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In just a few short years, Stitch Fix has become a major player in retail. From its founding in 2011, to its IPO just six years later, Stitch Fix has quickly grown from a Harvard student’s side project to a fierce competitor existing retail companies should be worried about.

There’s an entire cohort of companies just like it coming of age, and they’re quickly supplanting traditional retailers who can’t adapt quickly enough to in the face of disruption. Built on a foundation of technology and serving a loyal customer base of digital natives, it’s a harbinger of things to come. And the time for change is now for retailers who want to compete with Stitch Fix.

What is Stitch Fix?

Stitch Fix bills itself as an online personal stylist. Users answer questions about their style preferences, an AI algorithm makes product selections with help from a human stylist, and the selections are delivered to the user’s home.

On the surface, Stitch Fix is a retailer. But underneath, Stitch Fix is truly a technology company. Much like Uber considers itself to be a technology company that enables transportation, Stitch Fix is a technology company that happens to make money by selling apparel. Its algorithms and analytics team employs over 80 team members who work to build and refine the company’s use of machine learning.

The software that makes up Stitch Fix’s foundation is, at its core, artificial intelligence for product selection. It learns from individual users and overall trends to deliver products that customers are most likely to want. The technology could theoretically be applied to any other vertical, from curating hard goods, to artwork, to service providers and even dating.

Stitch Fix customer Carrie shows off outfits she bought from the retailer.
Flickr: mamamockingbird77

Why is Stitch Fix a threat to traditional retailers?

Stitch Fix represents much of what people want from ecommerce. Its model is simple and easy to use, and items are delivered with no commitment (return shipping is free and encouraged). And it’s working – the company has grown 25% year over year, and its IPO in November 2017 was largely successful. Shares of the company debuted on the Nasdaq exchange at $16.90 and have since (as of March 2018) settled in the $20 range.

But the real reason Stitch Fix is a threat is because its entire operation is built on technology. The company has even shared details on how its algorithms all work together. Its competitive advantage is that technology is the basis for everything Stitch Fix does, from customer experience, through to design, logistics, and inventory management. Stitch Fix has the benefit of perfect data about every step of its processes, internal and external. Its systems are not only designed to generate data; they learn from it and apply it across all areas of the business.

All other retailers (the sole possible exception being Amazon) fall short of Stitch Fix in this area. This is especially true of traditional retailers who come from an era when the mall was one of a few scarce sources of discovery for fashion. While Stitch Fix is able to track every step of every customer’s journey and make adjustments to improve their chances of getting product selection right – thereby maximizing sales – most retailers have next to no data about their businesses.

Traditional retailers fall short – or flat on their faces – when it comes to data

At best, traditional retailers have disparate segments of data from different corners of the business with limited resources to put them all together. Store and ecommerce sales data may or may not be connected, but attribution can be challenging. CRM and loyalty data may inform some decisions, but feedback loops may be incomplete. And pieces like price optimization might be completely siloed from other areas of the business.

All of these pieces of data, while valuable, live in different places in different formats, without a mechanism to connect them all together in a meaningful way. Stitch Fix has arguably perfected this, while many retailers are only in the beginning stages of understanding how these data can be made useful.

What’s truly dangerous about this fragmentation, however, is that the inability to use AI to make objective decisions based on data leaves decision making to one of the most biased, fallible entities there is: the human brain.

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How to use data to compete

The model Stitch Fix has created is an ambitious one. Every piece of the puzzle is informed by data, and it all works together to continue learning and improving.

While every retailer should aspire to the same level of integration, it’s not something that most companies can achieve overnight. Stitch Fix had the advantage of being built on an AI platform from day one; other retailers are being forced to retrofit their processes with new technologies. Over time, new pieces are added, and old ones are deprecated. That is what leads to the fragmentation discussed above. A measured, long-term approach is necessary to overcome this challenge.

See also: You’re Too Slow To Compete (And What To Do About It)

The first step is to adopt a strategy of unified data management. Simply put, this means getting all of your data in the same place and formatting it in a way that it can be manipulated and cross-referenced easily. This allows data from one area of the business to be applied cleanly to another.

It also generates a basis for AI applications. Since AI learns over time, having consistency in your data is an important first step toward a holistic data strategy.

The next step is to actually start leveraging the data and AI applications to assist with decision making. There are various applications that can do this across many segments of your business. Start with small decisions, and compare the results generated by algorithms against the results produced by humans. By going on to measure the actual outcomes, you can understand where the benefits are and begin entrusting greater portions of your decision making to AI.

Using AI to amplify human judgment

Frequently, using AI to assist human decision makers will lead to the best outcomes. Stitch Fix doesn’t leave everything up to the machine. It uses a mix of algorithms and human judgment to guide product selections for customers. Likewise, most retailers have teams of extremely talented people who understand their businesses and customers at an intimate level. Combining artificial intelligence with human intelligence can generate a strong competitive advantage.

The key is to know which decisions to entrust to the technology, and where to apply knowledge that’s best provided by people. For example, sales history can only tell you so much about fashion trends, and machine learning is liable to fail to predict sudden and dramatic shifts in customer preferences. A buyer who’s assisted by assortment planning software that can help her apply her knowledge of fashion to the nuances of the business is stronger than a buyer alone or software alone.

See also: What Is Assortment Planning?

It’s time to compete

Stitch Fix has created a strong model, but there’s a second generation of even more powerful, tech-first retailers yet to come. Traditional retailers who fail to leverage their data in a meaningful way will not be able to compete with these companies of the future.

But it’s not too late. You have to crawl before you can walk, and you have to walk before you can run. By taking the beginning steps now, you can begin to build a foundation for your business to adopt more data-driven approach. Taking steps to unify your data can set you up for success in the later stages of adopting AI tools and bringing your business to a place where it’s able to compete with technology companies like Stitch Fix.

Sports Retailer Scores with daVinci

How does one of Europe's largest sports retailers plan buys across multiple nonstandard seasons, a variety of store types, and multiple countries and currencies? With daVinci.

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