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TECHNOLOGY

Tech Start-up Steals Killer Retail Strategy

You've heard of the try-before-you-buy-model. Now one company has applied it to gadgets--and it's working.
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There are always new twists to doing business--ways to satisfy customer demands that no one has thought of doing before. In the process, there's a chance to build a company and make a lot of money. The latest why-didn't-someone-else-think-of-that one, now backed by Google chairman Eric Schmidt, is called YBUY. And it offers a hook into consumer electronics purchasing that is smart and has been missing in the market.

One of the problems with gadgets is that you don't get to try them for longer than a few minutes in a store before you actually buy. Warranties cover the product working correctly, but not customer satisfaction. Although some retailers, both real-world and online, will offer a no-questions-asked return policy, most aren't going to welcome returns because a customer decided that the product didn't really wow them.

There's where YBUY comes in. The company lets consumers sign up for accounts (although they are only letting some in at a time and claim to have a waiting list of 50,000 people). You pay $24.95 in a given month (you can skip months) to try something from a curated list of products that YBUY offers. At the end of 30 days, you can return the product if you don't like it, or pay to keep it, with the $24.95 fee credited toward purchase. Products can be new or refurbished.

This is a very smart play toward gadget lovers:

  • The $24.95 gives customers something they can't readily get in other ways: a chance to know whether they really want a product or not.
  • Because the fee is applied to the purchase price, shoppers won't feel as though they're paying a penalty.
  • If YBUY smartly picks its collection of items, it should see a relatively low return rate.
  • Smart negotiations should let them return the items to the vendor for refurbishment at a low cost.

For example, consider an iPhone for $600. Say that 3% of people return them. That's an average $18 cost per iPhone, but they're getting more than that amount with the $24.95 fee, and how many consumer items are going to cost significantly higher than that? It's the sort of thing that should work out better as the numbers get larger, and, as Ingrid Lunden reported at TechCrunch, they apparently have been:

What's perhaps most compelling is that as the service continues to grow, it's actually making better and better margins on the service. In December, he says, they were losing $50 per customer. Now they are making around $35 per customer, with the value per customer at $450, with the profitability per customer ranging between 25% and 50%.

If YBUY gave accurate numbers, it suggests a business that will actually make more money over time, and all due to a real twist on how consumers, retailers, and vendors have assumed business had to be done. So what other opportunities have most of the world left for you to pick up and run with?

Last updated: Jul 6, 2012

ERIK SHERMAN | Columnist

Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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