Case Study

What would you do with this business?

Mark Graham for The New York TimesVeeral Rathod (left) and Hil Davis.

Last week, we profiled a dilemma facing J. Hilburn, a Dallas clothing company that uses direct sales and multilevel marketing to sell custom shirts and other menswear. Founded in 2007 by Hil Davis and Veeral Rathod, two Dallas financial industry workers, the company’s sales rose from $1 million in 2008 to $3.25 million in 2009 and $8 million in 2010, a year in which it sold 60,000 shirts (starting at $89).

As Mr. Davis and Mr. Rathod built their business, they knew they would have to raise money. They wanted to expand the business with an Internet sales channel, and they needed to build their inventory. But as they went about raising capital, they discovered a problem: potential investors questioned their vision for a company that would blend direct sales with an online channel. Direct sales suffered from a historically dodgy reputation, for one thing, and the blend did not have the sizzle of a pure Internet strategy. Of those investors who were interested, some looked at the Internet channel as a way for the company to increase sales while eliminating — or at least cutting — the commissions paid to the direct-sales reps, something Mr. Davis and Mr. Rathod thought would alienate the people who had helped them build the business. And then there was the problem of how to integrate a direct-sales force with an Internet sales channel, not something commonly done in the retail world.

Mr. Davis and Mr. Rathod solved part of their problem when they met Battery Ventures, a venture capital firm that seemed to understand their vision. Battery sent representatives to Dallas to spend time with J. Hilburn’s sales force — known internally as style advisers — and in August 2008, Mr. Davis and Mr. Rathod raised a $1 million round of funding with money from Battery. They subsequently raised three more rounds, largely from Battery, for a grand total of almost $13 million in financing.

These investments gave them enough money to build inventory and pay for an Internet channel to handle re-orders from existing customers. But having the money to build a Web channel and doing it right proved to be two different things. The first Web roll-out in 2009 — an attempt to adapt an existing e-commerce platform to J. Hilburn’s unusual needs — flopped. A customer-to-customer Internet referral ended up sending out gibberish e-mails. The decision to include all 200 fabrics online, instead of putting up a limited set and allowing the style advisers to explain the full set, baffled customers. And, worse, the process hurt morale by raising and then dashing the hopes of the sales representatives.

So the company went back to the drawing board and custom-developed a new site, a process that took almost two years. Introduced in June, this new site improved the referral program, and it gave sales reps access to more online options than the customers, which meant they could walk their clients through the online shopping process. The sales reps are paid full commission on Web sales, even ones in which they do not participate directly.

So far, the strategy seems to be working. A September online referral promotion — in which the referring customer and the new customer both get a $50 coupon — resulted in about 8,000 e-mails being sent in a month, of which 30 percent were clicked through. Some 63 percent of those click-throughs turned into sales. With an average sale of more than $300, the program is expected to bring in some $500,000 in new sales. Aided by its 1,100 style advisers, J. Hilburn expects its revenue to hit $20 million in 2011 and between $50 million and $80 million next year. Per-customer annual sales have risen from $212 in 2008 to more than $600 today, and average style adviser sales have grown from $7,500 in 2008 to $20,000 over the same period.

Mr. Davis and Mr. Rathod discussed their recent results in a brief interview.

Q: Why were you so adamant about paying your sales representatives full commission on Web sales?

Hil Davis: We felt that they do a lot of upfront work acquiring the customer, and we also want them to be compassionate and caring about customer service, so we decided to keep the full rate commissions where they are and pay them outright.

Veeral Rathod: The style adviser does the brand introduction and can make it more of a tactile experience with fabric swatches, measuring and fitting. And then, the Web site gives them an easy channel to reorder.

Q. Will the style advisers always get full commissions on online sales?

Mr. Davis: I think over time there will be a customer service score associated with online commissions. So if a partner has a high or low customer service score, the commission will reflect that. If they have high customer service scores we’ll pay full boat. And if they don’t, it will give them the incentive to raise their customer service levels. That’s the next evolution — that’s probably 12 months away.

Q: How will you measure that? How do you know how often style advisers should be interacting with customers?

Mr. Rathod: We ran a customer survey in May and June and a partner survey in August, and the customers said they wanted to know and hear about what was new once a month. They may shop once a quarter, but they want to hear more often. When we talked to the partners about how often they felt they should contact the customer that frequency was a lot less, maybe once or twice a year. They didn’t want the customer to feel that they were nagging him.

Q: One reader commented that it might be interesting for you to try charging more for style adviser visits. Perhaps that would move more orders online, thus making sales more efficient.

Mr. Rathod: That’s not in the plans. Because to get the fitting correct, as well as to set the tone, you have to have a person-to-person meeting. The last thing we want to do is to encourage a customer to save money by entering measurements online or shopping online only. If they enter online, they’re going to get a shirt whose fit they’re not happy about. Plus all of our order size metrics go up when we get a style adviser in front of a customer.

Q: Another reader suggested you should try to make all your clothing in the United States, which would be a marketing coup and might get you some tax or investment savings from communities eager to rebuild their manufacturing base.

Mr. Davis: We did try to do as much as we could in the U.S. Ultimately, we found there wasn’t enough skilled labor available to do it. The biggest custom shirt manufacturer in the U.S. can do 5,000 shirts per month. Next year we’ll be doing 20,000 shirts per month. Where we can, we do. Our ties and cufflinks and belts are made in the U.S. We’re working with a U.S. company to resell their shoes. And we do jeans that are made in the U.S. It’s just a lost trade in the U.S.

Article source: http://feeds.nytimes.com/click.phdo?i=56dba4f242a1c0445335703d70675144