Private Sales is one of the hottest online retail concepts with:

• Rapid revenue growth (Vente-Privee – 0-$1 billion in 6 years, Gilt Groupe 0-$400 million in 3 years)
• Extremely attractive financials (e.g. extremely low customer acquisition cost due to viral invitations)
• Larger players buying-in (GSI Commerce acquiring Rue La La for $350 million and perpetual rumors of Amazon buying Vente-Privee for up to $3 billion)
• Incumbents adding Private Sales to their sites (Neiman Marcus, Saks, Comcast(Swirl))
• VCs funding new entrants (BuyVIP, Secret Sales, Private Outlet)

For those looking to develop Private Sales businesses, there is a great opportunity to learn from the leaders.  Specifically:

• What are the best practices that can be learned from the leaders?
• What are predictions for future capabilities that the leaders will offer?

What is Private Sales?

Private Sales has different variations but is generally defined by the following:

• Invite-only – requires an invitation from a friend to get in
• Name brand merchandise -quality merchandise not just cheap or out of date items
• Discounts – compellingly priced to drive impulse purchases and loyalty
• Selling Event – timed event at which the merchandise is offered until it sells out or a time limit is reached

Who are the leaders?

Early leaders are emerging in the Private Sales space and are listed below.  The space is dynamic, but these companies are early leaders that are the most likely sources of tested best practices.

• Vente-Privee – originator of the concept in 2001, nearly $1 billion in revenue in 2009, in France, Germany, UK, Italy, Spain,
• Gilt Groupe -$500 million in revenue after founding in 2007.
• Ideeli – 1.3 million members, recent $20 million VC funding
• Rue La La (GSI Commerce) - acquired by GSI for $350 million
• Hautelook - $90 million in revenue

We reviewed these sites for key business model design elements that drive their success, as well as some unique elements of each to watch as trends going forward.

Key Design Elements

A successful Private Sales model requires the creation of an exclusive club, a viral invitation only machine, a highly loyal repeat customer base and a powerful demand for impulse purchases.  Several key design elements have become best practices to achieve these objectives.

• Viral invitations -New customer acquisition is driven primarily through people inviting their friends. This dramatically reduces the traditional customer acquisition cost of SEO, paid search and affiliates. The average incentive is $10 for each person that is invited and makes a purchase. Each site makes it easy to invite friends through either Facebook Connect or adding contacts through Plaxo.
• Cart reservation – One of the biggest complaints from Private Sales shoppers is that an item will sell out in the time it takes them to move an item placed in a cart to checkout. The most common approach to address this issue is to provide a reservation time buffer once an item is placed in the cart to allow enough time to checkout. Some of the sites extend the time when another item is placed in the cart. A notable difference is whether the reservation time should be shown; which is a consideration between notifying the customer that they may continue shopping to drive up average-order-volume vs. the risk that they will horde merchandise in their cart.
• No site search - Most ecommerce sites offer search or guided search to find products. Most Private Sales sights do not. The goal is to create a window-shopping experience where a shopper spends time looking at each event to create an impulse to buy. Shoppers are not coming to the site with an intent to purchase a specific item. However most of the sites do offer a variant filter such as size and color.
• One page event list - A traditional ecommerce retailer may have thousands of SKUs in a hierarchical product catalog broken down by category, sub-category, and product page. Large Private Sales sites may have dozens or even a hundred simultaneous events, but are listed on a single page. The emphasis is on encouraging browsing to create the urge for an impulse purchase.
• Sales events always start at the same time - It is important to train customers to come to your site at the same time for each sale to start. This maximizes the impulse purchases, the rate of product sellout and converting return visitors. It does create a huge challenge for IT to support extremely spiky traffic. IT would much prefer to spread the start time of sales events throughout the day to ease the operations – but the business benefits of training customers to come to the site everyday at the same time greatly outweigh the additional IT costs and performance challenges. Cloud-based auto-scaling platforms are ideally suited to address this spiky demand.
• Order stays open for a few hours – Compared to traditional shopping, a Private Sales shopper is motivated to check-out before the inventory depletes or her reservation runs out on her cart. This creates a situation where a shopper is forced to checkout soon after adding an item to the cart. This means that buying many items may require several checkouts, inevitably leading to call-center complaints about multiple shipping charges for same-day purchases. Advertising that free shipping is available for additional items purchased within a given number of hours builds goodwill, increases order volume, and most importantly does not create disgruntled shoppers.