Discounting is killing online retailers. Here's how one startup is trying to fix that.

by Jason Del Rey @DelRey May 12, 2016, 3:13p

Mark Walker had two goals for his startup this year: Get its new line of clothing into as many guys' homes as possible and get them to pay full price. He would have to get creative.

Walker, after all, is the CEO of JackThreads, a men's clothing site that has mainly been known for its discounted prices since it started in 2008. It had grown rapidly for years on the back of flash sales — short-lasting, deep discounts that spurred impulse buying.

 As the flash fad faded, though, JackThreads was forced to move away from the model, meaning it would have to rely less on discounts. But as revenue growth became a problem, it found itself turning back to its old tricks, even after it launched its own JackThreads clothing label to help it stand out and boost profit margins.

"We were guilty of talking out of both sides of our mouth because we wanted to make top-line revenue goals," Walker told Recode. "We were continuing to send 10 to 14 emails a week to our guy, and we were still relying on the 25-percent-off-all-boots."

JackThreads is not alone in this predicament. It's tough going, selling clothing online as a venture-backed startup in 2016. How do you keep growing fast to satisfy investors without relying on short-lived gimmicks? The fast-growth days of flash sales are mostly over, and subscription-in-a-box successes are few and far between. Then there's the Amazon problem.

Some fashion startups have resorted to opening their own stores to get in front of new customers while also acknowledging that many people still won't buy clothing they haven't tried on.

In December, Walker had a come-to-Jesus meeting with the rest of his board of directors, led by chairman Ben Lerer. (Lerer had bought JackThreads back in 2010, as the CEO of the digital media company Thrillist, when the idea of melding content and commerce was hot. Last year, he split them apart.)

Walker's task: "Getting out of this death spiral of discounting." The group came to the realization that you can't build loyalty among customers if they only shop with you during a sale. And you can't run sales all the time and expect to make money online.

Try before you buy

A month later, Walker and his executive team had come up with their idea: Tryouts. Everything on the site — JackThreads' own line of clothing as well as all the other brands they sell — would come with free delivery and free returns. No minimum thresholds.

What's more, shoppers would have seven days to decide what to keep and what to return — and they wouldn't have to pay until they made that decision.

The executive team knew from their data that customers who bought the JackThreads brand of clothing loved it. They ordered more frequently and spent more than other customers did. But there was one big problem.

"We were just not getting it on enough guys fast enough," Walker said.

The new model aimed to fix that. It combined the free-delivery, free-returns policies that companies like Zappos pioneered along with the try-on-at-home models of personal styling services like Trunk Club and Stitch Fix. About 65 percent of JackThreads customers pay with debit cards, making the pay-after-trying feature a crucial one, too.

"For the guy using a debit card, they need that hundred bucks," he said.

The Tryouts service, in short, aims to bring the store to you. It also includes touches that the company hopes will make returns less of a hassle. Pre-paid return labels are included in the delivery box, as is a piece of tape to reseal it so it can be reused. So is an empty shipping bag in case the items to be returned would fit in that cheaper shipping method. Packages can be left for a USPS delivery person if you live in an area where leaving a package out front is possible and prudent.

Break the advertising addiction

If this plan sounds expensive, it's because it is. JackThreads is paying for shipping both ways and the costs associated with a large expected increase in returns. There's also the risk of having so much unsold inventory in people's homes.

“Delaying your cash flow for like a week or longer?" said Forrester Research analyst Sucharita Mulpuru. "I don't know a ton of merchants that actively embrace that."

To afford it, JackThreads is reallocating a chunk of money from online advertising to these new efforts. The bet — a bold one — is that it can turn its current customers into more loyal ones while buying fewer new customers who don't often stick around.

JackThreads also faces the challenge of training existing customers to pay full price for clothing, when it has taught them over the years that the JackThreads name was synonymous with discounting.

I tried out the new program and it did succeed in lowering the barrier for me to order clothing that sits outside of my comfort zone. The quality of the clothing seemed to be better than fast-fashion brands like Uniqlo, but worse than a brand like J.Crew. As it turned out, the one item I wasn't at all sure about — a pair of black jeans — was the only item I ended up keeping out of the six I ordered. And there's no way I would have ordered them if returns weren't free. (Most of the other stuff just didn't fit right — but I'm a picky shopper, so I'll say, "It's me, not you, JackThreads.")

I asked Walker whether the company turned a profit on my purchase of $60 jeans and he declined to answer. But he said the goal is clearly not to have people order six items and only keep one.

Walker also said the company will consider partnerships that would help make returns even easier. He said JackThreads has talked with startups like Shyp, which has an app that lets people schedule package pickups. It also has talked with Happy Returns, a startup that hopes to get e-commerce sites to allow their customers to return orders to nearby malls or other retailers' stores.

If the majority of clothing purchases are going to someday be made online, similar experiments to this one will have to be the norm. JackThreads hopes it has timed the move right.

"In the end," Walker said, "we're trying to bring the fitting room into the online experience."