Chloe Dao knew she needed help. But she didn't know where to find it.

The owner of a Houston boutique called Lot 8 and the 2005 winner of Project Runway, Dao had just enjoyed a few flush years, thanks to a wave of postvictory publicity—including a spread in Elle and a showcase at the Smithsonian—and a lucrative contract selling women's sportswear on QVC. But by mid-2010, the national spotlight had faded, and the QVC contract had come to an end. "I was stuck with all this overhead and a fraction of the revenue," Dao says. "I needed an outside view of my business to figure out what to do next."

Hiring a professional consultant was out of the question. The fees, which start at about $200 an hour, were way beyond her reach. Instead, she took a chance on some students at nearby Rice University.

Like many other business schools across the country, Rice's Jones Graduate School of Business offers free consulting services by teams of students. In the school's Action Learning Project, or ALP, each team spends an entire semester on a project, logging about 40 hours a week. At a traditional consulting firm, that would cost tens, if not hundreds, of thousands of dollars. But the only compensation the students get is a grade for their final presentations. About 45 businesses, including giants such as Hewlett-Packard and Chevron, apply to host student-consultants each year, but only 20 get selected.

Dao discovered the program through a fellow business owner and immediately jumped at the opportunity. If the students' suggestions were off base, Dao reasoned, at least she wouldn't have wasted money; if they were good, they just might save her business. After submitting an application, Dao attended the ALP job fair and presented her situation to the students, who then bid on their favorite projects. Dao's goal at the time was to replace her QVC revenue, which had constituted 25 percent of her total revenue, by generating sales through her website. That goal would quickly change.

About a week later, Dao met her team of six student-consultants. They ranged in age from 25 to 29 but seemed wise beyond their years to Dao, who is 40. One had managed construction projects before enrolling at Rice; another did publicity for the San Antonio Spurs. They divided themselves according to their individual specialties and began poring over Dao's financial statements, interviewing her seven employees, studying the designer-boutique market, and surveying more than 300 customers. They consulted a retail architect, who analyzed Dao's approach to merchandising. Dao and the team met weekly at her store to discuss their findings.

It took only a few weeks for the students to arrive at some startling discoveries. First, if not for the QVC contract, Lot 8's revenue would have plunged 21 percent in 2010. The team decided that before Dao even considered investing in e-commerce, she had to address the problems at her store. "QVC's revenue had been masking a lot of operational inefficiencies," says John Levene, who focused on Dao's finances and operations. Dao's expenses were 16 percent higher than the industry norm, in large part because her store was twice the size it needed to be; plus, she was open an hour longer than most competitors were on weekdays. The research also revealed that Dao's core customers were 25 to 38, younger than she had thought, and the average Lot 8 cocktail dress cost about $100 more than most customers wanted to pay. From a marketing standpoint, the students also found that Dao's own name was more meaningful than Lot 8, and suggested Dao rename the store to reflect that. Meeting with the students and absorbing their insights, Dao says, "was like going to therapy every week."

Meanwhile, the students were getting some professional help of their own. Three faculty advisers met with the students weekly and challenged them to come up with a business model for Dao going forward, not just a list of near-term challenges. "The students saw the little pieces, but not how it all tied together," says Kim Kehoe, director of the ALP program and one of the team's advisers. "We forced them to think about the connection between those pieces." Kehoe admits that even the most diligent students lack the experience and expertise of seasoned consultants. But he says that giving students real-world assignments is no different from what medical students have been doing in clinical practice for decades. "Business schools don't do much of that at all," Kehoe says, "but it's important to help the students put their skills into practice."

While they were working with Dao, the students were enrolled in other classes. That enabled the students—and Dao—to get help from professors. Two students, for instance, were in a market-research class, which helped them draft the customer survey for Lot 8. Says Mallory Engler, the team's marketing lead, "Our experience in the classroom really complemented our work with Chloe."

Dao, for one, never felt as if she were dealing with amateurs. In their final presentation, the students urged Dao to stop thinking of Lot 8 as a national brand and instead position it as a destination boutique for young women in Houston and take greater advantage of her local celebrity. They told her to cut extraneous merchandise, like her bridal line, and to open at 11 a.m. instead of 10 on weekdays and use the money saved from those five hours to hire a part-timer.

Since Dao started following the students' advice, she has cut costs about 20 percent, and for the first time in two years, sales are stable rather than shrinking. She expects even better margins next year, when she plans to halve the store's size and change its name from Lot 8 to Dao Chloe Dao. As for the students, they received an A for their work and were among four teams given awards for top performance. "For me, it's about what you know, not your age," Dao says. "They performed CPR on my company, and it really was a lifesaver."

Is That Gonna Be on the Midterm?

Working with B-school students can yield big results for a low price—but only if you follow these four rules, according to Kim Kehoe, who heads the student-consulting program at Rice University.

1. Keep it manageable.

"These students have analytical skills," Kehoe says. "They can slice and dice data, but don't expect them to tell you how to run your business from scratch."

2. Get a short leash.

"Meet with the students at least once a week," Kehoe says. "Supervision is important. The last thing you want is to hand them the project, walk away, and come back in four months to something you don't need."

3. Take them seriously.

"Let them know you're committed to implementing at least some part of the work they've done," Kehoe says. "Don't let them think that their work is going to go into a folder, never to be seen again."

4. Keep it confidential.

In other words, even if the school doesn't require students to sign a confidentiality agreement, you should. "That way, there are no concerns about what you can and can't share with the students," Kehoe says. "Their project will only be as good as the data they work with."