Why ThredUP Shifted From a Peer-to-Peer Marketplace to an Online Consignment Store

ThredUP is not just a successful online marketplace of “practically new kids' clothing,” but also a company on a mission – “becoming an iconic brand in American homes around making smart choices as a consumer,” explains James Reinhart, its co-founder and CEO. On its way there, ThredUP has made few transitions, most notably last March when it shifted from a peer-to-peer marketplace into an online consignment store.

This transition seems to be successful in terms of volume - 7,000 new customers join ThredUP every month with a 46 percent retention rate as Reinhart told AllThingsD.com in October. Yet not all parents were happy of this shift – “This is such a bad move for the company. They have completely forgotten what made them unique and different for their loyal customers. ThredUP was more than just used clothes...it was a community that this new venture totally ignores. I'm sad that they have taken this path,” was one of the comments following the transition last March.

These sorts of business model adjustments and will likely become increasingly common as a growing number of companies in the sharing economy start looking, just like ThredUP, to shift from being a great story to being a good business. This is why the story of ThredUP’s evolution is an important one – should other companies look at it as an example to follow or to avoid?

ThredUP originally started as a peer-to-peer clothing platform that focused on men’s and women’s shirts. The idea, explains Reinhart, was to capitalize on underutilized assets in everybody’s closets - all the stuff we have there and don’t really wear. Reinhart and his team understood that clothing exchange was a good idea but not a good business because they didn’t manage to generate enough traffic.

So then ThredUP decided to move on to kids’ clothing. Kids, as the company reports, use more than 1,360 articles of clothing by age 17. Not only that this is a costly expense, but parents must also constantly look for ways to get rid of old clothes and make room for the new ones. Hence, ThredUP believed that kids’ clothing are a bigger consumer problem and will provide the company with a better opportunity to scale up and generate improved business results.

ThredUP wanted to bring affordability and convenience to the kids’ clothing market, creating an online swapping platform where parents could trade boxes of used clothes directly with each other. This marketplace became quite successful with 300,000 customers who exchanged about 2 million items in total. Yet, impressive as it may sounds, it wasn’t enough.

The problem as ThredUP learned was that to succeed in such a business, where the business model is based on receiving a small fee for every transaction, you need an enormous scale, such as what you find on eBay for example. But no matter how well ThredUP served the hundreds of thousands of parents that used its platform, it wasn’t eBay and even with 500+ new customers per day joining the site, it was nowhere near to becoming large enough to sustain itself financially.

ThredUP had a very clear choice to make – either it continues to act as a great community service with little chance to succeed as a business, or it needed to make a change in its business model, putting business before community. It chose the latter, announcing on March 7, 2012 that “we’ve made the difficult decision to shut down our swapping service, and focus exclusively on our concierge experience and new consignment shop.”

The re-vamped website, the company explained, takes all the legwork out of traditional peer-to-peer swapping, and “makes sharing and accessing used kids clothing easier than ever.” The process works like this – parents send ThredUP a post-ready bag at no charge  filled with their kids’ clothing. The bag is then evaluated by the company and the parents get paid for items that meet ThredUP’s rigorous acceptance criteria – about 20-30 percent of each item’s resale value. These items will then be offered for sale on ThredUP’s online consignment store. Items that ThredUP won’t accept for reselling are entered into its 100% Re-Use Program.

And the results? According to TechCrunch’s report last October, ThredUP has rapidly grown its user base since it started with the new model and is now trending toward 400,000 customers. Reinhart also said in his interview that ThredUP receives 6,000-10,000 pieces of clothing a day.

These figures are pretty impressive, although of course it’s still far from eBay, where millions of items are listed, bought, or sold daily. Reinhart himself said that ThredUP is looking to vertically expand to “anything you can put in our prepaid bag,” which might suggest that the company doesn’t believe it can generate good business solely from kids’ clothing.

So far, investors seem to have faith in this path - last October, a new investor (Highland Capital Partners) led ThredUP’s $14.5 million Series C round, announcing that “ThredUP is disrupting the $30 billion resale industry by moving something families have been doing offline for generations, online,” and bringing the company’s total raise to date, to $23 million.

While it’s too early to predict whether ThredUP will evolve into a good business, the company has already showed that it’s impossible to be both Freecycle and eBay. Companies need to make a clear choice if their mission is focused on the business component or the community component of their operation and act accordingly. The sooner they figure it out, the better their chances are to succeed.

[Image credit: thredUP]

Raz Godelnik is the co-founder of Eco-Libris and an adjunct faculty at the University of Delaware’s Business School, CUNY SPS and Parsons the New School for Design, teaching courses in green business, sustainable design and new product development. You can follow Raz on Twitter.