Aaron Luo and Carmen Chen Wu are the complementary co-founders behind handbags maker, Caraa. With Aaron looking after finances and Carmen applying her CFDA award-winning design skills, the duo built a direct to consumer brand that combines fashion with function. In this episode of Shopify Masters, Aaron Luo of Caraa shares the importance of having a complementary partner, testing ideas in the market, and finding an ideal pricing model.
The importance of having a complementary partner
Felix: Tell us about the inspiration behind Caraa?
Aaron: A little background behind the brand. Both my co-founder and I, we always say that we don't come from fashion, especially myself, but we do in the sense that my family has been doing luxury handbag manufacturing for the last 30 years. And my co-founder Carmen Chen Wu is a CFD awarded fashion designer, spends a lot of her time working with high-end design houses in terms of designing for the runway. So when we came together back in 2015, we obviously knew the handbag space fairly well. A lot of cool things are happening in the space especially for a lot of luxury houses. When I think about some of the larger couture types of brand names coming from Europe, again, very cool things coming from a design standpoint, but one thing we felt that needed a little bit of improvement, I guess, it's lack of functionality. Handbags specifically play such an intricate part of a wardrobe on a daily basis. But we just felt that a lot of the handbags couldn't have the functionalities that will keep up with her active lifestyle, at least for the millennial consumers that we initially aim to service. So the idea behind the brand really is around creating a luxury item at a direct to consumer price point or contemporary price point, but very much focused on the functionality and keeping up with the lifestyle. If you take out one of our hero products, our studio bag, the bag is produced in the same factories as some of the world's leading luxury brands from Europe. We keep the prices below $400 in terms of the price point. So it's a lot less than a luxury item. And when it comes to functionality, you will see that you can wear our bag in three different ways. So as a backpack, crossbody, satchel, and then it's going to have different compartments for different types of activities that you would do throughout the day. So there's a compartment for the gym, a compartment for your tech, a compartment for your makeup, wallets, keys, phones, and so on and so forth. So that's kind of the idea behind how we initially started is to really give her like, because it's mainly a woman's brand, a product that really can keep up with her lifestyle and something that she wouldn't really need two or three more bags throughout the day, just one bag will serve all the purposes.
Felix: How did you meet your co-founder?
Aaron: So we both are from a Chinese background, but we both grew up in Spain actually. And it's funny because unlike the US, in Spain similar to some of the European countries back in the '70s and '80s, there weren't that many immigrants. And we actually came to know each other more from our time spent in New York. But when we started connecting and sharing some notes and worst stories about highlights of our time in Spain, we realized that our families actually knew each other. Another fact that our grandparents at one point did business together, it's some somewhat of a fate. To a certain extent because when we came together and we started discussing different ideas, we quickly realized that at the end of the day we really like the entrepreneurial path. We specifically love the manufacturing, supply chain, and handbag industry just because we feel that even though it's a mature industry, there were some areas that were ripe for disruption. If you look at ourselves in terms of skill sets, we always say that we have the perfect yin and yang. I'm more the business person. I'm a more sales type of personality. And Carmen, besides her design background and product background and just overall tastemaking background, she grounds me quite a bit, So I always say this, the number one advice I give to a lot of entrepreneurs that we get the chance to work with or me is if you do end up having a business partner, which I fully recommend, make sure that you find somebody that can complement your skill sets, that can be really great at what you are not so that it's a complementary relationship as you thrive.
Felix: How do you know that you are a good fit?
Aaron: So for us, I think it was very clear to us pretty early that we share a lot of the same values and I think it has to do a lot with the fact that we grew up in a European country from Chinese backgrounds. Our parents were all born in China and we were the first generation that really had the opportunity to really grow outside of China. But I think when you are growing up in that kind of way, I feel like a lot of your values are very much the same. We'll both think about investments the same way. We'll both think about value the same way. We'll both think about how to service our customers the same way. So when we sat down and start comparing notes, we quickly realize that there's a lot of similarities in how we're thinking about the world. But even though, our skill sets are very different. So it is somewhat of an art and like I said, often allude to dating a little bit. It's a little bit of dancing in the beginning, but for us, we're both looking back and say pretty quickly we realized that you know what? There's something here and we should definitely give it a try. And five and a half years later, we are with a thriving brand.
Experiences in sourcing and logistic proved to be beneficial
Felix: Before starting, Caraa, you both had started a sourcing agency, how useful was that experience when starting Caraa?
Aaron: We're product geeks at the heart. Anybody who has attempted to start off the brand would tell you that it's a long journey. It's a treacherous road. So we didn't really want to get into the product or didn't really want to get into the brand side when we first started working together. But we knew that our passion was around manufacturing, global supply chain, logistics. Just because my background is in finance, my family has been doing it for so long, that's embedded in our DNA. And a similar story with Carmen, even though she comes from a luxury designer background, her family has always been in manufacturing and supply chain as well. We started a small sourcing agency in Kotara called Our Partners. And the idea behind it six and a half years ago, as we realized that there were few large sourcing agencies that were helping larger brands in the US, but other parts of the world too. So think of Walmart, Costco's, Tommy Hilfiger, large brands that work a lot with sourcing agencies in order to help them to not only just source from different parts of the world but also manage logistics and supply chain. And as a result, they are able to enjoy a lot of the benefits that come with sourcing agencies because sourcing agencies, especially if you work with larger brands, have a lot of scales, meaning that you can get a much cheaper price for your product. But of course, you have to have a lot of volumes. We wanted to take that, but give it to the little guys. Whether it's China or Brazil, or Mexico. So the idea was to take in that sourcing model, but really working and helping smaller brands to scale. It was a wildly successful agency. We grow very rapidly in the first two years. Then, we start exploring the idea of Caraa, just mainly because we felt that that space that I described before back then, we feel that we could actually tell a story that nobody was really doing. We make our bags from the same factory as some of the world's leading luxury brands but keeping the prices really affordable. We also wanted to go direct to the consumer right away and obviously Shopify plays a big role in that.
Felix: Do you see the advantage for a typical entrepreneur with a team of 10 or less, does it make sense for them to go with the sourcing agency or can they do it themselves?
Aaron: I think it depends a little bit on your product and your market. So if I think about the main customers that we work with on the sourcing side, it usually is below $20 to $25 million in sales. So a thriving business, but still smaller and easier to manage. So that's kind of more or less gives you an idea in terms of the size of the business. As far as manufacturing, all of the customers that we work with on the sourcing side, they already have some type of footprint in terms of manufacturing. I think a lot of them come to us for different reasons, some of them are looking to consolidate. So if you were in a similar boat where you just have a lot of different areas that you're touching on for a sourcing manufacturing standpoint, think about working maybe with a sourcing agency that can help you actually manage through that. Some other brands come to us because they have been paying domestic prices and joined domestic volumes, but just looking to scale and for whatever reason, they can't or don't want to pay domestic prices in terms of scale. They're thinking about going overseas. Going overseas, it's a minefield. A lot of people think that you can just pick up a website, find a few factories, start emailing them, and viola! You can show up in China one day and start producing. Sure, at a thousand fee levels that's what happens. But it's a minefield. I mean, there are so many things that can go wrong in logistics and supply chain. If you've never done it before, either to hire somebody in-house who has done this before or go with a sourcing agency that can help you hold your hands a little bit. Two, three, four years down the road when you are mature enough, you can think about making changes, whatever that change is. But I don't see anything wrong with hiring a good logistic production person to help you through that. But sourcing agencies a lot of the time fill that gap where you don't have that kind of access to those resources.
Strategic components that turn an idea into a brand
Felix: What are the skill sets that you're more focused on building a brand?
Aaron: For us, our point of view is that you have to have production and sourcing nailed down before anything. And there are so many great designers out there and we were fortunate enough to work with a bunch of them through our sourcing agency. But the reality is that having an idea is just part of the equation. I think getting that sampled produce, shipped, sold, that it's a mammoth effort. We knew if we didn't really have that kind of supply chain production background and we purely had design and marketing, I'll probably think twice before starting any brand really. So I will say for us and for any entrepreneurs that we meet and mentor and so on and so forth, that's the number one thing we always ask is, "What does your supply chain look like and how are you going to produce this? How are you going to scale up and down and what are you going to do if something happens to a particular location if you need to pivot?" Once you have the product, you have the substance. I think once you have the product then you have the right to start thinking about storytelling and communicating with your customers and start building your community based on the product. Some other people would definitely disagree with me and have other points of view, but for me the product is substance. At the end of the day, you're selling a product, you're not selling fluff, if your product is not great and you don't have a unique point of view or you don't even have the production, the supply chain to produce it, I think your business plan would probably need to be looked at.
Felix: Where would someone even begin if their goal is to build some fashion brand, but don't have any experience with manufacturing?
Aaron: For first time entrepreneurs or entrepreneurs just starting at the stealth mode stage, I would say, forget about overseas manufacturing. You're going to get killed with minimums, get killed with complexity, stick to local manufacturing. Come up with a set of prototypes. Don't think about mass production. Think about small production. The most important thing is to prove your concept. Touching on Shopify a little bit, there are tools out there like Shopify that can allow you to actually test your concept very quickly and very easily. Your first prototype, it's not going to be perfect. I think if you clearly communicate that with your customers a little bit, I think there'll be more forgiveness in the beginning. Don't pretend something that you are not. Don't pretend that you're the next Nike, just be transparent with your customers that "Listen, we're a startup." And obviously there are crowdfunding channels or platforms that you can also use. Be straightforward with your customers, and tell them your story in a genuine way, and prove the concept with your product, thus having a market fit, and that's a term that I think a lot of people borrow from the tech world. The first question that I ask a lot of people I interact and meet with is how do you know you have a product-market fit, You have a concept, you have an idea, you have this hunch of this thing that you want to build, but that's your hunch. It's in your mind. You haven't proven anything yet. So how do you go and prove that your hunch, your concept is valid and there's a market for it that you can actually make a business.
Felix: What are you putting out into the market to test if there's a product-market fit?
Aaron: In the beginning, we started the brand initially with 50 units but it was offered in the family. So that never counts. I always joke around and say, "Your first 50 bags, your mom and your brother and your cousins bought it, I wouldn't call that a product-market fit test yet." But our true test was the first hundred units that we made. And I knew these sell really well. We got a lot of feedback and we were very transparent with our customers in the beginning in terms of, "Listen, we are an emerging brand. This is our story. This is what we're trying to fix in the market space, and here are our products, and we welcome any feedback." I do remember actually the first 20. Those 20 customers stuck with me because those 20 customers actually gave us very great feedback. They bought the bag even though in the beginning there were a few issues with some of the design aspects of the bag. They came back and said, "I'm keeping the bag, here's a reason I'm keeping it, but here are some of the recommendations in terms of making the bag better." So that's one area that's how we went about in terms of proving product-market fit.
We also had the chance to work with a lot of influencers in the beginning. That's kind of our core community. We work with the influencer community that we had a previous relationship with to test the product and get the feedback that way as well because you don't want to launch the product going through that blind. So you want to use people that you know that will be your customers and have tested and given you feedback along the way. So again, just a couple of different ways that we went about proving the product-market fit and making sure the product actually is going to be a viable product.
Felix: Now when you're working with influencers, how similar are they to the actual market?
Aaron: I think a mixed bag. Unfortunately, I think in fashion specifically, there are a bunch of influencers that we had a privilege to work with in the past. And they all vary depending on the influence you work with. On the fitness side, you will say that in a lot of them, their followers are very much like our target customers, so you approach marketing slightly differently when you work with that particular influencer and on the fashion and lifestyle side, it's a little bit of a mixed bag. So I think it comes down a little bit to understanding the influencer that you work with and getting to know her and her audience. And depending on who follows her, I think you change your questions and you'll go off testing slightly differently depending on who they are. So it's not a one size fit all.
Failing quickly and cheaply is key to finding product-market fit
Felix: How did you generate the initial wave of interests and customers?
Aaron: So we didn't do advertising for a long time actually, because we wanted to create an organic community before anything. There are so many venture-backed retail brands that are popping out left or right. And before even taking any time building their own core community, they start buying ads left and right. Which first of all, it's not a sustainable business model in my opinion. But also unfortunately for brands like ours, it creates a lot of bad noise for us. So we didn't want to do that. We wanted to create an organic community for the first two and a half years really. And to answer your question in terms of how we went about generating traffic and putting eyeballs on the brand, you just have to test. We tested from standing in the corner in Soho it and handing out flyers, asking people, "Have you heard of Caraa? Because we'd like to tell you about our story." All the way to get on national television, where we were invited by The Lifetime Network, to appear in Project Runway. And that was a great opportunity to get on. So I gave you two very drastic examples in terms of like you go from the street corner essentially telling the story of your brand to national TV.
Felix: What do you do after you find a product-market fit?
Aaron: Fail quickly, fail cheaply. So the point is if you're going into it with the idea that you will fail, the next question is how do you do it quickly and as cheaply as possible? Because if you take all your funds, you finally get the core to start a business, and you've got the loans, maybe some money from friends and family, and if you put all of that money into the first test and you fail, you're in a tough spot. So don't do that. Try to test as cheaply as possible. And then if you fail, that's okay. Have a contingency plan. I think people, a lot of times, get too bogged down and too honing on the idea of, versus really truly understanding the root cause of the failure. And if you dig deep enough, there's always that one cost. It could be pricing, it could be the product, it could be market, it could be seasonality. And have the courage a little bit to stand up again. It's not about when and how you fall, it's all about how you get up from that. So I think yeah, it's setting expectations before you start, is that you will fail and that's great. You shouldn't see it as a failure. You should see it as a learning experience.
Felix: How much did you know about your customer, who your customer was like at the beginning? And how much did that change over time?
Aaron: It changed a lot. You're always going to have your target customer or your actual customer, you don't know what your actual customer is until you're ready to start selling. I would argue that you will continue to learn throughout the lifetime of the brand because the actual customer will evolve over time. And your goal or your job really is to evolve with her or with him in some cases. For us, I will say we understand about 55% of our customers. We mainly target active millennial women living primarily in urban areas. For us, it was more just a lifestyle, understanding how she lives. And I think once we understood that, I think it was a lot more apparent for us to understand who she was or how we want to go about targeting her if you may.
Felix: How do you get the valuable feedback to actually make decisions?
There's no one answer because depending on the data point, the feedback you get for different parts, I think you will interpret it differently. On the product, we always break down the product feedback in a couple of different compartments or a couple of different segments. When it comes to functionality and features and so on and so forth, we do listen quite a bit to our customers. When it comes to product and when it comes to tastemaking design that's where our creative director or my co founder takes the lead. Truthfully speaking the way I think about it is that that's the hardest. That's the art behind our brand because we think of ourselves as a tastemaker because our co-founder is a tastemaker and she is a fashion designer. And then the beauty and I think the uniqueness about her is that they're able to set trends versus following trends. And what that means is that a lot of times she will be able to tell you something that you need before you even know it. So that's, I think, the difference in terms of design a little bit when we are the one who is setting the trends, and leading the trend, and being the tastemaker versus I think some other brands who would go about design more on the data way than looking at what's the trend and then let's catch up with the trend a little bit. So that's how we think about it in terms of gathering product feedback or feedback in general from our customers and how to incorporate that into the brand. If you look at a lot of European fashion houses at the end of the day, We're talking about different brands between Caraa and a European brand, but if I think about those European brands, the reason that you paying such a premium at the end of the day, it really is for the tastes of the designer, the taste of that brand.
Pricing and the factors that influence it
Felix: Got it. Now I want to talk a little bit about the pricing. At what point does that come in where you're able to test and finalize pricing for your product?
Aaron: In the beginning, you should really think about cost and I have a finance background, so I don't want to be too geeked out in terms of the different pricing models. But I always say cost is probably something that you want to think about when you first start the brand. I think once your brand becomes a little more established, I would say at least be in business for five to 10 years where people start knowing you, and wanting to come to you, and start trusting you more, and giving you more goodwill. In finance, we call it goodwill that's seen in the balance sheet. So that's the goodwill that you generate over time. Then you think about value-driven pricing where you can start thinking about charging premiums. I will never tell you how much a Hermes bag or a Birkin bag will actually cost to make, I can tell you it's not the tens of thousand dollars they charge, that's not a cost-plus model. But in the beginning, I think it's a combination of primarily cost plus because you've got to cover your bases. But also just do your market research and understand, "Hey, what are your competitors charging?" And what kind of pay you want to make.
Felix: Once you learn more about your customer about their lifestyle, how does that play out in your messaging or the way that you market the product?
Aaron: It's important, half of the battle is understanding who she is. Once you become a certain scale, and once we start realizing that we want to start doing more and more marketing and this is where a lot of technology comes into play. There's handful of vendors I can think of in terms of offering the right platforms to help you understand who your customers are. And once you understand it, I think it's absolutely empirical that you do change and target those customers with different marketing messages. And I mean there's kazillion material out there that you can read and obviously you can definitely hire the right team to actually help you with this as well. But I don't believe one message fits all. I think if you talk to any savvy marketer, they will probably all agree with me. So the idea is how do you segment it into the right buckets, not too many because then your message gets very diluted, but you segment it into a few major buckets and then come out with slightly different messages to target that, Because by default you're going to have different groups of people within your customer demographic, You're going to have the ones that love your brand, but don't want to spend maybe as much as that your MSRP is and looking for deals, then you talk to them in one way. You have the other group of people that it's not really price-sensitive, but really wants a message or wants a product that resonates with the lifestyle, that want to feel that you're talking to them and having that dialogue with them, you talk to them slightly differently. Understanding your demographics, understanding your customers is really half of the battle. Once you have that, definitely segment your messaging and tailor it as much as you can to the different groups that you have within your customer segmentation.
Felix: Are there any tools that you rely on for the segmentation or any other marketing-related tools or apps that you rely on to run the business?
Aaron: I wish I could give a few shout outs to a few. Honestly, we're still thinking through that a little bit ourselves. The truth is the good ones out there are very expensive. We like to be scrappy and I think scrappy is good no matter how big you are as a company. So we're using a bunch of different tools and put them into SQL internally and hyper analyze them. We find that that's the best way that we get to rack and stack the data in the way we find it. It's interesting and find it inside the form, if you may. But no, I guess I wish I can give a few shout outs to some platform out there that we work with. But most of the members on my team, they're pretty data-savvy. And SQL is our friend.
Felix: What's been the biggest lesson that you or you and the company learned last year that you wanted to apply this year?
Aaron: I think to get the right team. We will not be who we are without the men or women that work with us on an everyday basis and we actually are looking to expand our team in a number of different areas. That is critical. I think for the first few years during the ramming periods of any brands, I think that the founder or the co-founders are critical for the business. But once you start getting to a certain scale, hiring the right team to help you grow and scale is critical. So we were very fortunate to have found all the right members of our team. But again, because we're growing, we're scaling and we're looking to increase our team. So for all those folks out there, I think, looking to create a brand and scale and build something unique and amazing, find the right partner and the right team to help you build because I think that you're going to go a long way if you have that versus not.