Leveraging Virtual Online Change Rooms to Increase Profitability

It’s no secret that retail dollars are shifting from bricks to clicks. Online sales growth in apparel is >25% year-over-year, growing faster than total retail sales. On the surface, this is cause for celebration. However, apparel consumers have adopted another shift in behavior that has online retailers worried. 

Online apparel customers have traded in-store change rooms for the privacy of their own home, establishing what is now referred to as “Home-Try-On” (HTO) behavior. The challenge with this shift in behavior is the return rate for online apparel sales is significantly higher than in-store sales, in excess of 40% within women’s apparel categories. It is not uncommon for consumers to purchase multiple sizes of the same product, knowing in advance that they will be returning some – if not all – of the items purchased.

This change is having a profound impact on retail supply chains and online profitability. In addition to mastering the art of home delivery (also called ‘last mile’ or ‘final mile’ delivery) through direct-to-consumer fulfillment operations, retailers must also absorb the cost of direct order processing, handling and shipping. On top of those costs are all the costs associated with higher returns, including opportunity cost in lost sales resulting from having merchandise trapped in the HTO cycle.  As a result, the profitability for online apparel sales is not great when compared to traditional brick-and-mortar sales.

A solution that is showing promise is linked to reestablishing the in-store change room online, just as we created an online equivalent to in-store shopping. Virtual technology has now reached a point whereby apparel retailers can integrate virtual change rooms into their online stores. A study by professors Santiago Gallino and Antonio Moreno demonstrated that this approach can lead to impressive results. 

The Value of Fit Information in Online Retail: Evidence from a Randomized Field Experiment found that leveraging virtual reality technology to establish online virtual change rooms resulted in higher conversion rates (+6.4%), higher order value (+1.6%), lower fulfillment cost (-5%) AND a reduction in returns (-5.2%). The study also highlights the ability of virtual technology to modify consumer behavior, reducing the HTO effect by 25%.  All of this leads to a higher net profitability per order, estimated at roughly +13%, with upper ranges hitting 20% for those retailers who had a return rate >40% prior to enabling a virtual change room.

An additional finding in the study is the increase in consumer loyalty along with more frequent visits to the retailer’s online store that result from incorporating virtual change rooms. When a consumer takes the time to provide personal details (height, weight, bust size, waist size, along with hair color, skin tone, etc.) needed to set up their own virtual model, they have made an investment in their relationship with the retailer.  Consumers who create their own 3D model, create and assemble their own outfits and vividly explore a brand’s offering are more likely to imagine themselves owning the brand’s collection. The relationship has evolved from transactional to loyal and personal, and total customer value increases along with per order profitability.

Several software platforms exist that can be used to launch an online virtual change room. The key is selecting one that fits within your online brand store and contributes to the consumer experience you want to promote.  In addition, online content must be digitally enabled to allow consumers to outfit their 3D model. However, not all content must be digitized in order to launch or to capture maximum returns on your investment. If you strategically select what to digitalize, a consumer can virtually experiment with portions of an apparel collection, providing sufficient insights into fit and size that enable the consumer to purchase non-digital listed items.

Virtual online change rooms demonstrate significant promise in addressing numerous challenges facing online sales for apparel retailers. To learn more about how you can potentially adopt this technology, please reach out so our team of retail and supply chain experts can discuss how to help you unlock the value of this amazing technology.