Business Model Canvas for Zara: Analytical Essay

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Business Model Canvas for Zara: Analytical Essay

Description of Zara’s Business Model Canvas

Zara is one of the most popular and successful clothing brands in the world. It was the first brand of the Spanish parent company Inditex, which was founded in 1963. Inditex is now one of the world’s biggest clothing retailers owning several other brands alongside Zara. (Inditex, 2019) Besides Zara’s great success with their physical Brick-and-Mortar Stores, the company is now also massively expanding into the e-commerce sector with Zara online being available in more than 200 markets across the world. (Cockar, 2019)

This success didn’t just arise out of nowhere. Zara has a clear and entrepreneurial approach when it comes to it’s Business Model. In order to get a better understanding of Zara’s operations and values, it makes sense to break down their model into the 9 elements as seen in the table above. The following description will help to understand the relationships and details of these elements and maybe reveal some room for improvement. Numerous different information sources like desk research, in-store observation and peer feedback contribute to the reliability of this report.

Customer Segments

The first question a company should ask itself is “Who do we want to serve with our product or service?”. Therefore, it makes sense to take a look at Zara’s Customer Segments considering the four types of segmentation, namely geographic, demographic, psychographic and behavioural.

Geographic: Zara targets mainly cosmopolitan cities in developed countries, where fashion plays a big role. Zara’s largest customer group lies in Europe, nonetheless the brand has become very global over the past years and serves customers all around the world. (Keller, 2012)

Demographic: Zara’s demographic target group is mainly young to middle-aged. Zara offers products for Men, Women and even children. However, Women make up the biggest segment.

Psychographic: The Customers who shop at Zara are looking for trendy fashion for an affordable price. These two aspects are the reason for Zara’s popularity among students and young working professionals. Moreover, Zara offers clothing for a more “grown-up” or “classy” look.

Behavioural: Zara tries to make the customer come to the store more often by offering a limited number of products from one line for a specific time. This concept of scarcity and low prices attracts customers to the physical and online stores on a regular and frequent basis. In fact, Zara’s Customers visit their stores double as often as other clothing retailers. (Danziger, 2018)

Summing up these four elements, it is clear to say that the pain of these customers is the need for up-to-date fashion, at an affordable price and with easy accessibility.

Value Propositions

The Customer Segments of Zara already give an indication of what the Value Proposition could look like. First of all, Zara offers fashionable and new clothing every week. Inditex’ huge designer team and the importance of customer preferences make it possible for Zara to be up-to-date with the latest trends and attract large numbers of young, fashion-aware consumers.

This fast change of fashion at Zara, also known as Fast Fashion, brings us to the second point of their Value Proposition, which is scarcity. Zara does this by producing many new and different styles but keeping the production quantity per item relatively low. (Weinswig, 2017)

The attributes of the Value Proposition mentioned so far sound more like a luxury clothing brand. So, what made Zara so popular and successful among all kinds of customer groups, especially students and average-income customers? The answer is ‘Low Prices’ and ‘Accessibility’. Keeping the prices at a fairly affordable level and offering a choice between online store and physical stores in city centres make it more likely for customers to overcome their hesitation and make a purchase.

Channels

[bookmark: _Toc10591025]When it comes to Zara’s Channels, there needs to be a distinction made between the Channels which generate direct revenue and the Channels that serve brand popularity and brand development. The Channels which create Revenue are basically the physical Brick-and-Mortar Stores, as well as their Online Stores. These are the channels where an actual purchase can take place, therefore, Zara focuses to make these means as intuitive and attractive as possible.

Social Media belong to the other Category of Channels. With Social Media Zara doesn’t gain any direct revenue, but it surely manages to create and capture customer value. Zara’s Instagram Account with more than 33 Million followers clearly shows that they know how to advertise themselves and connect with millennials. (Instagram, 2019)

Moreover, Zara also presents its newest designs at fashion shows and in campaigns. These are great ways to advertise the new clothing lines in a noble way compared to ordinary methods like TV commercials or ads on the internet. In fact, Zara only spends about 0.3 % of their sales on advertising, which is clearly lower than the spending’s of Zara’s competitors. (Nazir, 2019) This shows that Zara’s existing Channels are sufficient and successful and that putting the Customer first pays off.

Customer Relationships

Zara tries to bring together their Value Proposition and their Customer Segments through excellent Customer Relationships. One of the concepts is called Customer Co-Creation. What is meant by that, is that Zara puts in enormous effort to research the desired needs and wants of their customers and the trends of the market. When a customer asks in-store about a certain product which isn’t offered by Zara yet, this will most likely be noted and considered. The same principle applies to their social media channels. After some time, these requests are evaluated and within few weeks the most desired products could already be found on the shelves. (Russell, 2019)

Customer Co-Creation is a fast-growing trend in the clothing retail industry, which means that Zara needs to reinvent their ways of gaining customer insights nonstop. Please make sure to have a look down below at Point 3 “Improvements for Zara’s Business Model” where I present an innovative way to create and especially capture customer value.

Revenue Streams

Zara’s source of income is the generation of transaction revenues from the sale of assets, clothing and other fashion items to be specific. This source is made up of two different streams, the sales in their physical Brick-and-Mortar stores, and the sales resulting from Zara’s e-commerce activity.

Zara focuses on a market-oriented Low Pricing strategy, which attracts new and different customers, but at the same time manages to create an experience which bonds many fashion enthusiasts with the brand. About 80% of sales in the retail industry come from the most loyal customers. Zara takes this into consideration and targets their loyal customers, who are more likely to spend more, thanks to the stronger connection to the brand value. (Danziger, 2018)

Zara offers their customers several ways of paying. In-store, customers have the option to pay by cash, credit or debit card, but also new services like Apple Pay are supported. When shopping in Zara’s online store, the customer has the choice out of 8 different payment methods which are credit or debit card, online payment services like PayPal or Zara gift- and member cards. (Zara, 2019)

Key Resources

Generally, when it comes to Key Resources, there is a distinction between four different types of resources. These resources are either physical, intellectual, human or financial, and depending on the company, there is a focus on mainly one or two of these types. For Zara however, each of these resource types plays an important role in the whole business model.

Lets start off with the physical resources. As the name implies, these resources are physical assets owned by the company. In Zara’s case, this applies to their Brick-and-Mortar stores, their logistics and their material supplies. Due to Zara’s “Fast Fashion” model, there is constant movement in their supply chain, which requires permanent and intense use of these assets. (Graafland, 2018)

Secondly, Zara heavily relies on their intellectual resources. These consist of customer feedback and data, the creativity of their designers and the partnerships with different social media influencers and bloggers. Since the customer is the highest priority for Zara, there is a need for constant research and adaptation with the aid of these resources.

With more than 2200 physical stores in more than 95 countries across the globe, Zara does clearly also rely on human resources. (Forbes, 2019) This kind of resource ranges from Zara’s huge design team, through managers, up to simple employees, which are needed in Zara’s day to day operations.

Last but not least, the financial resource is also of great importance for Zara. The constant and fast-paced innovation and production processes demand permanent revenues in order to continue smoothly. Moreover, the parent company INDITEX is on the stock exchange and ensures financial support for their strongest brand. (Bloomberg, 2019)

Key Activities

The main Activity of Zara is to produce new fashionable clothing on a regular basis for their highly demanding customers. However, this process is more complex than it sounds. There is few important Key Activities which are required for the model to work smoothly.

First of all, Zara is doing a great part in researching their customers’ preferences and adapting their product lines and designs accordingly. This Activity contributes tremendously to Zara’s brand development and creates superior customer value, which makes Zara stand out compared to other Retailers. (Weinswig, 2017)

After information about customers is gathered, there needs to be action. The permanent iteration of new designs and production requires efficiency and effectiveness. Zara does this by keeping proper track of all the supply chains and by ensuring good communication between all of the stakeholders.

Finally, Zara needs to bring the Value to the customer and generate sales. This happens through the given Channels mentioned in 2.3. In this step or activity, Zara can observe what works well and what works less well regarding the buying behaviour of their customers, which closes the circle back to the first mentioned activity, customer research.

Key Partnerships

As a global company operating on many levels, it is obvious that Zara has many partnerships to take care of. In the following I would like to mention some of the Key Partnerships. However, in reality Partnerships are far more widespread and complex.

First to mention are the Designers and the Suppliers which work for Zara. These partnerships enable Zara to produce and develop their products on a high level, especially regarding the fact that Zara practices the model of Fast Fashion.

Another kind of partnership exists with Fashion Houses, Malls and Franchise Owners. These partnerships are essential for Zara’s physical store presence. As mentioned earlier, Zara has more than 2200 physical stores around the world, which means this is probably the largest part of the Key Partnership Element.

Furthermore, there is a relatively new type of partnership, which Is extremely useful, if not even essential nowadays. It Is the partnership with Bloggers and Influencers on Social Media. With these partnerships, Zara has the chance to reach their young and digital audience. Recent collaboration between Zara and Singer Patricia Manfield shows how effective this Partnership is. As a result, Zara’s Instagram posts have been reaching over 120.000 likes. (Instagram, 2019)

Cost Structure

A Cost Structure of a company can be either value-driven, cost-driven or a combination of both. Value-driven means that the company is willing to increase costs in order to create a more valuable product for the customer. This structure will in most cases also require higher prices for the products. Cost-driven on the other hand, is when a company tries to reduce costs to a minimum, in order to offer products to the customer at a low price.

Zara’s cost structure is a combination of both of the mentioned types. The value-drive can be seen in the high frequency and quality at which Zara delivers new clothing for their customers. At the same time, the relatively low prices clearly show that Zara also applies the cost-driven structure to some extent.

Another fact to mention is that Zara has both an economy of scope and of scale. Economy of scope means that Zara produces a variety of different and new products on a regular basis and the costs stay relatively equal. Economy of scale describes the fact that Zara is already a big global company, which means it can produce larger amounts of their products and in this way reduce their costs.

Improvements for Zara’s Business Model

Initially I had two ideas for improvements for Zara’s Business Model. The first idea that I am going to describe appears to be implemented in some selected Zara stores already. The whole concept of Fast Fashion made me think about all of the clothing that is being produced and bought by customers every day. Even Zara Founder Amancino Ortega sees clothing as a perishable commodity. (Roll, 2018) But where do these clothes end up? My idea was to find a sustainable way to turn the life of Zara clothing into a more circular economy. I was gladly surprised to find out that Zara already offers this service in form of recycling boxes in their stores or even as a pick-up service at home for people living in Spain. These clothes are then being sorted and donated to non-profit organizations or recycled into new fabrics for new products. (Zara, 2019)

The other idea aims to improve the Elements ‘Value Proposition’ and ‘Customer Relationships’ of the Business Model Canvas. In my Sales Presentation in class, which was about this idea, I called it a ‘Revolution of Customer Co-Creation’. The idea is to create short surveys about style and product preferences, which can be conducted both in Zara’s physical stores as well as in their Online Shop. For the surveys in the physical stores I suggest using feedback devices or tablet stands. In order to attract customers to this method of sharing their opinions, there needs to be an instant reward for filling in the survey. This can be done by offering a 5% discount coupon as a reward. This coupon should only be valid on the same day, on one purchase and only one coupon at a time.

The questions of the survey could be divided in three categories:

Which outfit looks the best? with pictures, choice of 1 out of 4 looks.
Which item would you like to see on our shelves again? choice of 1 out of 4 products which have been popular in the past, but which aren’t available anymore due to Zara’s Fast Fashion and Scarcity model.
Which new product would you like to see in our stores in the future? choice of 1 out of 4 products which are completely new and haven’t been in stores yet.

Obviously, these are just suggested broad categories which could be specified further on. Besides receiving the 5% discount code at the end of the survey, the customer could also have the option to fill in some sort of contact details like an email address or phone number, in order to get notified once a preferred chosen product hits the stores.

As we can see, this improvement offers benefits for both Zara and their Customers.

Benefits for the customers:

Ability to influence trends and predict products
Ability to bring back popular, sold out products from the past
Being notified when a desired product arrives at stores
5% discount for the same day

Benefits for Zara:

Extensive Customer Insights and Data Collection
Increased Customer Curiosity and Brand Attraction
Increased Customer Activity and Loyalty
Applicable for both physical and online stores

As we can see this idea could clearly benefit Zara and improve many parts of it’s Business Model. As Customer Co-Creation is becoming one of the hottest topics right now, Zara should consider ideas like this one and try to turn the customer into their most valuable advisor.

Reflection on received Feedback

My classmate Yassine Leenen was so kind to give me feedback on this report and also on the observation report which we had to do in this Block. The feedback is divided into four parts. The first part is the feedback on the visualization of the Business Model Canvas. According to Yassine, my BMC has a clear and easily understandable visualization. The improvement point is to use more pictures in order to make it even more visual. I agree with Yassine, but I decided not to add pictures because I didn’t want the BMC to become too overfilled.

The second part is about the description of the BMC. Yassine perceived it as succinct and well-researched, with the tip to describe the BMC more in the introduction, instead of the company itself. I disagree on that point, because it is good to get information about the company in general first and the BMC parts are described in detail for each element throughout the main body.

Yassine found no fault for part three of the feedback sheet, which was about the observation. He thought it was well-researched and written clearly.

The fourth part of the feedback is about the overall layout of the report. Yassine liked the clear sections and the fact that I worked up to required formal standards. His improvement for the layout concerns the element of customer segments. After reading this improvement, I added a clause in that Paragraph (starting from “namely”), in order to make the subsequent segmentation clearer.

Bibliography

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Danziger, P. N. (2018, April 23). Why Zara Succeeds: It Focuses On Pulling People In, Not Pushing Product Out. Forbes.
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Graafland, A. (2018, September 12). Secrets of Zara’s success with fast fashion – and why its shop assistants watch you extra closely. Mirror.
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Russell, C. (2019, March 15). The Formula Driving Success For Inditex. Forbes.
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