Zalando’s platform-based business model & Marketing Strategy

I first came to know about Zalando during my MBA at HEC Paris. Zalando’s recruitment team visited the campus to hire the right talent for its exponentially growing platform-based business model. I am a strong evangelist of the platform model. Why? The platform model benefits the entire ecosystem: customers, partners, and the company providing the platform. 

Zalando is on a mission to become the Starting Point for Fashion in the markets it serves. Zalando’s platform-based business model is a critical component of achieving this ambition.

The platform provides an excellent choice to the customers over a full range of categories, styles, and price points, powered by inspirational and personalized recommendations that demonstrate a deep understanding of customers’ fashion wants and needs.

Zalando Business Model

Key Partners

Zalando’s robust relationships with its key partners have been a strong growth driver. The company aims to create a best-in-class multi-brand environment for partners to engage with customers and provide expertise, insights, and services through which they can drive their success. 

As per Zalando, these strong, mutually beneficial partnerships help power a platform flywheel where customer traffic and engagement, partner participation and selection, and platform features and investments reinforce each other and where customers, partners, and Zalando benefit.

Despite the many challenges the COVID-19 pandemic created for the overall European Fashion ecosystem in 2020, Zalando grew its active customer base to more than 44 million, further deepened customer relationships to an all-time high order frequency of 4.8 per active customer, and increased its Partner Program GMV by 96.4% year over year. 

Customers & Value Proposition

Zalando offers its customers a one-stop shopping experience with an extensive selection of lifestyle articles, with free delivery and returns as well as diverse payment options wrapped into an inspirational and personalized digital customer experience. Zalando’s assortment of more than 3,500 international brands ranges from popular global brands to fast-fashion and local brands and is complemented by private label products.

Zalando’s main customer proposition, Zalando Fashion Store, is extended and enhanced by Zalando Lounge, which offers registered members special offers at reduced prices.

The ten brick-and-mortar outlet stores in Berlin, Frankfurt, Cologne, Leipzig, Hamburg, Hanover, Munster, Stuttgart, Mannheim, and Ulm opened between 2012 and 2020 serve as an additional sales channel for excess inventory for Zalando and its brand partners. 

From designing for #circularity with the “redeZIGN for circularity” collection, to piloting repairs, to scaling our Pre-owned offering, to developing an open-source platform for textile waste management, our strategy looks at the whole spectrum of the industry challenges. pic.twitter.com/raxmmW7qHL

— Zalando News (@Zalando_Press) October 5, 2021

Revenue

The revenue of the online fashion retail giant Zalando reached over 7.9 billion euros in 2020. Zalando made over 2.7 billion euros in the second quarter of 2021, which is ~35% growth from Q2 of 2020.

Zalando closed a prosperous business year, achieved strong growth, and improved profitability in 2020. The group reported 23.1% revenue growth to a total of EUR 7,982.0m (prior year: EUR 6,482.5m). The group reported an EBIT of EUR 367.0m (previous year: EUR 165.8m) corresponds to an EBIT margin of 4.6% (prior year: 2.6%).

Apparel remained Zalando’s most significant product category, followed by shoes, sports, and beauty products.

Zalando Marketing Strategy

Zalando has a marketing strategy to become a loved brand by its consumers by effectively adapting to a social-first strategy. Zalando used social media channels extensively in 2020 to ramp up its brand’s voice and strengthen its storytelling capabilities.

Zalando increased its social media investments on Instagram, Facebook, and Tiktok across the entire user funnel as part of its digital marketing strategy. As a result, Zalando was able to increase its engagement rate on Instagram, expressed by likes, shares, and comments, by 67% and TikTok followers by 1,300%. At the same time, Zalando could drive Marketing efficiency up by decreasing the cost per reach.

Zalando spent 8.3% of its revenue on its marketing initiatives. In 2020, Zalando continued to leverage its well-established and long-term-oriented ROI- based marketing strategy, which led to elevated spend levels and a corresponding effect on margins.

Zalando’s Verticals

Zalando’s internal management structure is based on a sales channel perspective. Its main sales channel continues to be the Fashion Store (Zalando app and website). The Offprice segment includes the sales channels Zalando Lounge (Zalando Lounge app and website), brick-and-mortar outlet stores, and B2B overstock management.

In addition, Zalando’s Other segment bundles a variety of emerging businesses, e.g., partner-facing Zalando Marketing Services and its personal style advice service Zalon.

Fashion Store– 

Zalando offers customers an extensive range of fashion items in its online shops, including shoes, clothing, and accessories, with free delivery and returns. Zalando’s online shops cater to local customers’ needs in 23 different European markets.

The range extends from renowned global brands and fast fashion to local brands and is supplemented by in-house private labels. In total, Zalando works with more than 4,500 international brands.

Offprice– 

The Offprice business of Zalando serves the sale of the previous season’s assortments. The Zalando Lounge offers registered members exclusive sales campaigns at discounted prices as part of a shopping club. 

Furthermore, bargain hunters can find Zalando’s outlet shops in Berlin, Cologne, Frankfurt am Main, Leipzig, Hamburg, Münster, Stuttgart, Hanover, Mannheim, Ulm, Constance, and Dusseldorf. Zalando’s Offprice business aims to deliver the best deals to bargain hunters and discount-oriented shoppers. 

Due to the economic downturn in Covid year, Zalando could cater to the increased demand for bargains and achieved record growth in active customers for its Offprice business. Zalando continued investing in its online and offline channels, localizing its offering, and leveraging automation and data-driven technology solutions.

New Business Fields- 

• Zalon– Zalon is a style advice service by Zalando, through which customers can consult and get inspiration from selected stylists regarding individualized purchases. Zalon is part of the Zalando platform and connects freelance stylists and customers.

• Zalando Fulfillment Solutions (ZFS)– Zalando makes its own logistics capabilities available to external partners, so they do not have to be concerned with infrastructure issues and can concentrate fully on their core competence in the fashion business. ZFS simplifies logistics for partners and offers a consistent convenience proposition to customers, regardless of whether a partner or Zalando itself sells the item they purchase. In 2020, ZFS delivered over 45% of all items sold through the Partner Program.

• Zalando Marketing Services– The entirety of Zalando’s expertise and scope is bundled in Zalando Marketing Services, which now offers personalized marketing solutions for brand partners. Zalando Marketing Services provides digital technologies and services that help partners increase their reach, brand impact, and better understand their customers.

• Zalando Partner Services– Zalando helps other players in the industry (such as brands, retailers, and manufacturers) to be successful in the digital world. For example, by connecting warehouse stocks with multiple retailers, digitizing processes involved in fashion wholesale, and integrating offline businesses into Zalando’s platform. Zalando’s Partner Program is an essential component of this platform transition.

What are the KPIs in Zalando’s business model?

Zalando’s most important critical financial performance indicators (KPI) for corporate management are GMV, revenue, EBIT (margin), adjusted EBIT (margin), and Capex, as well as net-working capital. In addition to these financial indicators, Zalando also uses a range of non-financial performance indicators to evaluate the growth of its business model.

Site visits: Increasing site visits drive revenue growth through a higher number of orders and higher advertising revenue. Compared to the prior year, the number of site visits increased by 29.1% in 2020. During Q2 of 2021 alone, nearly 1.7 billion visitors accessed the website, mobile site, and mobile applications.

Mobile visit share: Users are making greater use of mobile devices to access the internet. In an effort to offer customers the opportunity to enjoy high-quality shopping on their mobile devices, Zalando continues developing and refining its mobile websites and apps.

As a result, the ratio of site visits from mobile devices to the total number of site visits increased by around 2.6 percentage points in 2020, rising from 83.7% in 2019 to 86.3%. To give you a perspective on growth, Zalando’s mobile share was just 28% in Q3 of 2013.

Active customers: The Zalando group measures its success by the number of active customers. Each customer that has placed at least one order within the last year (based on the reporting date) is considered active. Compared to the prior year, the number of active customers increased by 7.8m, rising from slightly below 31.0m to above 38.7m in 2020.

Number of orders: In addition to revenue, the number of orders placed is a key performance indicator (KPI) for the group’s management. This indicator is monitored independently from the value of the merchandise and is a crucial driver of growth. In 2020, the number of orders placed increased from 144.9m in 2019 to 185.5m.

Average orders per active customer: The average number of orders placed by active customers during the last twelve months totaled 4.8 as of December 31, 2020 (prior year: 4.7). This KPI is an essential indicator of customers’ trust in the company and is primarily influenced by customer specifics and category mix.

Average basket size: Like the number of orders placed, the average basket size directly affects the group’s revenue. The average basket size (after returns) increased slightly in 2020 from EUR 56.6 to EUR 57.7. It is influenced by category mix, customer mix, and shopping channel.

Conclusion

Zalando with its platform-based business model has the vision to become a starting point for fashion. Zalando is not just creating value for its customers but is also adding a lot of value for its partners through various technology stacks.

Despite a high degree of unpredictability and volatility in the overall market environment in 2020, Zalando delivered a very strong financial performance in all the KPIs we have seen above. What remains to be seen is that when and how this European startup stretches its arms in other countries. Acquisition? Maybe! Let’s see!

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