I think for us, we're just kind of taking a little bit slower. You know, [00:47:19] I think there's an advantage to being around for a while. And I think we have certain membership targets in mind, but I think we're not going to ever try to acquire members unprofitably. That's [00:47:30] just not something that we're... Like I mentioned, we're a pretty financially conservative company. So we're just very conscious of that. I think in terms of the customer side, like there's a lot of content that we want to produce. So education around like how we sort of manufacturers, what types of products they're producing, like how they do so, you know, blogs, all the stuff that like is the boring kind of, let's say, Facebook marketing content and maybe a mix of new channels like that's realistically how we're going to scale.

Phillip: [00:48:02] Right.

Jeremy: [00:48:02] Yeah. And then the supply side, we basically have to convince our manufacturers to incur a larger and larger inventory risk, which is going to be a challenge. But I think there's ways that we can make them feel more comfortable with higher sales volumes. So, yeah.

Phillip: [00:48:17] That's a very, very complete answer. You're like the model guest on a podcast. Thank you.

Jeremy: [00:48:25] {laughter} Thank you.

Phillip: [00:48:25] That's probably because you haven't hired a PR person that got in between us because they usually like to tamper down the questions on my end. What should I be asking you? You mentioned there just a second ago about, you know, some greater depth on... It's slipped my mind. What's another question that others might be pondering that a listener of the show might attempt to write me an email later on saying I didn't ask something?

Jeremy: [00:48:59] Yeah, I mean, I think for what it's worth, a lot of the stuff that I'm saying right now is probably not applicable for like 99% of the brands out there. And of the ones that are, they're probably more mass retailers that maybe operate in like a niche space. So that's my intuition. So for what it's worth, I also run another company with my girlfriend, Katie called Not Pot. It's like a very fun, American, wellness CBD brand that I feel like I just ruined my credibility right here.

Phillip: [00:49:39] {laughter}

Jeremy: [00:49:39] But I will say that we were relatively early. So we've been around since like 2016 before the big boom and that's bootstrapped. So it's the complete opposite of Italic, which is venture funded, very large assortment, so on and so forth. So I think I'm operating with both lenses in mind has been really helpful for me, I think. And that's also part of the reason why we like to shoot a lot of the traditional like blue chip, direct to consumer, New York playbook, if you will, which is go big, spend massively and hope for the best, which for what it's worth, has not yielded a success yet, in a financial like exit yet.

Phillip: [00:50:21] Yeah, yeah. Yeah. That's well documented. {laughter}

Jeremy: [00:50:25] Right. Right. So I don't have to repeat that.

Phillip: [00:50:25] No, you don't.

Jeremy: [00:50:29] {laughter} In terms of things that I think are really helpful in thinking about. So I think the venture ecosystem right now for direct to consumers still exists. My guess is it's not going to be like the top tier firms that will be doing these investments. I think a lot of the reality that people will probably operate in the ecosystem nowadays is like you might if you want to raise, you might raise like either before launch and do between one to three million. If you're lucky. Maybe it's less. And consider that your last capital raise, like basically don't assume you'll be able to raise beyond that at a terms that you'll be excited about. And then I think for what it's worth, I don't expect that to change. I don't think that will go back to like pre COVID times where, or even pre 2019, where there was just like 10x multiples...

Phillip: [00:51:25] Sure.

Jeremy: [00:51:25] I think on the exit side that might still be the case. You still see conglomerates or legacies like paying pretty large markups on revenues. But I think in terms of the alternative, which is you're currently operating in business and you're scaling like I think the main thing that I would recommend to everyone is invest in... And this is so I guess on brand for me, but invest in reporting, invest in data, invest in understanding your metrics much better than I think... I think the reality is, like a lot of these brands, when they start to grow, they assume everything they've done today will work into the future. And that also goes back to the two core metrics of like what's your LTV and what's your CAC? And I think the reality is like that changes very quickly depending on the company stage. And what you do today almost certainly will not work like when you're doing two times your volume. A lot of brands like if you want to scale and you don't have like a celebrity presence or you don't have like this huge, like, brand presence, let's say you have like a Glossier, etc. It's a million times over. Reality is like you're going to rely on performance marketing.

Phillip: [00:52:42] Sure.

Jeremy: [00:52:42] And that's not something that people talk about very proudly. But you have to become good at performance marketing. And as a result of that, you have to develop a really good competency in producing great creative on an ongoing basis. And you also have to develop really good competency around building a data driven mindset of OK, is this risk of scaling spend worth it? Because ROIs will almost certainly drop like immediately and so on and so forth. I mean, I could talk about that all day, but I do think that's the main thing that's missing from the conversation I see.  [00:53:17]It's like it's always about community, it's always about PR, it's always about like brand, brand, brand. But in reality, brand takes you to the first step. And I think you have to maintain brand going forward, but you have to become really good about scaling as a performance company to do so. [00:53:31] And granted, like, we're not great at that at Italic yet. I think we're getting better. But that's I think that the next step for us.

Phillip: [00:53:40] You've said data a few times. Maybe I could just pick your brain on one random question then. I saw this... Someone I highly respect who does performance marketing on Twitter had mentioned something about, you know, something that corporate staffers or consultants say all the time is where is the data as a means to back up some sort of claim.

Jeremy: [00:54:07] Right. Yeah. {laughter}

Phillip: [00:54:07] Like a consultant going to say, "Where is the data?" as sort of like a blanket response for pretty much anything. But startups don't do that. Like startups are basically saying, "How do I test this to get the data for my use case?" I'm curious what your reaction is. Is that like a maturity curve sort of a thing?

Jeremy: [00:54:27] No, I mean, I think that's very fair. I think. So actually, that's a really good point. I think being data driven doesn't mean risk averse. I think the two can go hand in hand. I think instead, especially at a startup level. Startup metrics are not like corporate metrics in which corporate metrics you look at last year historicals, and in startups like that does not work because last year historicals might be like 20% of what you are going to do this year.

Phillip: [00:54:56] Sure.

Jeremy: [00:54:57] So I think instead what I mean specifically is like, OK, on a cohort level, are there observations you're making in the data that will lead to certain intuitions or I guess exciting things that would maybe be moving the needle for you? So, for example, for Italic, on a cohort level we studied like the purchase frequency, LTV and AOV of the members versus nonmembers. And very quickly it became obvious like within week four that on a frequency level, I think people were doing like 60% better as members. On an AOV level it's 10% better. LTV is tied to frequency. So it's kind of comparable. So very quickly, we were able to come to the conclusion that, hey, even though we might be limiting our financial upside to a hundred dollars on these numbers, that actually makes more sense because the conversions. The conversion lift and the engagement lift was higher and leads us to kind of conclude that membership is a good idea. I think the wrong take there would be to say, OK, well, last year we did 300K this time this month, and this year we're doing like I don't know, let's say 600K, so it's double. And last year we grew like the next month 20% or something like that. Or when we launch a product, and one launch went bad like that means we should never launch a product again. I think there is a lot of it doesn't mean like have decision paralysis or like not do things because the data suggest you to do otherwise. I think it's more like it's a really good pulse on how the company is doing on an aggregate level. And I think far too few companies invest in having that pulse on their company too late. Or sorry, far too few invest in that. In general, it would be helpful for them to understand these things earlier in their customer lifecycle.

Phillip: [00:57:06] Well, you know, as an operator and long time operator in your role, I think having that mindset from the top... I'm a firm believer in the proverb, you know, as the head goes, so does the body. And I think when you have that kind of insight driven leadership, I think that trickles down to the rest of the organization and causes a culture shift. I think it's really difficult when having been on the consultant side, not in performance marketing as much, but certainly in driving, trying to drive or draw a line to return on investment in the agency space to, you know, to direct to consumer brands who are looking to justify their spend with you every 12 months. When it's time to re-up.

Jeremy: [00:57:51] Right.

Phillip: [00:57:51] Our general approach is to be risk adverse. And I think that that's such an interesting thing to play out in this time when so many brands are bringing that sort of capability and skill set in-house. And I think it says even more when you're held to that standard by prolific operators who are in leadership, who are looking for that kind of mentality, that you don't have to be risk adverse. But having data earlier on is definitely better than not having it later. I don't know how to say that nicely. Certainly not the most eloquent way to wrap up the show.

Jeremy: [00:58:35] Yeah, it's like it's something no one wants to hear and it's the boring thing to do.

Phillip: [00:58:39] Oh, sure.

Jeremy: [00:58:39] It's like the least exciting part of the business versus like getting a fancy press release. But it's also, you know, just as important.

Phillip: [00:58:46] This is the problem, right? Everybody wants like one cool trick and/or the bag of tricks. And I think that that's a hard thing to keep up over the long haul. I think the trick is just having adaptability as a superpower and understanding what's happening right now and investing in what's working right now and trying to sense on what that right now is going to be. And in just a little bit a ways. We have this really interesting issue, especially in thought leadership, you know, direct to consumer echo chamber of Twitter, of this idea that there's no best practice outside of Facebook ad spend, and it's a moving target. It changes all the time. So it's really interesting when you come across folks like yourself who are doing it in a completely different way and sort of have constrained themselves, the business model has kind of sort of constrained you to have to be creative within a boundary. And I know that, like, now I'm channeling Brian, who probably would have gone on and on and on about this. But, you know, having boundaries is what causes us to thrive. And I think it's a very human thing to try to thrive within those boundaries. I'll give you the last word, Jeremy. Any final thoughts?

Jeremy: [01:00:10] Um...

Phillip: [01:00:10] Go join Italic. How's that?

Jeremy: [01:00:12] Yeah, sounds good.

Phillip: [01:00:13] Thanks, I appreciate you taking all this time. Once again, for those of you listening, I enjoy my membership. I get nothing out of this. No one's paid me to say this. But I do enjoy Italic. I think you might, too. And thanks to our guest today, Jeremy Cai, the CEO, over at Italic. You can find it at italic.com. And Jeremy, you're over on Twitter as well. Very interesting follow. I love seeing you in the mentions. Thank you for your time today.

Jeremy: [01:00:39] Thank you so much, Phillip. It was a lot of fun. Really appreciate it.

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