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Everlane’s retail recipe: Stock less than you’ll sell and never discount a thing

By Laura Lorenzetti

To understand online retailer Everlane’s business model, you must first understand the traditional economics of retail. Customers pay for clothing in three ways: full price, somewhat discounted, or rock-bottom prices.

But Everlane never offers discounts. The price tag attached to its signature T-shirts or cashmere sweaters is permanent—or promises transparency, meaning buyers know the percentage of profit Everlane is making on each transaction. (Example: A black T-shirt sells for $15, and Everlane makes approximately $8.30 off it.) Inventories are kept lean; the goal is to sell out.

“We found that in traditional fashion there are so many different styles and none of those styles get carried over,” says Michael Preysman, CEO and founder of Everlane. “You can’t really make this really perfect product.”

But you can try. Everlane launched in 2010 with the intention of doing just that with basic cotton T-shirts, oxford button downs, canvas weekend bags and leather belts, to name a few of the 15 types of products it makes for men and women. Preysman’s fashion company wouldn’t be about keeping up with the latest trends but about creating the ideal version of a handful of items.

When the company launches a product, Preysman orders less than he thinks will sell, which means that there are often sold-out products on Everlane’s website. As of last week, for example, the women’s seed stich raglan sweater was sold out in all colors and sizes. The intention is that Everlane gains feedback on that product and creates an updated version before placing another inventory order, much like a tech firm launches versions of its digital products, slowly getting closer and closer to the perfect T-shirt, weekender bag, or cashmere sweater—and the right supply of them.

Streamlined inventories have become the retail standard in the wake of the 2007 recession, as stores try to control costs and improve profit margins. “When there is less inventory in the pipeline, there is less work to do in the supply chain,” says Leslie Hand, a retail analyst with IDC Insights. Indeed, improving inventory accuracy can radically improve a retailer’s productivity. Bon-Ton stores saw a 13.6% increase in productivity once inventories were streamlined using warehouse management software.

Everlane’s limited inventory approach has led to strong second-year growth, though it is still a small player in the larger online retail world. The company has sold to more than 100,000 customers, about 40,000 of them regulars. With the holidays on the horizon, Preysman is expecting to double or triple those numbers—all without any advertising. For comparison, its 34-year-old T-shirt making rival American Apparel lists almost 250,000 SKUs on its website that serves as many as 1.5 million visitors per month.

“A lot of what we’ve done is come in as outsiders,” says Preysman. “Why does the industry work this way? Is that the right way or the wrong way?”

The minimal inventory also helps keep overhead costs low, an important consideration for a startup. But Everlane’s slim inventory also leads to a number of missed sales, which can cut into profits over time. Back orders can cost traditional retailers upwards of $7 to $12 per item in additional shipping and fulfillment costs as well as extra customer service, according to studies by consultants. While Everlane doesn’t plan to extend beyond its digital footprint, the lost sales could add up.

For now, that doesn’t faze their devoted customers, many of whom will sign up for the waitlist and hold out until the new version arrives.

“Sometimes it’s a waiting list or sold out, but if you love a brand you just kind of forgive them for a month,” says Axelle Tessandier, who has shopped on Everlane regularly for the past year. Recently, she purchased a purse from Everlane’s new Petra collection, which had a two- to three-week wait. Everlane produced 1,000 of the high-end bags, ranging in price from $325 to $425. There is a waiting list of nearly 6,500 people for the next batch.