Free Enterprise Staff  | July 25, 2014

How Warby Parker Profits from Free Samples & Free Shipping

There is a certain leap of faith that online customers must take when deciding whether the pants they’re considering buying will fit snugly or loosely, or if the bag that appears so vibrant in pictures will look rather drab in person. Yet more and more, companies like Warby Parker are surmounting this ostensible obstacle by shipping sample products directly to consumers, effectively turning their homes into makeshift brick and mortar stores. Though undoubtedly innovative, is this business model feasible and, more importantly, does it signal the end of the physical retail outlet?

The answer, it turns out, is not as clear-cut as you might think.

E-commerce has changed dramatically over the past few decades, as the internet has become the latest setting in retailers’ never-ending war for customers. With Amazon leading the way, e-commerce sales have increased at a rapid pace, the United States Department of Commerce recently reported, with total such sales hitting $71.2 billion in the U.S. in the first quarter of this year—up 15% from 2013.

While online shopping has surged in popularity over the past decade—in 2004, first quarter e-commerce sales were only $15.5 billion—it has also undergone a series of fundamental changes aimed at assuaging consumers’ concerns, explains Kirthi Kalyanam, a professor at Santa Clara University’s Leavey School of Business who directs the school’s E-Commerce Initiative.

“The e-commerce industry is all about innovations that try to break down barriers,” Kalyanam says. “The initial barrier was whether you were going to get the right product on time, and Amazon invested heavily in building up an infrastructure that would guarantee that. Then people were concerned over whether they could trust sellers, so eBay created this online rating system. Another barrier over time was this notion of consumers not wanting to pay that much for shipping. Low and behold, you have a bunch of new innovations come up like Amazon Prime and free shipping policies.”

Pioneered by Amazon and eBay, these sorts of strategic initiatives that many digital consumers now take for granted have helped lure customers away from standalone brick and mortar stores and toward e-commerce sites. That doesn’t mean, however, that obstacles don’t still exist, Kalyanam stresses. Rather, he says that by offering their customers the option of trying products before they actually commit to buying them, companies like Warby Parker and Trunk Club are tackling the next wave of e-commerce anxiety. “Allowing customers to touch and feel the product is really the next barrier to overcome,” Kalyanam says.

But how can businesses afford to spend money to ship products that they might never profit from? Warby Parker does not have the same operating costs as a brick and mortar store, Kalyanam says, which enables it to offset the costs associated with buying and shipping additional products to customers across the U.S.

“There are definitely costs for the company, which is not something to be taken lightly,” Kalyanam concedes. “But I think that the comparison to me that is interesting is how else would you buy this product today if you weren’t buying it online, and what are the costs associated with that? These guys are reinventing the supply chain of fulfillment and, because they’re reinventing the supply chain, they are eliminating inefficiencies on the backend—and those inefficiencies release extra margin. At the same time, they’re able to lower prices for customers, provide them with free samples, and still make a profit.”

Nevertheless, Warby Parker has expanded beyond the e-commerce space, opening standalone stores across the U.S. While this may seem counterintuitive given its success in the digital space, the eyeglasses purveyor is actually creating a new kind of physical store, Kalyanam says, one that is altogether different from the traditional model it resembles.

“It’s a complex message so I think it’s easy to get confused, but I think what people are saying is that physical stores, the way they used to be done in the past—as an extension or as a primary representation of a physical retailing model—are probably going to be facing a lot of challenges,” he explains. “Whereas a physical store that is being introduced as an extension of an e-commerce model is probably going to operate very differently. They’re both physical stores, but they’re very different. Warby Parker is really very early in this … and they’re opening physical stores that complement the direct model.”

With Warby Parker now operating brick and mortar stores in 10 cities across the U.S.—as well as a roving bus outlet—the company will likely continue shuffling its product offerings as it seeks to hone its multi-faceted approach to attracting customers. Its strategy has already caught the attention of major players in the business world, as the company has reportedly garnered investments from J.Crew chief executive Mickey Drexler and American Express. Looking toward the future, Kalyanam says that Warby Parker and other retail shops will have to excel in two critical areas if they hope to stand out in an increasingly crowded e-commerce space.  

“There are a lot of new internet retailers that are out there, some of which are interesting and work well,” Kalyanam says. “But a lot of them, unless they’re differentiated, they’re not going to be doing very well. The second trend I see is that unless people are reinventing supply chains and are really doing a good job of reinventing the backend process of what they’re doing, it’s going to be a challenge to compete in the future.”