ShoeDazzle's New CEO Is Risking it All to Build a Billion-Dollar Company

By Sarah Lacy and Michael Carney , written on June 18, 2012

From The News Desk

ShoeDazzle's business is losing customers and top management.

ShoeDazzle is better poised than ever before to build a big company.

Astoundingly, both of these statements appear to be true. And they both have to do with the same singular event in the company's history. It wasn't changing the business model from the subscription "stuff in a box" fad to traditional commerce. It was hiring CEO Bill Strauss last Fall.

Brian Lee -- the LA wonder-entrepreneur who has co-founded LegalZoom, ShoeDazzle, and The Honest Company -- is one of those entrepreneurs who likes to start things, and leave the scaling to someone else. So when he decided to spend more of his time on Honest last fall, he was the first to say ShoeDazzle needed a decidedly un-Brian Lee CEO who could block, tackle, and execute without constantly coming up with new ideas.

Former CEO Bill Strauss was that guy and two things happened as a result. ShoeDazzle surprised the industry by pivoting away from subscription commerce, as has been well covered. And it kicked off a flood of C-level departures. PandoDaily has confirmed that its President MJ Eng, COO Deborah Benton, and CTO Thanh Khuu all quietly left the company in recent weeks. We've been told that several of them have "landed softly" at other stealthy startups within the Brian Lee family.

According to people close to the situation, these were mutual decisions. These were "Brian's guys," and the new CEO wanted to bring in his own lieutenants.

That may be spin, but it's also not uncommon when a new CEO takes over. But it definitely represents as big of a shift inside the company as the business model change was for customers.

And here's the bedeviling thing about these moves: Both seem like things that would happen at stagnating companies, but by all accounts ShoeDazzle is doing insanely well. "Last month was the best month in our history," says Lee. "We had more growth in new buyers than ever before and buyers boughr more items per transaction than ever before."

The pivot in business model wasn't particularly because of a sign of trouble. It was that Strauss looked at the market in a way the CEO and board hadn't before. Up until then, ShoeDazzle spent all its time looking at how its existing customers felt about the brand. Its net promoter score was through the roof and the constant spazzing out on its Facebook page painted a clear picture of happy customers.

But Strauss asked about all the people who got emails from ShoeDazzle several times a month, opened the emails but never bought anything. Why weren't they customers? It was a question the management and board had never posed.

Those customers all said they didn't have $500 a year to spend on shoes, and there was no convincing them that you could just opt out every month and not be charged. So the company took a huge, huge risk and switched the model.

In essence, they killed a business model that was bringing in loads of cash because of people like our own Sarah Lacy, women who didn't mind a $40 charge enough to unsubscribe but didn't necessarily want shoes every month. Those people -- including Sarah -- may never go buy another pair of shoes at ShoeDazzle again. But it turns out that's not whom the company is going after.

Lee says:

"We dont consider other online subscription businesses to be our customers. We're trying to compete with Forever21 and H&M. To do that, we need to expand beyond our initial model. As a whole, it was neat to see so many women clamoring to it, but at the same time we had to ask, 'How are we going to get from a $100 million business to a $1 billion one?' We weren't going to do that at a single price-point of $40 per month. Even with the new model, we've stayed true to our mission of delivering fast fashion in more personalized and curated way than ever before."
It remains to be seen whether other companies will follow suit. The industry has been asking when ShoeDazzle's golden goose business model suddenly went south, and the answer is apparently it didn't. But the company worried how big it could get, as monthly subscription commerce eventually gave way to customer fatigue.

The bet was to make more customers happy, even while it lost many others who were happy to keep paying $500 a year. It was the classic bet on long term customer happiness, sacrificing near term cash. It was a move the company may never have taken if it didn't change CEOs. And that CEO wants a new team and a new more flexible business model.

ShoeDazzle may not be the company it was only a few quarters ago. But even Lee is confident it's better positioned than ever before to create a huge company.