The Unlikely Business Benefits of Crowdfunding

By ILAN MOCHARI, Crowdfunding is called crowdfunding for a reason: You’re getting money from the masses, because they believe in your business or perhaps even because they just owe you a favor. Put your company or a product on a crowdfunding site and, if you’re fortunate, you’ll come away with cash and a sense of consumer demand.

According to a recent article by Marty Lariviere, a professor at Northwestern’s Kellogg School of Management, there may also be some hidden benefits to crowdfunding: inventory management and operational flexibility.

Crowdfunding and Gustin Jeans

When it comes to inventory management for short-lived products (such as fashion goods), Lariviere points out that product variability is costly. “Having to commit resources before knowing what will sell means risk,” he writes. “But that risk also suggests an opportunity: If one can find a way to reverse the order of things and commit resources only after knowing what will be demanded, then an otherwise unprofitable business can be a profitable one.”

That’s where crowdfunding comes in. If a company can use a crowdfunding platform to learn which products customers demand, then it can offset the risk that comes with product variability. In other words: If you have a precise sense for the quantities of customer demand, then you’ll do a a better job of stocking and turning over your inventory. You won’t have to commit resources to buying or making products, before you know which ones will sell.

As an example, Lariviere cites Gustin, a maker of high-end jeans. He writes:

It initially sold its jeans through boutiques, which bought jeans at a wholesale price near $80 but then marked them up to around $200. Gustin had to front all the cost of production and then wait for stuff to sell. Now, they have reversed the order of things and take orders directly from customers ahead of production.

That’s the inventory management piece of it. Another benefit for Gustin is operational flexibility–specifically, the ability to offer more variety. The reason? Gustin no longer has to take risks buying one type of fabric or another before knowing what customers want. This gives them the flexibility to source based on what they know will sell. They’re no longer hemmed in by risky sourcing choices made in advance of gauging customer orders.

The Bigger Picture

All of the above is clearly working for Gustin, but as Lariviere mentions, there are reasons clothing companies have traditionally relied on wholesale-retail distribution. “An established brand that has built a broad distribution network could be doing quite well in that model and may be at a scale that cannot be easily reached with Gustin’s model,” he writes.

Plus there’s the whole try-them-on-before-you-buy-them thing with jeans–a category of clothing where finding a perfect fit isn’t easy–or any piece of clothing for that matter. “If customers find testing the fit of jeans important, being in stores is helpful and may point to a limit to how much Gustin can grow,” he concludes.

For some context, I reached out to Nudie Jeans, a global brand based in Gothenburg, Sweden, to get their take on Gustin’s model, as described by Lariviere. Public Relations & Marketing Manager Ruari Mahon emphasized that the inventory management benefits Gustin gains through crowdfunding are feasible in wholesale-retail arrangements, too. “Orders are placed ahead of the assigned season, before production gets underway,” she says. “The ‘selling season’ usually closes at least 4-5 months before the product would become available in stores.”

She adds that there are potential retail benefits above and beyond the initial trying on of the product. For example, repairs: Nudie happens to run 17 standalone locations which not only sell the brand, but also offer to fix your holes. “This promotes creating less waste to the end consumer, but in a tangible and original way.”

Interestingly, Gustin touts the waste-free attributes of the crowdfunding model. “We use crowdsourcing to line up supply and demand for every product we make. This creates zero waste cycle and we return the savings to you,” notes the company web site.

The silver lining, of course, is that both companies are respecting consumer concerns about life cycles and wastefulness.

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