[MUSIC] Welcome back, everybody. It's time for Module 5. And it's kind of hard to believe it, but we're already halfway done with the course, right? In this module, we're going to focus on the most counterintuitive of the five models, what I call scarcity models. When I worked for The Gap many years ago in its early years, what our merchants wanted to do was sell as much of each style as possible at the best margins possible. But retailing has changed, and companies like Zara and Mango are killing Gap and others with a vastly different approach to what and how they sell and how they buy, and they're doing it with scarcity models. So first, let's be sure we know what we're talking about here. Scarcity models are those in which the seller restricts what's available for sale, both in time and in quantity, with the seller's supplier being paid after, sometimes long after, the sale is made. When the goods are gone, they're gone. And very importantly, there won't be anymore. So what's the implication here if you're the customer? Many of you are probably Zara shoppers. And if you as a customer finds something in a Zara store that you like, what do you do? Well, you know you'd better buy it now or you miss your chance, and you'd better come back often because you may miss something that you might like. So what's the implication for the seller? Let's think about it. The customer pays in cash or with a credit card, but the seller, Zara, for example, does not need to pay its supplier yet, typically not for 60 days. This provides a boatload of cash with which Zara can open more stores and grow the business, which is exactly what Zara has done. So that's the brick-and-mortar version of the scarcity model, and it's worked really, really well for Zara. They've grown like crazy. You'll hear more about Zarah later in this module. But there's also an online version of the scarcity model called flash sales, the inventor of which is a French company called Vente-privee. There the story's been quite different, and I think it's worth understanding why so many flash sales businesses have become very large and why so few of them are prospering today. First, though, how do flash sales work? Typically it's a three-day event, for example, on Vente-privee. There's scarcity timewise there. There are only a few styles for sale, so scarcity selection-wise too. And when the sale is over at the end of the three days, the orders that came in from the customers are placed with a vendor. The vendor then ships to the merchant, and the merchant ships to the consumer, or sometimes it goes directly vendor to consumer. Then, quite some days later, the vendor gets paid. But meanwhile, the customers have already paid the vendor. Maybe that's you. And you can use their cash until you need it to pay your vendors. So originally, flash sales merchants like Vente-privee were in the business of discreetly solving apparel manufacturers' problems of fashion mistakes. They'd made too much of something, and Vente-privee and others would buy it, but they'd buy it at closeout prices. And they would sell it in flash sales events that would not disturb the fancy markups on the Champs-Elysees in Paris. That's especially useful in tough economic times like 2008 and 2009, when many of the flash sales businesses got funded and grew very fast. Eventually, though, two things happened. The merchants got their inventories in order and they had fewer closeouts. And at the same time, the number of flash sales merchants was growing rapidly, creating growing demand for the closeouts that the manufacturers now had less of. Well, think about it. Here's a short quiz. If you were a manufacturer with multiple flash sales merchants beating down your door for your closeouts, how would you react? I'll pause here. What would you do? [LAUGH] Well, here's what they did. They raised the prices of course, right? If too many people beating down your door, you raise the price. And they made more of the stuff. So today, the many flash sales merchants are simply another distribution channel, perhaps an attractive one for the apparel manufacturers. But the flash sale deals are not what they used to be, as most of what's sold there is merchandise made specifically to sell that way. Perhaps a few fewer fashion touches here, fewer stitches per inch there, less costly fabric as well. So the value's gone and the customers have figured it out. And by the way, aren't there always 50% off sales at the malls anyway? So the results have not been pretty for the flash sales industry. Dismal results, in fact. And since I wrote the book, Gilt Groupe has still been unable to go public despite talking about doing so for years. Zulilly went public but then got sold after its post-IPO price tanked. And Vente-privee had to shut down its US operation. So if you want some failures to learn from, here they are. Now how have they responded if they've not already shut down? Many of them have moved to more traditional e-commerce models, rather than flash sales model, to try and find a way forward. But what that means is they have to compete directly with the likes of Amazon. Good luck with that. Vente-privee, the originator, still gets more than 80% of its sales in France despite the fact that they have divisions in many other countries. So they've struggled elsewhere too. So my suggestion to you is this. You're going to need to do something more meaningful than buying somebody else's closeouts if you want to build a scarcity business. And the rest of this module may give you some pretty interesting ideas. So let's take a look at what lies ahead as we examine these scarcity models. First, I'm going to tell you the Zara story, so you get it in more depth, and what makes it work and why Gap and others are struggling so much to compete with Zara. Next I'm going to interview a Canadian entrepreneur, his name's Rud Browne. He put together scarcity principles and combined them with a pay-in-advance model and used them to ward off the effects of the financial crisis in 2008 and come out largely unscathed. His story is told only very briefly in chapter one of The Customer Funded Business, so you'll get the inside story straight from Rud in considerably more depth here. Then I'm going to talk to Ajeet Khurana, one of the best-known and most successful angel investors in India. He thought about screening ventures according to whether or not they've won customer funding, and I think you'll find his perspective useful no matter where you are. Finally, I'll come back to wrap up the scarcity model topic, I'll suggest some optional reading for those of you who still think flash sales might be a way forward, and I'll tee up a few final lessons you won't want to overlook in chapter six. I'll be back with the Zara story next. I'll see you there. [MUSIC]