Men’s Clothing Firm Wants to Expand Into Online Sales

J. Hilburn is a 50-employee luxury men’s clothing brand based in Dallas. Using a direct-sales and multilevel marketing model similar to that of Avon, J. Hilburn sells clothing that is custom fit using measurements taken by company sales representatives, known as style advisers, who make house calls and who share in the profits of other sales advisers that they recruit.
THE CHALLENGE To expand its business beyond direct sales without alienating the direct-sales representatives who helped build the company.
THE BACKGROUND Hil Davis and Veeral Rathod started J. Hilburn in 2007 after Mr. Davis had a midair epiphany. While flying to Los Angeles from Chicago, where he worked for a hedge fund, he was shocked to read in Robert G. Hagstrom’s “The Warren Buffett Way” that Mr. Buffett considered his investment in the direct-sales cooking products company Pampered Chef one of his best — despite the dodgy reputation of direct sales and multilevel marketing.
“Here’s one of the smartest investors of all time and he’s long direct sales while other investors are like, ‘Why would you touch that?’ ” Mr. Davis said.
Mr. Davis, 39, who lived in Dallas, joined Mr. Rathod, 32, a fellow banker based in Dallas who had been looking for a change, and the two settled on men’s custom clothing.
Men do not like to shop for clothes in stores, they reasoned. A network of representatives who make house calls would solve that problem and also allow the pair to cut costs: without brick-and-mortar stores or tailor shops, they could offer custom-fit clothing for something like rack prices.
“We sell a value proposition, personalized fit and luxury products,” Mr. Davis said. “We can sell everything for half the price of Nordstrom and Neiman Marcus or for 85 percent of the price at Brooks Brothers.”
Still, Mr. Davis and Mr. Rathod knew nothing about the clothing industry. Armed with $650,000 from friends and family, the two opened with the help of four direct-sales representatives whom Mr. Davis’s wife had known. While the first representatives found customers, the inexperience of the founders showed.
They chose their first factory, in China, because it had produced two high-quality samples and assured them it could produce more. But after J. Hilburn started ordering in quantity, things did not go so well, a problem worsened by time and language differences.
“We let two shirts be the proof of concept when one of us should have been over there,” Mr. Davis said. “Our first 400 shirts came back wrong because we were the idiots who didn’t get on a plane to watch over the factory.”
They did visit their second factory before selecting it, only to have it fall behind on complicated orders. Each day, they later learned, the needle workers put the most difficult shirts back on the bottom of their pile, delaying delivery. After the partners announced that customers would get a free shirt for every four days an order was late, they received a standing ovation one day in a Dallas restaurant from customers who called them the “free-shirt guys.”
They had fabric-buying problems as well; Italian mills were not accustomed to selling quantities as small as of 100 meters.
Mr. Rathod and Mr. Davis had to retrain their entire supply chain in an industry they did not know. Had they known then what they know now, Mr. Davis said, “we could have started this business for 40 cents on the dollar.”
But they learned. Sales rose from $1 million in 2008 to $3.25 million in 2009 and $8 million in 2010, a year in which they sold 60,000 shirts (which start at $89). And they built their squad of style advisers to about 1,000 today from the original four.
J. Hilburn representatives make a 15 to 30 percent commission on sales, plus 2 to 4 percent on what is sold by the style advisers they have recruited (and those recruited by their recruits). J. Hilburn limits each rep to five recruits, something that, according to Mr. Davis, has kept annual turnover around 14 percent, compared with the industry norm of 56 percent.
“Most direct-sales companies fail their reps by telling them to ask everyone they can to join teams and we’ll see what sticks,” Mr. Davis said. “But most people are not prepared to be business owners. That’s why direct sales has such a bad reputation.”
Most of J. Hilburn’s representatives are college-educated, stay-at-home mothers, from their mid-30s to mid-50s, Mr. Rathod said. While the top three earn more than $200,000 a year, the average style adviser works three or four hours a week and makes $7,500 a year.
As they built J. Hilburn, Mr. Rathod and Mr. Davis started considering how to expand the business online.
“Retail is about customer transactions,” Mr. Davis said. “It should be platform agnostic.” But there was a problem: They did not want to alienate their representatives, some of whom worried that the company was trying to use the Internet to do an end-run around them.
THE OPTIONS When Mr. Davis and Mr. Rathod went looking for venture capital, they realized how hard it would be to find investors who agreed with their vision for a company that would blend direct and online sales. For one thing, that blend did not have the sizzle of a pure Internet strategy.
“One of the challenges is that VCs have specific likes and specialties,” Mr. Rathod said. “And we didn’t fit into anyone’s box. We weren’t technology. We weren’t e-commerce.”
As they built their business in the middle of what Mr. Rathod calls “one of the worst consumer environments we’ve had,” the two founders had a choice to make: Would they position their company more as an Internet play to attract investors? Or would they stick to their direct-sales plan?
WHAT OTHERS SAY Paul Hurley, founder and chief executive of Ideeli, a New York company that offers flash sales of designer clothing: “Never position the company to get investors; only focus on what customers want, and investors will come. Map the value created by the advisers — customer benefits, new leads, market intelligence — and determine whether it’s really worth the margin dollars. This is critical. If they aren’t generating significant value over a Web alternative, competitors will eat your lunch.”
Marla Gottschalk, chief executive of The Pampered Chef, which is based in Addison, Ill.: “J. Hilburn should provide style advisers with the opportunity to sell online and empower them with the e-tools needed to market their businesses and maintain relationships with their customers. Sales representatives will likely support the company’s plan to incorporate online sales if they see that their personal businesses will continue to grow along with the company.”
Doug Fleener, president and managing partner of the Dynamic Experiences Group, a retail consulting firm based in Lexington, Mass.: “What differentiates J. Hilburn from the competition is the value the style advisers add to the customer’s purchase. At the same time, J. Hilburn is missing the customer that wants to buy online without scheduling a fitting. The new sales site should highly recommend the customer see a local style adviser since that ensures the best possible experience, but the customer can still choose to buy online from J. Hilburn. The key is to compensate the style advisers who are in that particular customer’s market for the sale.”
THE RESULTS Offer your thoughts on J. Hilburn’s decision on the You’re the Boss blog at nytimes.com/boss. Next week, on the blog and in this space, we will give an update on what the company is doing.

Mr. Davis and Mr. Rathod solved part of their problem when they met Battery Ventures, a venture capital firm that seemed to understand their vision. Battery sent representatives to Dallas to spend time with J. Hilburn’s sales force — known internally as style advisers — and in August 2008, Mr. Davis and Mr. Rathod raised a $1 million round of funding with money from Battery. They subsequently raised three more rounds, largely from Battery, for a grand total of almost $13 million in financing.
These investments gave them enough money to build inventory and pay for an Internet channel to handle re-orders from existing customers. But having the money to build a Web channel and doing it right proved to be two different things. The first Web roll-out in 2009 — an attempt to adapt an existing e-commerce platform to J. Hilburn’s unusual needs — flopped. A customer-to-customer Internet referral ended up sending out gibberish e-mails. The decision to include all 200 fabrics online, instead of putting up a limited set and allowing the style advisers to explain the full set, baffled customers. And, worse, the process hurt morale by raising and then dashing the hopes of the sales representatives.
So the company went back to the drawing board and custom-developed a new site, a process that took almost two years. Introduced in June, this new site improved the referral program, and it gave sales reps access to more online options than the customers, which meant they could walk their clients through the online shopping process. The sales reps are paid full commission on Web sales, even ones in which they do not participate directly.
So far, the strategy seems to be working. A September online referral promotion — in which the referring customer and the new customer both get a $50 coupon — resulted in about 8,000 e-mails being sent in a month, of which 30 percent were clicked through. Some 63 percent of those click-throughs turned into sales. With an average sale of more than $300, the program is expected to bring in some $500,000 in new sales. Aided by its 1,100 style advisers, J. Hilburn expects its revenue to hit $20 million in 2011 and between $50 million and $80 million next year. Per-customer annual sales have risen from $212 in 2008 to more than $600 today, and average style adviser sales have grown from $7,500 in 2008 to $20,000 over the same period.
Mr. Davis and Mr. Rathod discussed their recent results in a brief interview.
Q: Why were you so adamant about paying your sales representatives full commission on Web sales?
Hil Davis: We felt that they do a lot of upfront work acquiring the customer, and we also want them to be compassionate and caring about customer service, so we decided to keep the full rate commissions where they are and pay them outright.
Veeral Rathod: The style adviser does the brand introduction and can make it more of a tactile experience with fabric swatches, measuring and fitting. And then, the Web site gives them an easy channel to reorder.
Q. Will the style advisers always get full commissions on online sales?
Mr. Davis: I think over time there will be a customer service score associated with online commissions. So if a partner has a high or low customer service score, the commission will reflect that. If they have high customer service scores we’ll pay full boat. And if they don’t, it will give them the incentive to raise their customer service levels. That’s the next evolution — that’s probably 12 months away.
Q: How will you measure that? How do you know how often style advisers should be interacting with customers?
Mr. Rathod: We ran a customer survey in May and June and a partner survey in August, and the customers said they wanted to know and hear about what was new once a month. They may shop once a quarter, but they want to hear more often. When we talked to the partners about how often they felt they should contact the customer that frequency was a lot less, maybe once or twice a year. They didn’t want the customer to feel that they were nagging him.
Q: One reader commented that it might be interesting for you to try charging more for style adviser visits. Perhaps that would move more orders online, thus making sales more efficient.
Mr. Rathod: That’s not in the plans. Because to get the fitting correct, as well as to set the tone, you have to have a person-to-person meeting. The last thing we want to do is to encourage a customer to save money by entering measurements online or shopping online only. If they enter online, they’re going to get a shirt whose fit they’re not happy about. Plus all of our order size metrics go up when we get a style adviser in front of a customer.
Q: Another reader suggested you should try to make all your clothing in the United States, which would be a marketing coup and might get you some tax or investment savings from communities eager to rebuild their manufacturing base.
Mr. Davis: We did try to do as much as we could in the U.S. Ultimately, we found there wasn’t enough skilled labor available to do it. The biggest custom shirt manufacturer in the U.S. can do 5,000 shirts per month. Next year we’ll be doing 20,000 shirts per month. Where we can, we do. Our ties and cufflinks and belts are made in the U.S. We’re working with a U.S. company to resell their shoes. And we do jeans that are made in the U.S. It’s just a lost trade in the U.S.