Subscriptions are finally back at ShoeDazzle, new venture round may be coming too

By Sarah Lacy , written on January 30, 2013

From The News Desk

shoedazzleNow these are words I never thought I'd hear ShoeDazzle founder Brian Lee say: "Bill Strauss actually did us a huge favor to free us from this model."

It's particularly surprising in the same conversation where he confirms what I've been predicting for months -- that ShoeDazzle is bringing back monthly memberships.

As we've covered -- at length -- Lee replaced himself with Bill Strauss back in June. What followed was one of the quickest unravelings of a promising startup I've ever witnessed. Not because Strauss didn't work hard, but because he was utterly the wrong fit for the company, immediately dismantling the three things that had made it unique: celebrity, monthly memberships, and social engagement. Kudos to the board and Lee: They recognized it and didn't delude themselves, and Lee came back in last fall to right the ship.

And in even quicker order, Lee appears to be turning things around -- dramatically. It's as if ShoeDazzle lives in a weird alternate dimension of hyper-speed even for the fast moving startup world. "Everything I'm doing has the goal of elevating the brand back to where it should be and bringing back as much engagement as possible," Lee said in his first interview with me since the whole dramatic story began last summer. (We'll have a much longer sit down at our May PandoMonthly in LA... That should be interesting given our somewhat relentless coverage of the company.)

We've already reported a few key parts to this turnaround effort. Lee dramatically slashed spending, returning the company to cash flow positive for two of the last three months of the year. On January 14, he launched a redesign of the site that included a new partnership with Rachel Zoe, a new "Daily Fix" feature, and some new policies around carrying outside brands and having a variety of price points.

Today, Lee is announcing the final part of his strategy: Yes, it's a return to memberships. But with a significant twist. "It was tough enough to get women to sign up for a $39.95 membership once," Lee says with a laugh. "It'd be even tougher to do that twice."

Instead, the membership will be priced at $9.95. That doesn't get you any shoe on the site the way the old one did. It's somewhere between the old plan and what Amazon offers with Prime.

First off, that $9.95 you pay goes into your account as a credit to be used towards anything you want on the site. And it can accrue for up to 12 months. Members also get 10-25 percent off regular prices, free shipping, extended return policies, and first access to sale items, along with other benefits. "We had almost 1 million people paying $39.95 who still wanted to be part of a membership," Lee says of the rationale for bringing back some kind of subscription. (See also: Duh.) After a limited beta program, more than 12,000 members resigned up, he says.

So why the kind shout out to Strauss for killing subscriptions to begin with and "freeing" ShoeDazzle from the tyranny of all those happy, paying customers?

It's not because Lee refuses to criticize Strauss's tenure. Although he mostly dances around the issues, he lets this one slip about the horrific (and expensive) TV ad campaign Strauss greenlit that featured a nasal-pitched commentator explaining the product with all the charm of nails on a chalkboard: "I almost shot myself when I saw that," Lee says burying his face in his hands. "If I wasn't laughing, I'd be crying right now."

(FYI, new commercials are coming too.)

But while Strauss may have killed subscriptions for the wrong reasons in part, Lee maintains he was right that subscriptions done the way ShoeDazzle was doing them -- and other competitors still are -- was simply not sustainable.

The model worked at the beginning; ShoeDazzle was profitable from the get go. And then a few things changed, that Lee hadn't anticipated. The problems weren't the things we were told back when Strauss made the change -- that women didn't want to be members. It had to do with rapidly escalating costs, the two big ones being production and customer acquisition.

Prices to produce the shoes in China increased by more than 25 percent, limiting the type of shoes that the company could offer for the set-in-stone $39.95 price. ShoeDazzle has moved production further inland where labor is cheaper, but that means the logistics of getting the shoes to the ports is more complex, and production has to be planned six months in advance, not four months in advance. "We have to place bigger bets on where our business will be in six months now," Lee says.

Lee has used the uncertainty as an opportunity to test out production in Vietnam and even produce a new high end $69.95 line of leather shoes made in Italy. But the core of production will likely continue in China.

Meanwhile, the cost of customer acquisition went up as everyone else caught on to social ads and marketing tactics. "We were one of the first advertisers on Facebook," Lee says. "It was cheap and we milked it for all the customers we could get." That's since changed.

Indeed this is a mounting concern in the industry, whether ecommerce entrepreneurs with high valuations want to admit it publicly or not. Alfred Lin -- former Zappos CFO and Sequoia Capital partner -- recently told me the over-reliance of customer acquisition via social was a big reason he'd strayed away from the large valuations of many ecommerce 2.0 companies. It's unclear whether anyone has figured something affordable and sustainable out, he says. Similarly, in conversations with PandoDaily, Bill Gurley of Benchmark and other VCs have criticized leading ecommerce startups for essentially just buying revenue, not figuring out a particularly novel new strategy. Google Keywords is still the cheapest and most effective way to get ecommerce conversion, Lin says, and startups simply aren't going to beat Amazon at that game.

"If I could turn back time and start ShoeDazzle again, this is the model I would have implemented," Lee says of the new subscription plan. "Women loved this brand, but as long as we were stuck at $39.95, there was no way we were going to make money. We modeled this out to the point where we were doing $5 billion in revenue and we would still be losing money."

If you take all his moves together, Lee has done a clever job of bringing back the emotional levers that worked in the first iteration of ShoeDazzle, without bringing back a cost structure that would bankrupt the company. There will still be a lot of inventory at that just-sub-$40 rate for the value conscious shopper, but they'll have the flexibility to offer shoes at other prices and not, yunno, go out of business.

He hopes that women who used to come to the site on the first of the month for their showroom updates, now will come to see the Daily Fix's brand new style of the day. It's not simply a deal of the day. It's a brand new style launched everyday. Buzz around new styles was a lot of what generated ShoeDazzle's unpaid social engagement in the pre-Strauss days.

Rachel Zoe brings back the celebrity curation marketing potential -- and indeed ups it. Lee says he polled users on who they'd best like style advice from and "Rachel Zoe was No. 1 and there was no No. 2."

He's careful when I ask about the differences in brand perception between ShoeDazzle's cofounder and former celeb spokesperson Kim Kardashian and Zoe. "There was a huge demographic we were hitting that weren't necessarily identifying with Kim Kardashian's style, if you will," he says. "Rachel Zoe speaks to all audiences. She can dress the younger, edgier crowd and the classic, sophisticated style as well."

Some early evidence: Zoe's "Rachel's Edits" is the second most trafficked page on the site; the Daily Fix is the third most trafficked page since the changes earlier this month. And in general, the repeat visitor traffic is up 12 percent in the last two weeks as well.

On the subscription front, Lee's plan encourages the serendipity I loved about being a ShoeDazzle member: An insignificant amount disappears from your bank account every month, and pretty soon you have a big ol' credit to spend on what feels like a free splurge.  While I will likely buy fewer shoes from the company given the smaller subscription rate, and generally higher price points, I'll likely buy at least a few pairs a year again. That's no small feat for a company that suddenly stopped refusing to take my money a year ago. It's not nearly as great of a deal as it was, but couldn't sustainably deliver two-for-one dog food with free shipping forever either.

ShoeDazzle's supporters have continually argued I'm not a typical user when I've criticized the company in the past. Now, they better hope I am.

One tweak Lee isn't making is launching new verticals like some competitors have. While the company has a few small lines around handbags and jewelry, shoes are the bulk of what it does and the brand will focus on that.

While more tweaks may come, this is the new foundation of the company. Lee says the company isn't in an immediate cash crunch, but may raise money in the next five months to bolster its position. He feels good about the company's ability to raise funds, and indeed, existing investors Andreessen Horowitz are incredibly bullish on the turn around so far.

Partner and ShoeDazzle board member John O'Farrell was somewhat sheepish when he told his partners that Strauss hadn't worked out and Lee was coming back to turn around the company last fall. His partner Marc Andreessen had a different take. "My reaction was 'yippee ki yay!' This is the best news I've heard about the company in years," he says. (Andreessen is an investor in PandoDaily.)

But while bullish on Lee, even Andreessen has been surprised at Lee's rapid progress. He's been particularly surprised at how quickly the financials started to improve. "Typically in a situation where a company is having a rough time, the financial indicators keep getting worse over time," he says. "In the case of ShoeDazzle, they keep getting better."

Every month, O'Farrell comes back from the board meeting to report that the numbers were better than expected, with a longer cash runway and more revenue growth than anticipated. "Usually in a turnaround, revenues are falling," Andreessen says. "In this case, revenue month to month has increased in this entire period. Even while the margins were compressing dramatically (under Strauss), growth was still happening."

Of course, this still leaves one big honking risk factor: Lee is still the CEO of two companies. As I've written before, this almost never works. The rare -- as in, two -- examples were by the exceptional Steve Jobs and Elon Musk, and neither said it was ideal or sustainable. It's generally not wise to hold yourself to a standard that those two of the greatest entrepreneurs in recent history could barely attain. When I asked Andreessen's view of the situation, he declined to comment.

But for now, Lee is sticking with both. He is clearly spending the bulk of his time on ShoeDazzle. He works at Honest from 6 am to 9 am and then spends the rest of the day at ShoeDazzle, sometimes revisiting Honest work late in the evenings. In the short term, ShoeDazzle clearly needs Lee more. "The Honest Team is the strongest I've ever worked with," he says.

I hope for the sake of my baby's hip diapers, this management bravado isn't as misguided as the one that hired Strauss to run ShoeDazzle.