Reducing overproduction in fashion
Ultra-fast fashion brands have developed techniques that could help avoid overproduction. This article explores how niche and sustainable brands can learn from them.
Fashion and apparel brands have been disposing of millions of dollars of unsold goods. Shoppers like variety but it’s hard to predict what items will be popular. So most global brands make a wide selection of mass-produced items in the knowledge that large amounts of unsold stock will be destroyed.
The destruction happens when items cannot be discounted any further. Or if luxury brands don’t want their items seen in discounted marketplaces. Public awareness of this unethical practice has been growing. Some EU countries are introducing laws to ban it.
Learning from fast fashion
Fast fashion is unsustainable, however, it can provide lessons for more ethical brands to learn from. Particularly in regards to avoiding overproduction.
The fast-fashion brand Zara uses sophisticated sales analysis to guide iterative production. This means they can replenish only the items that sell well. Ultra-fast fashion brands have demonstrated that the real-time analysis of social media fashion trends can improve forecasting and reduce overproduction.
There are several ways to better match production volumes to sales. One is to restrict the volume of production to a level at which the goods are sure to sell out. This can be assisted by using drops. Small batches go on sale often at times independent of conventional seasons. For strong brands, this approach can often generate so much demand that items soon appear on resale marketplaces at higher prices. The street-wear brand Supreme is a leading example of this phenomenon.
Intense pressure to grow means that few brands are willing to limit production in this way. Even regional niche ones. So they have to apply heavy discounting to try and clear inventory.
Algorithmic production
The ultra-fast fashion brand Shein is one of the world’s biggest. It uses data-driven algorithms to guide iterative production runs of as little as one hundred items. This keeps inventory risk low and limits overproduction. This capability is made possible by insisting that suppliers use Shein’s own in-house production software in exchange for ensuring prompt payments.
Shein can produce new items in just three days, but as a Chinese company focused on foreign markets, orders require long-distance shipping, so delivery times can be up to two to three weeks. A prevailing belief in fashion retail has been that customers are impatient and want items immediately. Shein is proving that with the right incentives people will wait.
Pre-orders
Mckinsey, in its 2019 State of Fashion report, identified pre-orders as one of the main trends to watch.
The pre-order approach is a big step forward over trying to predict demand long in advance. Pre-ordering minimises inventory risk as items are only produced to order.
High-end luxury brands are increasingly adopting pre-order solutions. Customers put in orders before new designs go into production. The shopper incentive to make pre-orders is to be the first to have desired items. The bestselling pre-order items in Moda Operandi’s “virtual” Trunkshow have two to ten times greater sales than ready-made items. Moda Operandi also enables brands to collect ongoing pre-orders.
A challenge for niche brands is to give compelling reasons for their customers to wait for an item. Fast fashion creates this by working with influencers to get people to desire the latest styles at cheap prices. Luxury brands invest in glossy marketing and influencers to create the desire to be associated with the brand’s exclusivity. This is the Veblen effect of conspicuous consumption.
Sustainable brands can explain to customers how pre-orders help avoid damaging overproduction. They can educate how the reduced inventory risk means they provide better value for money or pass on the cost savings.
A pre-order discount can be a useful extra incentive. For brands that don’t also sell ready-made items, messaging around pricing is challenging as shoppers have nothing to compare the pre-order price against.
Two French pre-order brands, Forlife and Asphalte, invest in demonstrating the value for money and quality benefits. These two brands focus on men's clothing where there is less demand for variety and item complexity. They still show, however, that this radical approach can make for successful businesses.
There are a growing number of solutions to help retailers on popular global e-commerce platforms take pre-orders. These are currently focused more on launching new items or testing product ideas. Greater sustainability benefits will come when pre-ordering becomes an everyday way of buying clothes.
A big challenge with pre-orders is the turnaround time from the customer’s delivery. Niche brands usually need a month to collect minimum order runs, and another month to make the deliveries. There is the additional challenge of ensuring enough material is ordered in advance of pre-order campaigns.
A way to predict the amount of material needed is to first collect purchase intent data. This can be done via the wish listing of sample items. A cunning but slightly underhand way to trick people into providing purchase intent data is to upload sample items that are already marked as ‘out of stock’, alongside the option to be notified when they are back in stock. This way brands can collect purchase intent data without having to even inform customers what is actually happening.
Sophisticated retail platforms are using peoples’ wish listing activities as a way to engage with tailored offers. Wish list data is essentially purchase intent data. So pre-order bands could use the wish listing of sample items as a way to guide the upfront material orders. The use of wish list data to guide potential pre-order campaigns is a solution my startup Pricetap is developing.
Made-to-order advances
Mass made-to-order personal customisation options using high-tech production facilities (e.g. Son of a Tailor) are starting to be more available. This will help people value and keep their items longer, as well as reduce overproduction.
Virtual fitting services and AI modelling will also help people make better purchase decisions and reduce return online orders. Most returned items (around 30% of orders) are destroyed since it is more costly to process them. Upcoming EU regulations are aiming to ban this unethical practice.
Can pricing innovations improve sustainability?
‘Setting the right price for your product or service is hard. In fact, determining price is one of the toughest things a marketer has to do, in large part because it has such a big impact on the company’s bottom line.’ — Harvard Business Review
Pricing plays a key role in optimising item sales to avoid excess stock but there has been little innovation in this space for niche retailers.
Fast fashion brands rely on sheer volume to make money and therefore have low margins. In niche and upmarket retail, it is common to markup prices two to three times above costs. The final price depends on intelligent guesswork about where the seller wants to be perceived in the market relative to the competition, and what they believe their customers are willing to pay.
Given that this process is educated guesswork, it is not surprising that the prices can often be set too high relative to the subsequent demand. This can cause items to sell poorly even though people like them, and that forces the need for deep discounting to shift the remaining inventory during the relatively short seasonal sales periods.
Dynamic pricing techniques are improving sales in larger online fashion platforms. But the majority of long-tail fashion and apparel brands still use traditional fixed pricing models. They have practical challenges such as changing prices on physical price tags but also conservative sales conventions, such as the fear of fluctuating prices disturbing shoppers. The rapid move to online sales during Covid has broken down some of these reservations, and it is now commonplace to see frequent price reductions in a brand’s own outlet section.
The inflexibility of fixed pricing means that brands cannot adapt to the changing needs and desires of individual shoppers. This results in lost sales opportunities; which then results in more excess stock (aka overproduction).
If brands could better match their sales needs with individual customer price sensitivity this would enhance both customer satisfaction, sales and profits. In the meantime, if the price is not right, potential customers must resort to waiting for possible seasonal sales, which is frustrating for both parties. Or shoppers can easily search online for cheaper alternatives.
Online discount coupons have become a mainstream method for brands to both incentivise sales and discreetly adjust prices. The challenge of discount codes is that they need to be manually generated and are therefore not used at a fine granular level; for example, to adjust prices on a particular item size or colour that is struggling.
Prices can also be determined by auctions which enable market forces to reveal the buyer’s price sensitivity. Auctions do require more attention from shoppers. Keeping an eye on a brand’s sales updates (e.g. in newsletters) on the off chance a desired item becomes discounted, however, is arguably even more time-consuming.
At Pricetap we have developed a system that acts as an automated broker between the seller’s needs and buyer sensitivity. After an item is added to a person’s wish list, the price starts to drop incrementally every day until someone claims it. At this point, a new round starts for the same item so that the other shoppers have another chance to claim it. The price also resets if a reserve maximum discount is reached. In this way, brands can find out in real-time what the price elasticity is of their items, and this information can be used to then guide conventional sales.
If Pricetap’s automated personal reverse auctions were to become mainstream, prices would optimise to demand. To solve the attention issue, we included discount level and back-in-stock notifications. Even though Pricetap runs in parallel to day-to-day retailer activities, the idea of allowing an automated system to manage prices is still pretty radical, so it will take courageous brands to try it.
Summary
More innovative pricing systems will help reduce lost sales opportunities. And this will reduce excess stock. Although it would be better to avoid overproduction in the first place. Shoppers should be incentivised with added value to make pre-ordering an easier and more regular activity.
The waiting times for pre-order items will continue to fall as the processes become streamlined and production facilities become more high-tech. Pre-ordering will gradually become more mainstream and this will be a win-win for brands, people, and the planet. Upcoming legislation will help motivate brands to better address the problem of overproduction. Mass-producing items that end up burnt or buried unsold will become socially unconscionable.
