Hardfacts on Software – Private Sales Sites

“While the online retail concept has been around for almost two decades, the desperation of the recession left luxury brands saddled with unsold merchandise. Thus, private sale sites offing goods at cut-rate prices began popping up.” says a post that first appeared on the American Express Open forum.
“It’s not a new concept — think of members-only big box stores like Sam’s Club and Costco that have been around for decades. A large membership base, exceptional buying power, low overhead costs and buying in bulk have enabled these companies to offer their members deeply discounted prices. Now, that same concept has been adopted online — members join or are invited to websites that offer private sales with great prices on everything from designer clothes, to furniture, to kitchen supplies, restaurant deals, and flight, hotel and vacation packages. Most memberships are free, but some sites, like Ideeli, offer paid VIP membership that affords members early access to sales. In the world of private sales, it’s first come, first serve, so having a head start over most people can really help. But how do these sites work? And how do they turn a profit selling a $500 dress for $150?
Block, Sell and Ship
Many sites, like Gilt, one of the most popular and successful private sale sites in the USA, operate on the “Block, Sell and Ship” model. In this model, brands send samples of their clothes to Gilt, where merchandise buyers hand-pick the items they want to sell on the site. The buyers then place their orders for the amount of merchandise they’d like the brands to set aside for the sale, based on available stock. After members pay for their goods and the sale ends, Gilt then places the confirmed purchase order with the brand for what it has sold online. Merchandise is then shipped to Gilt, where everything is packaged in Gilt-branded boxes and shipped out to customers.  
This is a fairly safe model with few risks to Gilt. The most Gilt really has to worry about is the time it takes for the brand to send its purchase order, and then send it out to customers. Another risk in this model has to do with inventory. If the count isn’t accurate, you could have a number of customers receiving refunds and apologies that their order could not be filled. The risk then is that the customer becomes discouraged and will look to other sites. But it doesn’t seem like Gilt is having that problem, as it’s reportedly on track to rake in about US$500 million in revenue this year, and that’s up from US$170 million the year before.
Buy and Distribute Direct
Another common way that other sites operate is to purchase and fulfill orders directly. With this model, the sites take more of a risk but have the potential to offer customers the best discounts. If a company chooses this business model, it contacts brands to see how much inventory is available, and the brands will send its inventory reports and samples. Here is where things differ — the more inventory the site buys, the better wholesale price, and the better price it can offer to members. The risk here is that if a site orders 100% of a brand’s inventory and it goes unsold, then that’s money lost.
Why Are the Items So Cheap?
In some cases, the items sold on these sites are samples created before the item went into mass production. Samples are often created by luxury brands and high-end designers to test design variations or to get a feel for how the market responds to their creations. These are the pieces you see on runways and an in magazines. In some cases, a design may never make it to production due to lack of interest from merchandising buyers. Either way, these sample items need to go somewhere after designers have finalized their line for the season.” While this may all sound good and nice for the states, what about us on Southern Africa? Well, the good news is that private sales sites are coming to SA, and they are delivering in neighboring countries. I will keep you updated.
Enjoy the shopping! Next week I will look more into this subject.