Business

Stitch Fix Business Model | How Does Stitch Fix Make Money?

Stitch Fix, Inc. is an online subscription service and personal shopper. Stitch Fix sells shirts, jackets, sweaters, leggings, vests, scarfs, jeans, loafers, and boots for men and women. US-based Stitch Fix provides clothing and accessories to customers across the globe.

Stitch Fix (NASDAQ: SFIX) is a company that leads in fashion and data science. Stitch Fix has been profitable for the most part since 2014; however, the company reported a loss in its most recent fiscal year. 

In 2011, the company launched its intelligent shopping platform, which is driven by the expertise of neuroscientists, mathematicians, and statisticians. 

In 2017, CEO Katrina Lake took Stitch Fix public, marking the first female-led IPO in over a year.

Since then, it has grown into a solid and stable business that provides personalized recommendations and high-quality clothing without the need to visit a brick-and-mortar store. 

The pandemic has affected many businesses, including Stitch Fix, which ended its fiscal year with a loss of $67.1 million. 

Despite this, net revenue increased by 11% year over year during the fiscal year (YoY). In this article, we aim to ascertain how Stitch Fix makes money.

What is Stitch Fix?

The Stitch Fix service is an online service that generates style suggestions with the help of a  combination of technology and human input. 

Once that is done, these Fix styles are shipped to customers. Customers are offered suggestions based on their body type, gender, preferences, and previous purchase behavior and past orders.

The Stitch Fix business model is based on clothing sales. Stitch Fix sells clothing from over 1,000 brands and their own private label (called Hybrid Designs). 

Stitch Fix Business Model

Furthermore, Stitch Fix earns money from a $20 styling fee, a subscription service, and a newly launched marketplace, Shops Your Looks.

A former Harvard graduate founded the company in 2011, which has been an enormous success so far. The company went public in 2017, making Katrina Lake the youngest female CEO to lead a  company to an initial public offering. 

Stitch Fix now generates over $1.6 billion in annual revenue and remains profitable.

How Does Stitch Fix Work?

Stitch Fix offers a personal styling service that operates online. The company provides outfit recommendations based on a combination of personal stylists and technology (more specifically, machine learning and deep learning).

User’s start by completing a style quiz in which they report their size, price range, gender, and personal preferences. 

The stylist selects a total of five items, which are then delivered to the user’s home for fitting.

Stitch Fix charges a styling fee for each order. In addition to its own stylists, the company says it collaborates with thousands throughout the U.S. 

In addition, customers are responsible for the cost of the clothes included in the package. The fee for styling will be deducted from the purchase price if the customer decides to keep at least one item of clothing.

The customer can return anything he or she does not intend to keep for a fee. The customer receives a 25% discount if they decide to keep all items in their delivery.

Stitch Fix provides styling services for women, men, and children. A few of the niche categories in which the company specializes are plus sizes, maternity, and petite.

A wide selection of Stix Fix is available throughout the US and UK. Customers can place orders via the Stitch Fix website and mobile applications available on Android and iOS.

How Does Stitch Fix Make Money?

Fundamentally, Stitch Fix is a business that sells clothes for a higher price than it pays for them. As a technology company specializing in clothing, the revenue streams for this company are as diverse as its inventory.

Stitch Fix generates revenue from a variety of sources. Let us take a deep dive into Stitch Fix revenue streams:

Styling Fees

Stitch Fix offers straightforward pricing for its clients. Stitch Fix charges a styling fee of $20 per order, which is deducted from the total price if the customer keeps any of the items. 

Stitch Fix reported a 9 percent year-over-year increase in active users for the fiscal year 2020, reaching 3.5 million. 

Assuming that each user orders at least one fix, the $20 styling fee will result in revenues of at least $70 million.

Stitch Fix Business Model

A styling fee of $20 is added to each Fix (as the company refers to its shipments). Whenever a customer keeps at least one item of clothing, the styling fee is deducted from the order.

Styling fees cover the stylist’s time in selecting the items. The customer can expect to receive their order within two weeks.

Revenue from clothing sales for each client is included in the revenue generated by that client. 

In the most recent quarter, net revenue per client was $486, down 2.4% from the previous quarter. A year-over-year comparison, however, shows an increase of 2%.

Selling Clothes

Stitch Fix’s primary source of revenue comes from selling clothes. However, for this company, data and algorithm development are critical aspects of the business that keep it moving forward and keep the customers engaged. 

The company employs over 100 data scientists who work on various projects, ranging from repurchase algorithms to trend forecasting, which allows the company to tailor each user’s shopping experience and account for their style preferences.

Stitch Fix is mainly a clothing retailer. They purchase clothing from brands like Ralph Lauren and Calvin Klein in bulk, store it in their warehouses located across the country, and then sell it profitably.

Stitch Fix’s recommendation function keeps users coming back as it keeps them coming back. About 80% of active users use this feature. 

The algorithm is so effective because it allows the user to provide feedback and, as a result, incrementally increases the ticket price every time by modifying the price to match their preferences. 

The average order currently stands at $55. The most recent quarter’s revenue was $443 million, and the fiscal year was $1.7 billion, both of which were up 11%.

So many investors were hesitant initially to invest in a venture that required a significant amount of capital to operate at first. 

Stitch Fix Business Model

Since the company had to acquire thousands of garments, hire a diverse workforce (including data scientists and managers), and establish a national distribution network, it had a lot to accomplish.

Moreover, the fashion and retail industries are among the most competitive in the world. Margin is razor-thin (especially for lower-priced clothing), and trends often shift within months, making forecasting difficult.

Therefore, how does Stitch Fix compete in such a crowded market? Data is the answer. 

Data scientists at the company work on a variety of projects ranging from automated processing to trend prediction.

It has developed re-purchase algorithms that alert purchasers when popular items are expected to sell out.

Additionally, the data helps to improve the company’s relationships with its partners. The Stitch Fix team can provide precise data (aggregated and anonymized) about the most popular styles, sizes, and colors.

An example of one of their projects was creating Style Shuffle, a Tinder-style app in which users swipe left or right to indicate what they prefer.

The company uses the generated data to train its recommendation algorithms. Also, it provides shopping inspiration to encourage customers to return to the company’s platform. 

Over 80% of the company’s 3.5 million customers have rated the tool, resulting in over a billion ratings.

The algorithm and the human both improve with every Fix, so Stitch Fix can operate more efficiently while also selling the items for a higher price. Currently, customers pay an average of $55 per item.

Private Labeling

Stitch Fix produces its own clothing under the Hybrid Designs label and sells clothing from other brands.

The concept evolved as the company’s data scientists identified market gaps. Women of middle age, for example, requested capped-sleeve blouses, which were simply not available.

There are three separate algorithms used during the design process. The first algorithm generates three clothing parents, which are suggested pieces of clothing that can be combined or used as templates.

The second algorithm suggests three distinct features, such as a V-neck or long sleeves, that complement the parent’s style. A small amount of randomness is incorporated in the third design, an unusual suggestion compared to the previous design (but potentially interesting).

Human designers then finalize these algorithmic suggestions. They may incorporate fashion trends, including color combinations.

Stitch Fix manufactures these garments in-house so that it can sell them with much higher margins. The current share of Hybrid Designs is 20% in every order.

Subscription

Stitch Fix’s Style Pass subscription service is only available to customers who have purchased a certain number of Fixes. 

Subscriptions cost $49 per year and include unlimited fixes as well as free styling. In addition,  the subscription includes free shipping and returns.

Stitch Fix offers a monthly subscription service to its most devoted customers. When a customer buys a certain number of Fixes, they can join the premium Style Pass program.

According to Ernest Research, Style Pass subscribers spend an average of 15% more for their clothing, despite being of a luxury, personalized shopping nature. Their retention rates remain between 50% and 70%.

In exchange for a $49 yearly subscription fee, customers will receive unlimited Fixes. Thus, they do not need to pay the $20 design fee and are only responsible for paying for the clothing. Furthermore, shipping and returns are free.

Style Pass customers pay 15% more for their clothing than non-pass customers, according to Earnest Research. The annual retention rate ranges between 50% and 70%.

Shop Your Looks

Shop Your Looks is a marketplace created by Stitch Fix that directly allows customers to buy clothing from its website.

With Shop Your Looks, customers can create and purchase customized outfits based on previously owned items, eliminating the need to wait for the next Fix. The platform is available to both men and women residing in the United States.

The content of the platform is updated and changed every day. Stitch Fix’s recommendations are more likely to be accurate the more data it has on its customers.

Since styling is not required, the shipping process is significantly accelerated. In most cases, orders are delivered to customers in a few business days.

Do Stitch Fix use any specific brands?

In addition to thousands of brands, Stitch Fix collaborates with independent designers. A few examples are TOMS, Scotch & Soda, Barbour, Rails, and LUSH.

Stitch Fix also designs its own exclusive clothing lines in addition to third-party brands. Men’s brands include Alesbury, Fairlane, and Even Tide. Among the female brands are Truly Poppy,  Mauvette, and Bixon Ivy.

How does Stitch Fix get its clothes?

Many of the clothing items Stitch Fix offers come straight from the brand (such as Adidas or Tommy Hilfiger). It is reasonable to assume that the company uses algorithms to determine which brands to source and how many items are needed.

In addition to sourcing items from brands, Stitch Fix also designs its own labels. Most likely, its clothing comes from Asia.

Who Owns Stitch Fix?

During the initial public offering, Katrina Lake retained approximately 16% of the company. Her shares have grown to 18% today, making her the company’s largest individual shareholder.

Stitch Fix’s largest shareholder, Lightspeed Venture Partners, owns 36.97 percent. Benchmark  Capital, which owns 14.3 percent of the company, is the third-largest shareholder, after Lake.

Bear in mind that Stitch Fix is a public company, which means that its stock is freely traded on the open market. As such, the ownership structure of the company may change over time.

What is the Funding, Valuation, and Revenue of Stitch Fix?

The startup raised $79.4 million across five rounds of funding during its startup phase,  according to Crunchbase. Benchmark, Lightspeed Venture Partners, and Baseline Ventures are among the notable investors.

A further $120 million was raised during the company’s November 2017 IPO. Investors in Stitch Fix valued the company at $1.4 billion. After three years, Valuation increased by $2.41 billion, nearly doubling.

During the fiscal year 2019, the company reported net revenues of $1.6 billion, a 29 percent increase over last year. A net income of $36.6 million was reported in the meantime.

Success Story of Stitch Fix

Stitch Fix is a personal styling service based in the United States that uses algorithms and data science to make clothing recommendations based on style, budget, and size.

The company was founded in 2011 by Katrina Lake, initially operating out of her apartment in Cambridge, Massachusetts. 

Stitch Fix’s mission is to help women discover and explore their personal style through a customized shopping experience. 

She also lamented the lack of innovation in the fashion industry, with most consumers still shopping in brick-and-mortar stores.

The company was initially called Rack Habit. This business was funded by a $6,000 credit card and sold clothes Lake bought in Boston fashion stores to friends and family. 

In April 2011, the company began to grow through word-of-mouth and secured angel investment funding. 

Stitch Fix attracted thousands of users over the next two years, but subsequent investors were hesitant to provide funding due to high unsold inventory levels.

The company generated positive cash flow in 2014. Lake led the company’s IPO on the NASDAQ three years later, making her the first woman to do so at that time. 

The platform is now accessible to men and children in addition to women and has a current user base of over 32 million.

What is the Future of Stitch Fix?

Stitch Fix combines e-commerce and data science in a neat package.

In addition to the rapid shift to e-commerce over the last year, Stitch Fix should benefit from increased interest in its service. 

The company stated that it would step up its efforts to expand into new markets, such as the United Kingdom, and establish a foothold in new countries shortly.

Shopping at this company is an excellent alternative to crowded malls on the weekend. 

Investors should not dismiss this stock too quickly, particularly when considering the data science approach used by the company after the recent pandemic.

Also read, The GoFundMe Business Model.

Key Takeaways from Stitch Fix Business Model

Stitch Fix is a personal shopping service based in the United States. Katrina Lake founded the company to provide a platform for women to discover their personal style through personalized shopping.

Stitch Fix makes money by purchasing clothing in bulk from designer brands and reselling it at a profit. Fashion profits tend to be slim, but this company maximizes profits by using data science to manage inventory levels and provide tailored customer recommendations.

Consumers pay Stitch Fix $20 for professional styling advice. Moreover, it offers a line of its own-brand clothing, which it developed using algorithms to identify market gaps.

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About the author

Madhav

Hey Folks, I am Madhav! I lead a team of Marketers at Tech Startup based in Australia. In my free time, I dissect the business models of various businesses. And if there's any free time, I cook some new Dish!