Catering to Customization

When Burger King introduced its “Have It Your Way” ad campaign in the 1960s, double ketchup on a burger was about the closest the general public got to cheap, mass customization. Designing a product and having it built to spec was something only for luxury buyers with much more than a fast food budget.

In recent years, however, a new generation of retailers has taken customization to the mass market. Startups with offerings from chocolate bars to beer steins to girls clothing have launched websites for people to create their own products and purchase them at prices that are often comparable to mass-produced items. And venture investors—always on the lookout for portfolio companies with a clear path to generating revenue—have allocated considerable sums to customization plays.

VCs have invested more than $244 million in 16 retailers and manufacturers of customized consumer goods, including $150 million in 10 of those companies in the past two years, according to Thomson Reuters, publisher of VCJ. (See table.) Most are e-commerce plays, operating websites where users both design and purchase a product, as in Chocri, a Berlin-based seller of “customized chocolate bars” that allows customers to mix and match ingredients much as they might toppings on a pizza. To help customers deal with the overabundance of choice, retailers are also incorporating social networking, as in the case of Infectious, a San Francisco-based site for making custom device casings that also runs design contests for artists.

For investors, however, the key appeal of such investments is less about tech than traction. The ability to print a personal design on fabric or add ones favored mix of nuts to a candy bar, after all, hardly represents a revolution in technology. What’s noteworthy for customization plays more recently is the speed at which many have grown—and the revenue early entrants are generating.

One of the earlier venture capital recipients, Vistaprint (Nasdaq: VPRT), which raised $77 million between 1997 and 2004, currently has a market capitalization around $1.65 billion. The company—which operates an e-commerce site where users can design and buy custom-printed business cards, books, T-shirts and other products—went public in 2005 and posted revenue of $670 million in its fiscal year ended in June, a year-over-year increase of 30 percent. Vistaprint’s net profit for fiscal 2010 was $67.7 million, up 21% from the prior year.

Another veteran company in the customization space is 11-year-old, Zazzle, which is still private. The company is profitable and on an annual revenue run-rate that’s “north of 9 figures,” according to Jason Kang, Zazzle’s vice president of marketing. The Palo Alto, Calif.-based company sells close to 40 different products, such as shirts, mugs and mouse pads that customers can adorn with their own photos and designs.

Zazzle raised $16 million in 2005 from Kleiner Perkins Caufield & Byers and Sherpalo Ventures in a Series A round with a post-money valuation of about $71 million, according to Thomson Reuters. About two years later, the company raised an undisclosed amount from sole investor Kleiner Perkins in an expansion round with a post-money valuation of $274 million.

You don’t want [a custom product] to be a luxury good. You want to be right there in the price point that a suburban mom feels comfortable paying.”

Scott Johnson

Even comparative newcomers are posting revenue approaching eight figures. Founders of Dallas-based J. Hilburn & Co., a 3-year-old custom dress shirt retailer, say they’re currently selling about 8,000 button-downs a month. At a typical price point of $150 per shirt, that works out to more than a $1 million a month. The founders say they expect sales to roughly double next year.

Fans of customization companies say current run rates represent just a taste of what’s to come. “This whole idea of using technology to enable real-world items to be created I think is just getting going,” says Scott Johnson, a managing partner at New Atlantic Ventures, an investor in Fashion Playtes, which runs a site where girls design clothes they can later purchase.

Johnson believes made-to-order items can now be cost-competitive with off-the-shelf items. With Fashion Playtes, for example, sewing to customer specifications adds to production costs, but the company makes up for it through its low-cost Internet distribution model. Overall, Johnson says, the customization costs roughly equate to the cost of supporting stores for a retailer like the Gap. That’s important, he says, because although customers value personalized products, most are reticent to pay a big premium.

“You don’t want to be a luxury good,” he says. “You want to be right there in the price point that a suburban mom feels comfortable paying.”

Games and Supply Chains

The new breed of customizers are tapping into two industry trends that are reshaping retail, namely, the increasing ease of accessing overseas supply chains and the propensity of younger shoppers to gravitate toward anything that resembles a game.

In the case of supply chains, startups can take advantage of the fact that large apparel makers, increasingly even luxury brands, have outsourced most of their manufacturing to independent factories in Asia, says Veeral Rathod, co-founder of J. Hilburn.

I saw this void in games for girls. They’ve been designing clothing online for years and spending all this time in creative pursuits. They need a way to translate it into the physical world.”

Sarah McIlroy

For example, J. Hilburn contracts with the exact same factory that’s already making shirts for a luxury brand that’s more expensive, Rathod says. The same applies for raw materials suppliers, such as the Italian mills from which Hilburn buys fabric for its shirts.

Others are taking a source-globally-and-customize-locally approach. Fashion Playtes, for instance, buys unadorned tops, skirts and pants from bulk manufacturers in Asia, but does custom work, such as sewing on ruffles or adding rhinestone decorations, at a factory a short distance from the company’s headquarters in Salem, Mass. After adding in personalized finishes, a typical item sells for around $25.

“The idea is that people can have something that’s uniquely theirs at a market price point,” says founder and CEO Sarah McIlroy, who says her market research unearthed examples of companies applying similar mass personalization to a broad variety products, including teddy bears, sneakers, cosmetics and granola.

Of course, not everyone wants to go to the trouble of designing their own granola, or even a T-shirt. For retailers of personalized products to scale and draw repeat customers, they’re finding it helps to apply elements of gaming to make the task of product design more entertaining.

McIlroy, a gaming industry veteran, says she got the inspiration for Fashion Playtes largely by observing how young girls were interacting online and designing clothes and hosting fashion shows on sites such as Stardoll and Barbie.com. She saw a niche in the market for girls who’ve outgrown Barbie but remain keenly interested in fashion.

“I saw this void in games for girls,” McIlroy says. “They’ve been designing clothing online for years and spending all this time in creative pursuits. They need a way to translate it into the physical world.”

Fashion Playtes raised a $4 million round Series A last month from Fairhaven Capital Partners, Golden Seeds, LaunchCapital and New Atlantic Ventures, according to Thomson Reuters. The company plans to use some of that capital to develop its community features, McIlroy says, including things like fashion shows, contests and collection showcases.

Brands don’t mean as much [as they did before the recession]. The customers realized they’re not getting attributes from that brand. They’re helping them pay for marketing.”

John Hilburn “Hil” Davis III

Such customer engagement techniques are increasingly common. On Infectious.com, for instance, site visitors during the month of October could vote in a iPhone skin design contest featuring artist renderings of a sushi plate, sardine can and one-ounce gold bar. At ModCloth, a seller of vintage-inspired women’s clothing, site visitors can participate in a “Be the Buyer” program, commenting on designs and helping determine what eventually gets sold.

While it isn’t exactly customizing, it does provide customers a sense of engagement in how their clothes are designed, says Ann Miura-Ko, partner at Floodgate Fund, an investor in ModCloth.

“What I liked was they had a community and a brand that the community was fanatically interested in and loyal to,” Miura-Ko says of Pittsburgh-based ModCloth, which closed a $20 million round in May. “If they put up a contest to name a dress, they get literally thousands of submissions.”

Quirky, a consumer products designer, has a more costly approach to generating customer feedback: It pays users for input. The New York-based company, which raised a $4.5 million expansion round in April, takes a sort of crowd-sourced approach to product design. Its design staff posts a product spec (such as a modular shower storage system) and asks website visitors for feedback. Participants who assist materially in developing the finished product—by providing input such as design improvement, logos or product names—earn a percentage of the sales the product generates.

Since Quirky launched its site in June 2009, it has designed about 60 products, including several power cord management accessories, a yogurt maker and a grocery shopping cart. The company expects several of its products to be sold by big-box retailers this holiday season, says Ben Kaufman, the company’s 24-year-old founder and CEO.

Too Many Choices?

While the idea of having a product designed to suit one’s exact taste sounds appealing, not everyone is convinced mass customization will translate into mass appeal.

My guess is that for people who know just what they want—the minority—customization is a blessing. For the rest of us, it will be a curse.”

Barry Schwartz

Miura-Ko says that while she sees a push toward customization among retailers, consumers have trouble with limitless, unfiltered choices.

“My question is: ‘Can you really create a brand around it in the same way if it’s not curated?’,” she says, adding that sites that provide more selection and appeal to defined tastes, such as ModCloth, seem better equipped to develop a following.

J. Hilburn co-founder Hil Davis says customers may be more after quality and choice than labels. When the recession began, Davis says, he noticed a trend among even affluent shoppers to shy away from big-name brands running excessive profit margins on their goods.

“Brands don’t mean as much,” he says. “The customers realized they’re not getting attributes from that brand. They’re helping them pay for marketing.”

Others also believe consumers are comfortable choosing from an immense selection. Zazzle, for instance, stocks about 2,000 different shirts that customers can embellish with their own designs. Chocri allows customers to add ingredients as offbeat as jalapeno peppers, chives, and candied rose petals to their chocolate bars.

After all, for consumers accustomed to supermarkets with entire aisles devoted to soda varieties, and big box stores dedicated to bedding supplies, choosing among an immense variety of options isn’t anything new. In fact, it may just be the logical evolution of a trend psychologist Barry Schwartz identifies as an overabundance of consumer choice.

In his book, “The Paradox of Choice,” Schwartz opines that people are already faced with far too many choices on a daily basis, many of which are largely irrelevant, such as “easy fit” or “relaxed fit” jeans.

Schwartz is skeptical customization could help solve the “paradox of choice” by offering consumers exactly what they want. “My guess is that for people who know just what they want—the minority—customization is a blessing,” he tells VCJ. “For the rest of us, it will be a curse.”