Focusing on the luxury resale market limits The RealReal's (NASDAQ:REAL) addressable market, but also gives it increased profit potential if it can tackle the market effectively.

In this episode of "Upgrade or Topgrade" recorded on Nov. 12, Millionacres editor Deidre Woollard and Fool contributors Jeremy Bowman and Nick Rossolillo discuss the details of The RealReal's business model and how it compares to some of its other resale peers.

Deidre Woollard: We've got a comment from Wawa who says, "Key to these resale companies is their authentication process. Posh gets bad reviews and customers sometimes receive a fake item." That is absolutely a problem and sometimes, that is not the seller's fault at all. One of the things that The RealReal and others have noticed is that people buy a fake item, they don't know they buy a fake item. It could be sold and they don't know. It goes on and on and there's a wide variety of quality when it comes to counterfeit. Some counterfeits are absolutely really, really well done and very hard to tell, and so there's things that the authenticators look for, the ways that two fabrics match up, the color of the thread that's used, the color of the metal in the hardware. Especially when you're looking at the handbags or shoes, there's all these little fiddly details that are part of the craftsmanship of a bag or any leather goods and why they cost so much money. That turns out to be really important for the companies that are reselling the high-end items.

It's less of a concern, I think, if you're talking about ThredUp or Depop because they tend to be at a different segment of the market. I think that's one thing, as we talk about The RealReal versus these others, is total addressable market. Because if you've got The RealReal, kind of smaller total addressable market. Other companies like a Depop or Poshmark much wider it seems to me. That's another thing that I think investors need to keep in mind with some of this. I want to read this comment from Yobeck that says, "Multiple players seem to be jockeying for what seems like a small segment of the fashion market. Am I missing something?" I don't think it's a small segment. I think it's going to be a massive segment. I don't know if either of you have thoughts on that.

Nicholas Rossolillo: Absolutely.

Jeremy Bowman: Go ahead, Nick.

Rossolillo: I absolutely agree with you, Deidre. It's pretty big. There are some other companies within e-commerce and retail where you could say the same thing, it's just luxury. But the price tag on these things, you don't need to sell a lot of items to generate a lot of sales. Obviously, the profit margins that go along with that, the name, The RealReal, could work that way too. It's a legit business. It's a big addressable market.

Woollard: Go ahead, please.

Jeremy Bowman: I was going to say, yes, I think The RealReal is giving up in addressable market. They are getting back in potential profit margin along the lines of what Nick was saying. You look at some of these luxury brands, they tend to have operating margins of 20 percent or higher. These are huge companies too. LVMH, Louis Vuitton, I think it's worth $400 billion. I think too with The RealReal, if they can expand globally, I think there's a sizable opportunity in front of them if they can get that execution there.

Nicholas Rossolillo: Just one other thing too, because I'm curious. This e-commerce-driven segment of the luxury market is interesting too. There's that company, Farfetch, that plays here, but not with used items like The RealReal does. But you can see the potential there. Farfetch blew up last year because suddenly, a lot of the shopping experience that used to be in person, that I want to touch it and feel it before I buy something if it's going to put me out a few thousand bucks suddenly had to move online. Now a lot of people are comfortable with that, so I think that could also be a potential game changer here for all these companies really.

Woollard: Well, I love that you mentioned Farfetch because they're actually working with ThredUp, which we'll talk about later, to do a donate program. That brings up something I think is really interesting. We'll talk about more when we talk about thredUp, but the idea of resale as a service. Now, The RealReal isn't doing as much of that because they are really focused on all brands. They're not really doing authentication as a service yet. But I do think that is a direction that they could go into if they wanted to. In terms of when I'm thinking about this stock compared to some of the others we'll talk about, pro, I think the authentication thing despite the lawsuit, I think that's a big advantage for them that they really dialed in that level of things. It's in their name, they're known for it. I think that's an advantage. I think that their packaging and shipping is a really great experience, I think, for the buyer. I think it looks more high-end than some of the others so I think that's an advantage. I think the merchandise, they're very careful about what they accept, so I think you've got that aspect of it, too. Those are some things that I love about the company.

Some of the things that I don't love as much is, we talked about smaller total adjustable market. The other thing is that dependence on supply. One of the things I mentioned in the earnings calls, they're buying from vendors at sometimes versus buying directly from consigners. They had to do that to supplement their supply when demand spiked back up again. That worries me a little bit. It makes me think that maybe they don't have the balance right and maybe they are not incentivizing appropriately. Are they too dependent on the stores? Is part of what happened during the last year, pandemic-driven people didn't want to go to the stores. Maybe they need to dial in their online consigning process better. I think it's really hard because they really rely on those concierge appointments where people are bringing items in where they can be assessed. I think there's potential for them to get smarter about how they do that virtually. I think they've been experimenting with some of the online, people showing the items and doing things that way, but I think that's a place where they have to go. The other thing is, I think they really need to dial in their structure for what they pay a little bit more. I think that's a concern for me. Any concerns from you guys?

Rossolillo: Yeah. For me as well. The first thing I saw was not just with The RealReal but all these companies, they have this complicated payout structure where it's [laughs] highly variable. The RealReal, I think, is like anywhere from 30% to 50% commission on the item that you're selling, so that's a big difference in commission structure.

Bowman: Yeah, I think having a straightforward commission is key in this market, especially with the luxury goods where you might be able to take that to another platform to avoid it. Seems like RealReal's charges pretty steep commissions. I think that Depop and Poshmark, for example, are pretty straightforward and more of a direct e-commerce resale site. I think in some ways, that might give them an advantage.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.