In the highly competitive clothing industry, loyal customers are worth their weight in gold. Stores go to great lengths to attract repeat customers with programs that provide rewards, discounts, or exclusive offers for loyal members. But even with these programs, customers are hard to keep. A 2019 survey by Criteo found that 72% of apparel shoppers were open to considering other brands, which is why what Stitch Fix (NASDAQ:SFIX) has done to create loyal clients without a loyalty program is so special.

Let's look at this personalized online clothing retailer's loyal customers, how data science is helping build loyalty into the process, and what management is doing to further capitalize on the company's momentum.

Loyal customers spend more

Clothing stores have seen a significant drop in spending in the past few months, but Stitch Fix's most recent quarterly revenue only declined by 9% year over year. Impressively, this decline was not due to a drop in demand, but because the company chose to close its warehouses for part of the quarter as it put safety measures in place for its staff. This strong result against a backdrop of abysmal retail clothing spending was powered in part by the company's auto-ship customers

In the most recent earnings call, CEO Katrina Lake indicated that customers who sign up to receive "Fixes" (shipments of clothes) automatically and on a regular basis "achieved the strongest levels of ownership retention in the last three years." She added that "this large contingent of loyal and highly engaged clients" are "very valuable." Having a stable base of repeat clients helps the company better predict demand trends, shape inventory purchases, and forecast appropriate staffing levels.

Additional benefits from Stitch Fix's loyal customers show up in the revenue-per-active-client metric. At the end of the day, consumers vote with their wallets. And impressively, this number has increased for the last eight quarters in a row. It's clear Stitch Fix clients love the service as they are willing to spend more over time.

Bar graph showing revenue per active client growing from $433 in Q1-2018 to $498 in Q3-2020, with the last eight quarters showing year-over-year increases.

Data source: Stitch Fix quarterly shareholder letters. Chart by author.

Possibly the biggest reason clients are spending more is that they are better matched with items they love.

Data science helps improve the customer experience

Making great clothing selections is key to the client experience for Stitch Fix. The job of keeping this recommendation engine humming and improving it over time is the company's data scientist team. This group is over 100 strong and many of its members have Ph.D.s in data science or related fields. The team received a patent on its Smart Fix Algorithm and has other patents pending. You can see the amazing detail that goes into this process on the Algorithms Tour section of the Stitch Fix website.

Customer opening up box from Stitch Fix.

Image source: Stitch Fix.

This algorithm is also driving selections for the direct buy offering, which allows clients to purchase clothing without the commitment of the five-item fix. This new service is taking off and its low return rates show that clients love it. Lake shared that "people keeping things that they love is ultimately like the true Northstar of our business and that's really where we're orienting a lot of our efforts again." One of these new efforts is focused on pushing the envelope of how stylists engage with clients.

Doubling down on personalized service

On the last earnings call, Stitch Fix President Elizabeth Spaulding discussed a pilot program that "provide[s] clients with increased stylist engagement and the opportunity to select items in their fixes." This program, currently being tested in the U.S. and the U.K., connects the client on a video call with a stylist while their fix is being created. This allows the client direct input into their selections and enables the stylist to become better acquainted with the client's clothing choices.

This innovative approach plays to the company's strengths and could further build its loyal client following. Spaulding indicated that more would be shared in upcoming calls, but said that "We believe this enhanced styling experience will appeal to an even broader set of clients as consumers seek high-touch engagement while not going into stores."

The takeaway for investors 

Understanding how Stitch Fix is improving the client experience to expand its set of loyal customers should make investors optimistic about the long-term prospects of this company's business model. In the coming year, management estimates that more than three times the annual rate of clothing spending will shift online, which represents a $30 billion opportunity. Spaulding shared that "...while other retailers are currently forced to pull back on investment and innovation, we're leaning in and executing against our product roadmap in ways that we believe will accelerate our gains in the future."

These investments should bring additional customers to the platform, improve the client experience even more, and enable this dare-to-be-different online retailer to emerge from the coronavirus pandemic a much stronger company.