stitch-fix-business-model

How Does Stitch Fix Make Money? The Stitch Fix Business Model In A Nutshell

Stitch Fix is an American online personal styling service using algorithms and data science to recommend clothing based on style, budget, and size. It was founded in 2011 by Katrina Lake to help women discover and explore their personal style through a client-focused shopping experience. Stitch Fix has a surprisingly diverse revenue generation model for an online clothing retailer, from clothes sales to a styling fee of $20 charged by the company approximately two weeks before an order is sent out.  The company also designs, produces, and then sells clothing under the Hybrid Designs brand

History of Stitch Fix

Stitch Fix is an American online personal styling service, using algorithms and data science to recommend clothing based on style, budget, and size.

Stitch Fix was founded in 2011 by Katrina Lake, with initial operations based in her apartment in Cambridge, Massachusetts. She created Stitch Fix to help women discover and explore their personal style through a client-focused shopping experience. She also lamented that the fashion industry was ripe for innovation, with most still purchasing their clothes in brick-and-mortar stores.

Initially, the company was called Rack Habit. It was funded by a credit card with a $6,000 limit and sold clothes to friends and family that Lake had purchased in fashion stores around Boston. Through word-of-mouth, the company began to grow and secured angel investment funding in April 2011. The next two years saw thousands of users flock to Stitch Fix, but subsequent investors were hesitant to provide funding because of high levels of unsold inventory.

In 2014, the company started to become cash-flow positive. Three years later, Lake led an IPO on the NASDAQ – becoming the first woman to do so at the time. The platform now targets men and children in addition to women and boasts over 32.5 million active clients.

Stitch Fix revenue generation

For an online clothing retailer, Stitch Fix has a surprisingly diverse revenue generation model.

Let’s take a look at it now.

Clothes sales

Stitch Fix purchases clothing in bulk from designer brands and endeavors to sell them for a profit. Margins are characteristically slim in the fashion industry because of high competition and constantly shifting consumer trends.

However, the company can maximize profits by employing a team of over 100 data scientists. This data can be made into algorithms that notify the company when an item is likely to become out of stock. Algorithms also predict various clothing parameters that sell best, including particular styles, sizes, and colors.

Perhaps the most significant contribution of data is in Stitch Fix recommendations. Over 80% of customers have used the recommendations tool in search of inspiration for their next purchase. This retains clients, encourages repeat purchases, and maximizes revenue.

Styling fees

A styling fee of $20 is charged by the company approximately two weeks before an order is sent out. 

This fee covers the expenses associated with a professional stylist picking out five items to send to each customer. If a customer decides to purchase any of the five pieces, the styling fee is credited toward the total cost of their purchase.

Private labels

The company also designs, produces, and then sells clothing under the Hybrid Designs brand

Creative direction is provided by algorithms that use data science to identify gaps in the clothing market. Once a gap has been identified, a team of Stitch Fix designers ensures the finished piece has an on-trend look. Margins for this clothing range are higher because the company utilizes vertical integration.

Shop Your Looks

Shop Your Looks is the name given to the online marketplace where Stitch Fix users can purchasing clothing directly.

Purchasers can discover entire outfits based on previous personalized deliveries. The more data the company has on a customer, the more tailored the clothing suggestions will be.

Key takeaways

  • Stitch Fix is an American online personal styling service. It was founded by Katrina Lake who wanted to provide a platform for women to explore their clothing style via a personalized shopping experience.
  • Stitch Fix makes money by purchasing bulk clothing from designer brands and reselling it for a profit. Although profits tend to be slim in fashion, the company maximises profits by using data science to manage inventory levels and provided tailored customer recommendations.
  • Stitch Fix collects a $20 fee in exchange for providing professional styling advice to consumers. It also sells a range of own-brand clothing using algorithms to identify gaps in the market.

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get The FourWeekMBA Flagship Book "100+ Business Models"