How Blockchain Can Further Circular Fashion
The NFT-native incentive mechanism that could make fashion sustainable again
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Firstly, apologies for not posting for a while. I've been involved in some research and consulting work that has taken most of my time.
Recently, I've seen numerous Twitter threads and newsletters detailing events that have transpired. While this is great for keeping oneself up-to-date in the space, it isn't sufficient if you're aiming to innovate or to front-run trends. In addition to looking backward and sideways, we should also be looking forward. People tend to ask me what’s the best Web2 project in Web3. While there are good ones, I don’t think we’ve seen much yet. While many companies have great elements and I applaud their initiative, in most cases, they tend to borrow from previous projects, for better or worse:
Adidas ALTS = Moonbirds
Puma = Gucci Web3 project + PUNKS Comic
Louis Vuitton = Vitalik’s soulbound post from January 2022 + D&G Collezione Genesi
dotSWOOSH = RTFKT
While some of the greatest lessons come from past projects and ideas, we also need to keep an eye out for the future. That is exactly what I’m trying to bring you with this newsletter and deep dives.
However, let’s refocus on the topic at hand.
Lately, I’ve been thinking about how NFTs and the blockchain can incentivize sustainable behavior from a business perspective. While there's immense potential in tokenizing carbon emissions, the infrastructure for this is still somewhat distant.
Nevertheless, there exists a novel and significant incentive mechanism that links NFTs and sustainability that we can already use.
Let me explain.
Lifetime Value (LTV)
We’ve all heard the term “customer lifetime value” or CLV in short. It essentially calculates how much one customer is worth to a business using the following formula:
CLV = average value of a purchase x number of times the customer will buy each year x average length of the customer relationship (in years)
In other words, if on average Brand X’s customer purchases $100 worth of clothes and the customer buys on average 10 times from Brand X each year and the relationship lasts 5 years, then the customer lifetime value (CLV) is $100 x 10 x 5 = $5,000.
However, what if we flipped the script? Instead of using customer lifetime value as a company’s source of value, what if we used product lifetime value?
The secondary sales transparency and royalties that blockchain and NFTs allow us to apply the lifetime concept to products as well. A single product’s (NFT’s) lifetime value could thus be:
PLV = Primary purchase price + average secondary purchase price per year x secondary purchases per year x royalty percentage x lifespan of product (NFT)
Moreover, it would make sense to distinguish the PLV for physical products and digital fashion/membership/subscription products.
Let’s dive into physical products first.
Tangible Products
Let’s take a practical example. Let’s say Nike sells a phygital shirt (a shirt that’s attached to an NFT) which has no other utility other than that its authenticity can now be verified on the blockchain. The above formula would look like this:
PLV = Primary purchase price + average secondary purchase price per year x secondary purchases per year x royalty percentage x years the shirt is wearable
What makes PLV exciting is that for the first time revenue and sustainability incentives align.
In other words: THE LONGER THE GARMENT CAN BE WORN, THE HIGHER THE PRODUCT LIFETIME VALUE TO THE COMPANY.
This creates a new concrete vertical of competition: sustainability via durability. Instead of vaguely attributing sustainability initiatives to higher revenue (via improved customer sentiment toward the brand), we now have an alternative competitive model that can create a direct link between product longevity and higher revenue.
(It is to be noted that PLV requires an NFT marketplace in which the royalties flow seamlessly. Whether that means you purchase the NFT first to receive the physical or purchase the physical first and scan the NFT into your wallet. This is to ensure the secondary royalty payments.)
Comparing CLV and PLV for Tangible Products
Let me explain the idea of PLV using two companies, Company Y the “sustainable one” and Company Z the less sustainable “high fashion one”.
Brand Y → The Sustainable Company → PLV
Brand Y wants to compete using the Product Lifetime (PLV) model, thus, they have to produce higher quality and longer-lasting products. Because of this their average product price is a relatively high $1,000 for a jacket and trades 1 time per year. Let’s assume a royalty percentage of 10% and a product lifespan of 10 years. Assuming the average price per year is 100% of its original price:
PLV= $1,000 + $1,000 x 1 x 10% x 10 = $2,000
Brand Z → The Fast Fashion Company → CLV
Now let’s assume brand Z competes using the product quantity (fast fashion) model. They make cheaper lower quality products and don’t integrate NFTs into their garments.
Let’s say the price for a jacket is $50, the customer purchases 2 times per year on average and the average customer relationship is 10 years (remember we’re using the CLV formula here).
If we apply the CLV formula:
CLV = $50 x 2 x 10 = $1,000
In other words, the PLV of one product from Brand Y is as equal to the CLV of one customer of fast fashion Brand Z.
Brand Z PLV Example #1 (Cheap product)
Now, let’s say Brand Z is able to extract secondary value from its products (PLV model), despite their lower quality. Because of the lower quality the product would likely trade closer to, say, 20% its initial cost (i.e. $10).
Let’s also assume a royalty percentage of 10%, a product lifespan of 2 years and trades 1 time a year.
The PLV of one of its products would thus be:
PLV = $50 + $10 x 10% x 2 x 1 = $52
Brand Z PLV Example #2 (Expensive product)
Even if they priced their product at $1,000 like Brand Y and the secondary price remained the same throughout its lifespan, yet the quality remained poor (lifespan only 2 years), we would get a PLV that looked like this:
PLV = $1,000 + $1,000 x 10% x 2 x 1 = $1200 or 60% of the more sustainable Brand Y’s.
Depreciation
To delve deeper into the PLV model, we need to take depreciation into account as secondary product prices typically do not retain their value. It could take a bit of modeling to determine the depreciation of a product. The product can be a depreciating (fast fashion) or even an appreciating good (e.g. vintage watches).
Below I visualized three secondary price scenarios for the Company Y jacket. It has three scenarios: Neutral (not appreciating or depreciating), Depreciating (-15% per year) and Appreciating (+15% per year).
As we can see depreciation can have a dramatic effect on PLV, the less depreciation and more appreciation (which NFTs also enable, see “Membership Products” section), the better.
What Does This Mean In Practice?
In addition, we can see what it takes for PLV = CLV, by using the previous Company Y and Z examples.
Company Y (Durable/sustainable product):
Secondary value = $1,000
Secondary royalty = 10%
Product purchased on secondary market times per year = 1
No secondary price depreciation assumed
Company Z (Fast fashion product):
Average value of purchase = $50
Customer purchases times per year = 2x
Customer relationship length = x-axis
Below we see Company Y’s PLV and Company Z’s CLV visualized.
Takeaway: A fast fashion brand selling a cheaper and less durable product has to maintain a 10 year relationship with a customer to receive the same value (CLV) as one high-quality product (PLV).
Total Values
Obviously, to get the total lifetime value of the business you need to need to multiply the CLV with the # of customers and PLV with the # of products.
If we use the same numbers as above for Company Z, assume it has 1 million customers and customer relationships last 10 years, the total CLV is $1B ($1,000 CLV per customer x 1M customers).
In that case, how many products would Company Y have to sell to match this value?
Below I graph the relationship between how many products Company Y has to sell and the customer relationship length of Company Z.
Using our assumptions above, for every one-year increase in average customer relationship length in the CLV model, a company using PLV has to sell 50,000 products. to match the total dollar value.
Depending on the context this could sound like a little or a lot. For context, RTFKT currently has around this many items while Nike just released over 100,000 OF1s.
Keep in mind, that the graph above doesn’t include the possible appreciation (or depreciation) of the PLV product.
Membership Products and Digital Fashion
As a reminder:
PLV = Primary purchase price + average secondary purchase price per year x secondary purchases per year x royalty percentage x years the shirt is wearable
So far we’ve assumed that the PLV product (or NFT) doesn’t have any intrinsic utility and has a finite lifespan.
However, if we look at NFTs like digital fashion (e.g. wearables or AR filters), the lifespan is theoretically infinite. On the other hand, if the NFT holds utility such as membership, loyalty points, future airdrops, etc. it can easily appreciate in value with time.
Overall, the utility and the permanent nature of NFTs could increase the PLV because:
Utility renders the average purchase price higher
On-going utility makes the secondary price depreciation smaller (assuming the utility is desired) than for purely physical products (with some exceptions)
The utility could cause the NFT to be traded more often than the two times per year assumed in Brand Y’s case
The product’s lifetime is potentially longer (e.g. membership can last longer than physical apparel)
Why Is the PLV Concept Important?
Improving the product secondary sales ecosystem (i.e. blockchain-enabled liquid secondary markets + automatic royalty payments), increases the viability of PLV-based business models.
From a brand’s perspective, secondary markets for their items are either non-existent or controlled by a few big middlemen. While global the resale market was $177B in 2022 it’s projected to reach $351B by 2027, according to Statista, brands often don’t get to participate in the upside.
What if a percentage of the secondary sales went to brands (royalties) instead of middlemen (fees). This would create a system that rewards the creation of lasting fashion not only style-wise and durability-wise. Whether royalties serve as an additional revenue stream or as the main source of income, they could enable big and small brands to innovate and push the boundaries of fashion going forward. 10% royalties in perpetuity could be a big deal.
Furthermore, based on McKinsey data, consumers rely on mostly arbitrary measures when determining a brand’s sustainability. A brand’s website and product tags are the most popular sources of information. These can be and are easily gamed by brands wanting to appear greener than they are. Putting clothes on the blockchain would have three important consequences that could improve the current situation:
Durability data: You could see the durability of the product. Because of the transparent nature of blockchain, you could see how long the product has been around and how many times it has exchanged hands. While durability doesn’t automatically equate to sustainability, it is a key component. There are also interesting ways I could see durability being integrated onto the blockchain in the future:
We’ll see how many times the garment was worn in the metadata. This will happen as brands start offering loyalty points per wear that is registered via the NFC chip on the garment.
The condition of the piece is updated via dynamic metadata which would rely on an on-chain reputation system. The more accurate the seller's interpretation of the condition of the piece is (according to the buyer), the higher the review the seller receives.
Because of this I also predict we could see a proliferation of the Patagonia Product Repair services to extend the lifespan of the product. Under the PLV concept, it could now make financial sense for brands to offer such services.
Price signals value: Harder to game than reviews.
Transparency creates trust: “Sustainability curators” will become the new influencers in the fashion/sustainability space. Instead of promoting brands in return for money, these curators will actually have to spend their own money to create a curated collection. While it’s still possible to game this (e.g. brands “buy” the piece for the curator"), there are two disincentive mechanisms that make this less likely to happen:
1) This requires additional effort than the current mechanism. Psychologically, whenever something requires more effort, people are less likely to do it.
2) More importantly, the curators’ reputations are tied with their on-chain history. Despite the mainstream narrative, I’d argue that it’s actually harder to be a con artist in Web3 than Web2 due to the transparent nature of blockchain. We’ve seen countless crypto “influencers” lose face due to revelations that brands have been paying them to buy certain ERC-20 tokens or NFTs (just read any of ZachXBT’s threads).
As consumers are shifting toward more sustainable options and are willing to pay more for sustainable fashion, this means we have a responsibility to point them in the right direction.
Brand Diversity
The PLV-based business approach indicates that more brands will be able to compete on the quality, versus quantity, spectrum. This gives small brands a new competitive paradigm they can use versus bigger more established companies.
The consumer benefits as well. The royalty-driven long-term relationship means branding will no longer be about creating a brand just to sell, but about creating a brand to continuously engage. The brand-customer relationship becomes closer than ever before, partly due to the importance of secondary royalties and partly due to the potential membership component (similar to the current NFT communities).
If we want increased brand diversity, this is a good bet.
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