Reflect.com Failure and Online Customized Perfume Business

The Rise and Fall of Reflect.com

During the period when Reflect.com was launched, many Fortune 500 companies were experimenting with online business models, driven by the rapid ascent of Amazon.com, Dell, eBay, and others. Many larger consumer packaged goods (CPG) companies, including Procter & Gamble (P&G), feared disintermediation of their exceptionally valuable and established distribution channels by Internet-based retailers (Andonova, 279). From small start-ups to full online retail stores, established retailers quickly invested in the most visible parts of website initiatives, often spending millions on catalogs, navigation, and graphical interfaces (Himelstein, Galuszka, et al.). Any business model that included an online component was considered valid, even if it was going to operate at a loss or sustain a very high cash burn rate over the first five years with little incremental revenue, as these investments were seen as critical for building brand equity (Himelstein, Galuszka, et al.). P&G was at the time falling behind on product innovation and saw this as an opportunity to leapfrog competitors and embrace innovation leadership once again (Himelstein, Galuszka, et al.). With all these factors combining to create a sense of urgency and a widespread assumption that online channels would succeed, Reflect.com was launched.

What immediately became apparent, however, was that the value chains of these companies were not designed to handle the intensive levels of mass customization necessary to support such a business model (Pine, 23–24). Completing mass customization of a process-related product—including cosmetics or perfume—would require intensive process re-engineering, redefinition of manufacturing workflows, and a focus on redesigning entire supply chains to manage wide variations in demand. In short, the entire business of this specific line of cosmetics at P&G would have to be re-architected. For P&G, adopting a mass customization strategy across its process-related manufacturing operations while simultaneously redefining its distribution channel strategy proved to be more complexity than the organization could profitably manage at once (Gaffney, 1).

Instead of concentrating on each linkage or aspect of their value chain, P&G—like many other companies at the time—focused only on the catalog and user experience, and quickly found that the business would not scale profitably as a result. In addition, P&G is primarily a process goods manufacturer, with the majority of revenue generated from soaps, detergents, liquids, and other products made through consistent, continuous processes. The minority of its revenues derives from discrete manufacturing processes, which made the transition to a customizable line of cosmetics even more challenging. The P&G supply chains were specifically designed to manage thousands of identical products being produced daily in their manufacturing centers, with tens of thousands being shipped to distribution warehouses and locations globally. The supply chains had to be redesigned to become highly demand-driven at the individual order level (Gaffney, 1), while distribution and fulfillment had to be redesigned to support single transactions—a process area in which P&G had very little experience (Himelstein, Galuszka, et al.).

When all of these factors are considered, it becomes clear how Reflect.com could not attain profitability. The costs of process inefficiencies were so great that any potential profits were quickly consumed by the cost per order to fulfill a custom cosmetic production run or ship finished products to the customer. P&G's value chain and cost structure were built around millions of units per year and relied on its distribution channel to move products into stores. As P&G executives discontinued operations of Reflect.com, they described it as an experiment and a learning experience (Gaffney, 1; Neff, et al.). What the company had in fact learned was that its value chain was so finely tuned to massive production quantities that moving into a mass customization strategy was extremely difficult. Ultimately, P&G realized what many other CPG companies also discovered: moving to a mass customization strategy online is exceptionally risky and costly, particularly when processes are complex, and it requires a precisely calibrated fulfillment network (Gaffney, 1).

Customer Concerns in Online Customized Cosmetics

The greatest concern customers have is whether they can trust the quality and validity of the personalized care products they buy online. Trust is the overriding and most critical issue when purchasing personal care products online (Lalisan, Rubio, et al.). In conjunction with trust, many consumers want expert-level guidance when it comes to determining which ingredients to use in a cosmetic product (Groves, et al.). A customized cosmetics website must also convince customers that the unique production processes used to manufacture their products are safe, secure, and reliable. The aspect of product personalization and mass customization must center on transparency about product quality and openness about each step in the production process for the product to be seen as authentic and worthy of trust (Pine, 2).

Target Market Realism and Business Model Challenges

Reflect.com's target customers were described as "beauty involved"—people willing to invest extra time designing their own beauty product solutions. This target consumer was not realistic. The prices P&G would have had to charge to cover the unique production processes, supply chain, and fulfillment strategies would have forced a high price point for these customized cosmetics (Pine, 23–24). At the price point necessary to achieve profitability, P&G would have had to focus on more affluent market segments. The more affluent the target consumer, however, the greater their time constraints; it would therefore be unusual to find someone with a high income who also had sufficient leisure time to create their own beauty solution online. It would be unrealistic to assume that highly affluent women—the majority of whom hold executive-level positions—would have the time to design their own cosmetics. These consumers face significant time shortages.

There are also a series of challenges arising from the technology infrastructure alone. The legacy IT systems throughout P&G had been designed primarily for dual-tier or multi-tier distribution, while data integration and campaign optimization projects within the company took four years to complete after launch (Gaffney, 1). The data analysis and support functions were also incomplete from a store-reporting standpoint, which was entirely different from P&G's core business lines, which had extensive in-store analysis capability. Finally, the value chain issues discussed earlier compounded these difficulties—specifically, the lack of a supply chain capable of supporting a mass customization strategy involving smaller quantities and individual order fulfillment (Gaffney, 1). All of these factors contributed to Reflect.com's difficulty in becoming and remaining profitable.

Evaluating a DNA-Based Customized Perfume Startup

In evaluating the potential opportunity to invest in a perfume mass customization business that would create and sell fragrances tailored to customers' DNA, several concerns must be addressed first. At its most basic and fundamental level, this business model requires an exceptional degree of trust between the company's brand and the consumer. Since customers would be providing their DNA—highly confidential by nature—for the creation of a new scent, the role of a trusted advisor is crucial (Lalisan, Rubio, et al.). The confidentiality, safety, and security considerations are particularly critical, as is the need to establish credibility as a trusted advisor on perfume production and customization (Groves, et al.). While the deliverable is perfume, what is really being sold is the ability to provide a highly unique and personalized experience every time the fragrance is worn. Becoming a trusted advisor in the cosmetics industry is a well-recognized challenge, and one the proposed venture would have to address quickly in order to gain market share (Lalisan, Rubio, et al.).

At the center of the business model for a personalized fragrance based on DNA is trust. The fact that high-end cosmetics are often sold at luxury counters where experienced clinicians provide guidance on color mixing and chemical reactions underscores how critical the role of a trusted advisor is in this industry (Lalisan, Rubio, et al.). To focus only on this element of the business model, however, would be to ignore the lessons of Reflect.com. That lesson is that for any mass customization opportunity to be fully realized, it must have the full support of background systems and processes operating in coordination with one another. The failure to synchronize and coordinate internal systems and processes was central to the downfall of Reflect.com (Gaffney, 1). The foremost business challenge, therefore, is to deploy these systems in a way that creates sufficient trust to give potential customers confidence in sharing their DNA with the company.

While the challenges are significant, so are the opportunities. This concept represents the ultimate in personalization: it incorporates the one chemical element that is unique to each individual—their DNA—and makes it an integral part of a personal fashion statement. Scaling the business model beyond retail stores also opens up the global market very rapidly, which creates immediate branding and sub-branding opportunities. Despite the challenges, the upside revenue potential is very significant.

Technology represents the most challenging dimension of ensuring customer satisfaction while achieving profitability. The back-end supply chain systems will need to be designed to deal with high variability in demand for specific ingredients and will require intensive quality management systems. The entire supply chain will also need to be audited and ready for a Food and Drug Administration (FDA) inspection at any time. All of these requirements will need to be automated using a portal-based framework that can scale to support supply chain integration with suppliers while simultaneously managing the extensive customization these products require (Gaffney, 1).