I studied economics at University and was taught that the first rule was ‘When price increases, demand decreases, all other things being equal”. However as with every rule, there was an exception and in economics it is called a ‘Giffen good’. For a Giffen good demand actually increases when the price increases, however we were told that it doesn’t happen very often, if ever
The early days of Warby Parker and the price of their first spectacles show this can and did happen.
Warby Parker traces its origins back to 2008 and a discussion between four graduate students attending business school at the Wharton School of the University of Pennsylvania.
David Gilboa had lost his glasses on a backpacking trip and the cost of replacing them was so high that instead of buying them he spent the first semester of grad school without them, squinting and complaining. Another of the four, Jeffrey Raider, had broken his glasses and had to pay $500 to replace them. It dawned on them and the other two, Neil Blumenthal and Andrew Hunt, just how hard it was to find a pair of great frames that didn’t leave your wallets severely depleted.
Blumenthal had previously been involved with a not-for-profit organization called Vision Spring that provided eye tests and low-cost prescription glasses for developing (countries?). He had been to the factories and seen companies “producing glasses for people living on less than four dollars a day, and literally ten feet away on that same production line were some of the biggest names in fashion that you would find on Fifth Avenue”. He knew producing glasses was dominated by a few firms who clearly were earning significant mark-ups.
They decided there was something in the idea and started doing more research and agreed that they would each put $25,000 into the venture. They also enrolled in a class where the requirement was to develop a business plan. Doing this allowed them to get a credit towards their degrees but also have access to the teaching staff to get their opinions and advice.
They took an early draft of their plan to one professor but when he saw their planned price, he baulked. “He looked at us and slid our PowerPoint back at us and said ‘That’s not going to work. Listen guys, one-tenth the price is just outside the realms of believability’” recalled Blumenthal.
They decided they needed to check this out and arranged an on-line survey looking at how willing people would be to buy glasses on-line at a range of prices starting at $50 and ending at $500. The results showed that at least in part their offer was that exception to the first law of economics. Demand went up as prices rose from $50 it was only after $100 that the ‘normal’ results came into play and demand started to drop off as prices rose.
They decided that they would pitch their glasses at $95 a pair. “If we had priced at $45, first nobody would have believed the quality would be good. And [as they learnt] we would have had no gross margin to run the business and market to people” explains Blumenthal. In all the interviews and reports I have seen there is no mention as to whether they knew they had a Giffen good.
That extra margin became vital pretty quickly, as the team did more research. People said they liked the idea but were not sure they would actually buy them unless they could see them in advance. The team’s first solution was a virtual try on feature on the website. The idea was that people could upload a photo of themselves and virtually try-on the different frames. However, what sounded like a good idea didn’t work, the technology at the time wasn’t sophisticated enough, scaling was difficult, and the glasses often looked distorted.
It was only then that they struck upon the idea of a free home try-on service, whereby the customer would get five pairs to try on at home. They could order or not at that point and return/mail-back the rejected frames once they had decided.
The whole home try-on service cut into the profit margins and every gram counted; as the lighter the packages were, the less they costed to ship. The team had what they call their “Apollo Thirteen moment”. A reference to the famous situation where the team trying to save the astronauts in the malfunctioning spacecraft had to identify every piece of non-essential ‘weight’ so it could be dumped. They used lighter cardboard, cut out metal straps and used lighter weight packing materials.
By mid-February 2010 they were ready to launch, under the brand name “Warby Parker” a name which had been agreed only after a long process: “It is a combination of the names of two characters that appear in a journal by author Jack Kerouac. They liked Kerouac, most famous for writing, ‘On the Road’ as they associated with his rebellious spirit, his aim to break free from the shackles of social pressure and embark on an adventure.
With limited funds, they couldn’t afford advertising, but they hired a PR agency who managed to get them coverage in GQ and Vogue. The launch was a success and they quickly sold out of their limited inventory.
From there, via additional funding and lots of hard-work the brand took-off and one example of the brand’s success is that investors’ nowadays regularly see pitches where budding entrepreneurs pitch their idea as “The Warby Parker of…”
I normally like to draw a moral from the brand stories I write but there are lots in the Warby Parker tale:
- If you can identify an industry which is dominated by a few players and consumers are paying higher than necessary prices, it is a new business opportunity (Just ask Richard Branson who built his Virgin brand on the premise)
- Most brands aren’t built on a single good idea and will probably need a number to overcome challenges along the way
- There is such a thing as a Giffen good, sometimes an extremely low price means people will assume what’s on offer is low quality, whether that’s true or not