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The RealReal.com – Managed Marketplaces and the evolution of platforms business models

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Online Marketplaces have been one of the hottest investment’s targets in the last decade. As traditional platforms business they were able to expand and grow quickly in the digital era that we are living leveraging the well know upsides of this model: strong network effects, significant scale economies, asset light requirements, and no (or even negative) working capital requirements.

But within marketplaces we have seen a significant evolution of business models with the introductions of notable innovations. When we look today the type of marketplaces business that are growing and consolidating in the market, known by “managed marketplaces”, and we compare them against Ebay or Etsy– as examples of “first era” marketplaces – we see notable differences. To illustrate this phenomenon, I will analyze the example of The RealReal, offering online luxury consignment.

When we talk about managed marketplace such as The RealReal we see a business model that seeks to control and manage the full customer experience. Here, regardless of who is on the other side of the platform (manufactures, resellers, retailers, etc.) the platform wants to be the owner of the transaction, offering several incremental services to buyers and sellers that allow the marketplace to capture an incremental commission on the sales.
The RealReal was founded by Julie Wainwright in 2011 and today has a GMV (gross merchandise volulme) of over $500 million and an estimated revenue of $70 mm. The company value preposition is to extend the life cycle of luxury items, making consigning of high-end goods effortless to sellers, guarantying, at the same time, 100% authenticity of products to buyers. The company, with more than 4.5 million of users and over 2 million of items sold, has been able to succeed in this space innovating the traditional marketplace business model towards a fully managed platform where The RealReal control every step of the value chain, building the trust that is required in this niche market. Some of the elements that I found particularly innovative are:

• They are combining the online platform with physical locations where they offered valuation services to sellers with experts in every product category, removing the traditional frictions of selling second hand luxury jewelry and also increasing the trust in the brand, beyond a particular product.
• At the same time the company is trying pop stores to showcase merchandise for 2 weeks period, combining the online experience with the best of the brick and mortar “showroom” effect
• The company employ 100+ experts, authenticators, gemologist, and art curators who inspect and price every item that is sold in the platform. Even we are talking of a marketplace that does not owns any of the product that are sold (no inventory capital required), is able to guarantee the authenticity of all the catalog and the revenue potential
• Attractive Freemium model with tiered plans generating an incremental revenue stream. The company offers three different membership plans to visitors, including a free one. Each plan offers different options, allowing the company to capture incremental revenue from membership of attractive customers.

2 thoughts on “The RealReal.com – Managed Marketplaces and the evolution of platforms business models

  1. Thanks for introducing this fashion resale platform Nicolás! Recently luxury consignment model is gaining a lot of momentum. During my last internship with a VC fund, one of the deals we were following was a Chinese startup called “Plum” employing similar consignment model for fashion resale. Our survey result suggests that the top three concerns for buyers choosing to buy second-hand luxury goods are “authenticity of product”, “age of product”, and “price”. For sellers, the top three reasons why they don’t list their items on such platform are “not aware of such platform”, “the process is too complicated”, and “selling price is not ideal”. From the survey result, clearly there’s big potential for fashion resale platforms to flourish.

    Another great thing about similar platforms is users have high level of stickiness. Of Plum’s paying customers, 40% are also sellers on Plum. This forms a closed loop of highly engaged users. The platform will also run algorithm to recommend products to users based on their viewing, purchasing and selling behaviors.

    One potential risk about such platform is once any counterfeit products are identified, it could be detrimental to the platform’s image. Some ill-intentioned users might even replace authentic products with counterfeit ones. Hence platforms like The RealReal and Plum have to invest heavily to build up a professional valuation team and relevant processes to tackle that.

    Reference:
    [1] https://www.crunchbase.com/organization/plum-8
    [2] Market research of Plum

  2. Thanks for this very thoughtful post, Nicolás! TheRealReal is a useful platform to understand the customer needs surrounding luxury items and quickly identify conventional pain points: length of ownership and cost. In fact, the similarities to this platform and the platform that I wrote about, Rent the Runway, are significant. However, I wonder if TheRealReal is in fact proof of concept for an “ownerless” model of high-end fashion. Since consigners are effectively putting their luxury items up for sale to lighten the load of their closet of make some extra cash, are they actually extending the shelf life of these items? Or are they revealing consumer trends in needing to own less?

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