In many business schools, MBA graduates complete their education with a thesis-like project of an internship project sponsored by an affiliate company. How would you like to be the potential MBA graduate who is assigned to disrupt a huge commodity industry and beat the market players that have been playing the game for decades? This is exactly what entrepreneurs Neil Blumenthal and Dave Gilboa did in the massive eyewear market. They came into a market with stagnated, non-competitive prices that prevented many people from getting glasses. Here are some of the elements of their unique business plan that allowed them to change the face of the eyewear industry with the Warby Parker company.
Like many young men, Neil Blumenthal started as a starving student barely making ends meet as he worked to complete his degree. At the beginning of one semester, he broke his pair of glasses and began to shop for replacements. He discovered that he would need to pay $700 for glasses, which he could not afford. Because of the high cost of eyewear at that time, Neil finished the entire semester without any glasses at all.
The State of the Industry
After Neil and Dave teamed up, they analyzed the industry to determine the cost model behind the high prices, to find if they were justified. They discovered two things. First, they found that optometrists and other eyewear providers were generally in a price-heavy relationship with the frame designers. Regardless of who manufactured the frames, the distributors would eventually need to pay license fees to the original design house. Second, they found that the eyewear distributors would impose a 200-400% markup on the wholesale frames. They understood that, in a competitive retail industry, the average markup should be closer to the 50% range. For commodity items like glasses, the markup should be much less.
In general, competitive industries drive down prices as the individual companies seek to out-price their competitors. Theoretically, the prices can be forced down to near the production and overhead costs of the item. Below that point, no company would make money and none would be able to stay in business. In highly competitive commodity markets, this profit margin can be as low as several percentage points of price. Neil and Dave found a huge profit margin in the glasses retail market that suggested the kinds of prices that would be charged by a monopoly.
What Drove the High Prices of Eyewear?
Normally, supply and demand drive the industry price point. With many competitors and lots of supply, the customers are in the driver’s seat and the maximum industry price is the amount consumers will pay on the average before they stop purchasing items. Neil and Dave deduced that eyewear had a particular perception as a medical item, the kind of product where no consumer thinks to question the price. In addition, glasses were a real need for eyewear customers who did not have any viable alternatives. This situation allowed the industry players to set a price well above the competitive standard. The Warby Parker owners recognized this price disparity as an opportunity and took advantage. They designed and manufactured their own glasses, bypassing the need to pay high license fees. In addition, they setup their own point of sale (POS) system to allow customers easy access to their glasses and to bypass the huge retail markup. This unique business structure allowed Warby Parker to offer glasses in the $95 range.
Buy a Pair, Give a Pair
An essential part of the Warby Parker business goals was that they determined to make stylish eyewear affordable to those that needed glasses. As part of their determination to fulfill their company mission, they came to realize that, in spite of a new low price for eyewear, many people in the world could still not afford glasses. To fulfill their company goals, they instituted a program of “Buy a Pair, Give a Pair”. This program provides glasses for those in need round the world, one for each pair sold through normal channels. An interesting point is that Warby Parker does not give the second pair of glass away for free. They provide the opportunity for recipients pay a nominal amount in order to own the glasses. For example, for a “finca” (farm) worker in Solola, Guatemala where the men only make about $4 a day, the charge for a pair of glasses is much less than a dollar.
The customer response has been amazing, not only in sales but also in customer gratitude. YouTube is now rife with videos of grateful customers, modeling their glasses and directing visitors to Warby Parker. With their innovative business model and smooth operation management, Neil and Dave have definitively changed the landscape of their industry.