Create a $1 Billion Online Business in Under 8 Years

I may make a powerful enemy in the direct marketing world with this post…

But it will also break down a business model that was used to create a $1-billion-plus direct marketing business in under 8 years — a model with many lessons to teach!

I should, by most measures, like Denny Hatch.

He’s the founder and editor of Target Marketing Magazine, a leading direct marketing publication. He’s a thought leader in the industry, and a friend of friends.

I have a few of his books on his books on my bookshelf, and regularly recommend the book Method Marketing in particular as a totally under-appreciated but masterful approach to the most important principle in marketing.

I regularly read his curmudgeonly “Denny’s Zinger” columns, where he takes aim at poorly-done advertising and marketing, tearing them down based on direct response principles… And often agree with his conclusions.

After all, at one point I self-identified as “the world’s youngest direct marketing curmudgeon” — so you’d think we’d agree on a lot!

But I find from time to time that he’s so caught up in “the rules of direct marketing” that he can miss a totally flawless execution of direct marketing principles.

And because of his reach, I think he risks holding the industry back rather than advancing it with these missteps. (A peril of the limelight.)

Today’s Denny’s Zinger, titled “Show Some Cleavage,” was one of those total misses…

Never mind any offense some might take to the click-bait title, this article missed on other levels.

It started out much like most of his Zingers… With a personal experience.

Denny had been clicking around in his Yahoo inbox, when he saw a banner ad for upscale men’s shoes, from Gilt.

Denny wears very wide shoes — hard to shop for — but the shoes themselves intrigued him enough that he clicked. He wanted to see if they might carry his size.

That’s when he hit the brick wall.

If you’re at all familiar with Gilt, you know you have to create an account to even browse their merchandise.

Denny, perturbed, didn’t want to create an account. He didn’t even know if they’d have shoes in his size. And he didn’t want to enter his email address onto yet another mailing list just to find out.

If he’d have left it at that, I would have no problem with it, and would’ve had to find another topic for today’s article!

In fact, I’ve left it at that before, too. I’ve been to Gilt’s site. I’ve run into the same brick wall. And I chose to leave rather than enter my email to shop.

The competing site following the same model, Zulily, is an exception because my wife shops there. I entered my email address because I regularly get links from my wife for me to check out — usually clothes for the kids. I had to have an account to see the links, so I made one. But I didn’t give them permission to send me email.

In short, I don’t want to enter my email address to shop at a website. As a customer, I don’t like that experience.

Gilt (as well as Zulily and others like them) has made the decision that they’d rather NOT have me as a customer if I’m unwilling to simply enter my email address.

That’s a perfectly legitimate business decision.

AND, I’ll note, a testable choice that the market can vote on with their wallets.

If Gilt launched their website and found that customers were unwilling to follow their rule of entering their email before browsing the merchandise, they would have had to adapt or perish…

But that’s not what happened. Quite the opposite, in fact, as you’ll see in a minute. Back to the article first.

Needing something to write about for his regular column (I feel the pain!), Denny decided to write about the experience.

Except he confused his personal experience with the viability of the business model.

He tsk-tsked at Gilt, and declared that they’d done it all wrong. That if they wanted his email address, they’d have to earn it by showing him the merchandise, first. And that if they were unwilling to do that, they weren’t a good marketer.

(While the truth is if they’d shown him the merchandise, he’d probably do what the vast majority of website visitors do which is to leave without buying or entering an email address.)

Gilt had taken the calculated risk of saying, “You can’t shop here unless you sign up first.”

This is a classic “Velvet Rope” approach. You have to earn admission.

It’s a low barrier — requesting an email address. But it firmly establishes insiders and outsiders. And insiders feel part of the privileged few.

Further, as soon as someone becomes an insider, Gilt has something that all online direct marketers covet…

An email address, and permission to follow-up.

Gilt then emails regularly. Daily. And they make limited-time or limited-quantity offers for their merchandise.

They’re building a list, and making regular offers to it.

If you’re not willing to put your email address in that box, they don’t feel that they need you.

To some this may seem snobbish or holier-than-thou. But then again, they’re only judging you based on action you’re willing (or not willing) to take. You can choose to join their fold with the simple opt-in. And you can choose not to, by clicking away.

So the big question is, does Gilt’s approach work?

Unfortunately, Denny didn’t do his research before writing their obituary. And that’s my major objection to what he wrote.

Gilt’s approach does indeed work — it works VERY well.

They launched the site in 2007. Since then, that objectionable process of requiring an email address before showing merchandise has netted them 6 million email addresses.

Daily, they send those 6 million people offers for clothing.

Based on older stats that are likely still relatively accurate, roughly 1/3 of the email subscribers log in to the site every month, to look at the deals. Among their most regular customers, Gilt Noir members, 65% make at least one purchase a month. But they’re not just selling to the file — 20% of purchases every month are new customers.

By 2013 (6 years after its launch), sales were about $600 million.

The year before, its valuation had crossed the $1 billion threshold, according to Bloomberg.

And according to Internet Retailer who does the best job of tracking these things, they are the 56th highest-revenue ecommerce company in the world. I don’t have full access to the database at that link, but I believe Gilt would either be the top or near the top of web-only, clothing-only ecommerce companies (companies like Gap and Victoria’s Secret are bigger online clothing retailers, but they benefit from built-up offline audiences).

Now I’ll concede something…

Gilt is NOT consistently profitable, according to recent reports.

This tends to be a problem with high-growth, venture-funded companies. They prioritize growth over profitability and can be simultaneously bringing in a ton of revenue and losing money at the same time.

That discounts management and strategic approach to building the business, though — and NOT the marketing model.

The fact is that Gilt’s approach works — and is the perfect application of THREE very powerful direct marketing principles…

Gilt got these three things right…

— They’ve built a HUGE permission-based marketing list of people interested in what they’re selling.

— They make regular offers to their customer base, resulting in substantial sales volume.

— And they’ve applied the “Velvet Rope” technique to make their prospects and customers feel like they’re part of something special, bonding with them in a way that traditional, open-to-all ecommerce fails at.

Taking a little time to peel back the curtain reveals that just because we personally may not like to enter our email address before browsing doesn’t mean this is a failed business model…

And if I’m a curmudgeon of direct marketing, the core foundational principle of my curmudgeonly ways is this: the market will tell us what is and isn’t an effective marketing approach.

We don’t get to decide that for ourselves. Good marketing isn’t decided in a conference room, or in the court of public opinion. Nor is it decided on a blog like this one, or in Denny’s column.

Good marketing is decided when customers vote with their wallets. And less so when they take measurable actions toward the sale, such as entering their email address to sign up for future marketing to be delivered to them.

On BOTH counts, Gilt’s strategy of requiring the email address before you can browse their sales is an effective one, and has allowed them to create a $1 billion online business in under 8 years.

For direct marketers looking for effective ways to apply proven marketing principles online, Gilt is worth careful study.

Even if you don’t like entering your email address on yet another website.

In fact, they’ve made it easy.

The founders of Gilt Groupe wrote a book about the business and their experience, called By Invitation Only: How We Built Gilt and Changed the Way Millions Shop.

The book was positively reviewed by Mark Cuban, Arianna Huffington, Tony Hsieh, Dan Heath, and Mindy Grossman — all business legends in their own right.

Chapter 9 is all about their use of exclusivity as a marketing strategy — both the ups and downs of this approach.

Who knows? Maybe you can use what you learn to build YOUR $1-billion business!

Yours for bigger breakthroughs,

Roy Furr

Editor, Breakthrough Marketing Secrets