What can a pair of male University of Waterloo engineering grads possibly know about the rapidly growing market for beauty products, where 98 per cent of customers are female?
A lot, it turns out, when one looks at how Loose Button co-founders Ray Cao and Aditya Shah and their small crew of hackers and marketing mavens are reshaping the way it delivers samples to their consumers.
Previously, suppliers such as L'Oréal, Moroccan Oil, Dermalogica and dozens of others employed agencies to go into malls and high-end stores to hand out samples to consumers picked nearly at random, collecting pretty much zero data in the process.
Messrs. Cao and Shah are highly analytical and believe in the value of tracking metrics to help build an enterprise and make it smarter. So they decided to do something about this part of the industry and, in doing so, created one of the most innovative 21st-century business models yet.
Their value proposition goes something like this: "We're the Netflix of the beauty products industry, but with eHarmony for brains," says Mr. Cao.
Every consumer who signs up is asked to complete a profile letting LooseButton.com know what type of products they are interested in. Then, once a month, a "Luxe Box" is delivered to their door by Canada Post with travel-size samples from suppliers they're interested in. This is a form of mass customization - each Luxe Box can contain different products matching individual consumer interests with the right type of supplier products, plus a few surprises thrown in.
Clients have been responding well to Luxe Box surveys, and have independently started to record YouTube videos of themselves receiving, using and experimenting with Loose Button's products. Some of these videos have been viewed more than 10,000 times, and all are spreading the word about Luxe Boxes for free. Tribes of makeup evangelists are forming around the strongest influencers in their ecosystem.
What's also interesting is that clients are paying $12 per month ($10 if they sign up for a year) to receive their monthly try-before-you-buy Luxe Box filled with samples that Loose Button gets for free from its suppliers.
But there's even more cleverness here. In addition to providing them with free samples, suppliers such as L'Oréal and Moroccan Oil pay to be included in the Luxe Box, which means Loose Button is in the enviable position of being paid not only by clients, but suppliers too. Talk about negative-cost marketing!
As well, the Globe and Mail, Chatelaine and other publications, desperately trying to hold onto their readers, buy Luxe Box subscriptions at around 80 per cent of retail price to give to their most loyal customers, thereby vastly extending Loose Button's reach and increasing its growth rate. The company won't say exactly how many clients it has, but it's currently estimated to be around 10,000.
Based in Toronto on Bay Street in shared co-worker space, its Ottawa connection was its original desire to use ByWard Market-based Shopify's platform. However, Loose Button was forced to move to Recurly.com because the Ottawa firm is not (yet) set up for recurring payments or subscription billing. Shopify is set up for dozens or hundreds of stock-keeping units, but Loose Button has only one.
When asked why they named their company Loose Button, Mr. Cao explained: "Buttons are fasteners that connect two pieces of cloth. We intelligently connect consumers and brands."
They started Loose Button right out of university and have an advisory board with luminaries such as Harry Rosen and former Toronto Star publisher Jagoda Pike.
"Mentoring helped us a lot," says Mr. Shah. "We decided not to go into the apparel space since it was already saturated. We went into the market research and product discovery side instead."
They are also part of Impact.org, which focuses on fast-growing enterprises. Started out of Waterloo, it is now a national organization with informal ties to local not-for-profit Exploriem.org, where this writer is executive director.
The guys have ideas for other Boxes, such as another line focused on men's products and possibly a foodie version. They intentionally called their first Box something different from their company name so they could conquer other verticals later. It's what Research In Motion tried to do with the BlackBerry and PlayBook (although maybe not too successfully in the latter case).
There isn't much to change in their business model, other than suggesting that they might consider adding a social layer over the whole thing - the follow/follower model is a powerful one that knits the community more closely together and makes it even tougher to knock off. Perhaps they could integrate the Twitter API and allow customers and suppliers to follow top influencers in their ecosystem on a more coherent basis than just stumbling onto one of their YouTube videos.
Other changes might include adding a Qricket Code to each Luxe Box (that's a QR code where you can change the website it resolves to after printing them) so that, like ET, each Box can call home. Maybe there will also one day be a LooseButton.org to give back to the community too.
But a business model where consumers and suppliers, as well as other organizations, pay the company to market their product, all while forming an intelligent community that is hard to knock off is, quite frankly, amazing.
Professor Bruce M. Firestone is entrepreneur-in-residence at the University of Ottawa's Telfer School of Management; founder of the Ottawa Senators; executive director of Exploriem.org; and a broker at Century 21 Explorer Realty Inc.