Phygital | The combination of physical & digital can determine the future of fashion
The fashion industry seems to be on a roll. Over the last few months new trends, new definitions and new issues have emerged, forcing both consumers and corporate executives to start thinking outside of the box. Despite NFTs having risen in popularity and the “Metaverse” being the hottest topic, it is a different term that will prove especially important for traditional fashion businesses within the next year: Phygital. Physical products that have a digital twin are not only the starting point for virtual explorations but are also holding the key to the survival of most big fashion brands, yet the majority of companies have not started drafting detailed strategies by now.
The overall concept of Phygital is obviously linked to the Metaverse.
Trying to define what the Metaverse is in 2021 can prove tricky, however it is widely referred to as the next evolution of the 2D internet that we are using today. Instead of looking at a flat screen, users will be able to interact with and “enter” the internet, either through virtual worlds (using a Virtual Reality headset) or by experiencing it as some kind of persistent overlay on the real world (by using Artificial Intelligence glasses). Most of the big tech companies are currently working on different hardware and wearables that will replace the mobile phone and allow for the mass adoption of the Metaverse. While this will inevitably change customer behavior and retail strategies, fashion will most certainly maintain its role in helping people express their identity. In fact, having a collection of digital items is already deemed as something completely natural by younger generations and the market for purely virtual in-game clothing and cosmetics is valued at $40 billion. For traditional companies of physical fashion, entering this space would be an incredible expansion opportunity. Younger generations are already starting to question the value of acquiring physical luxury goods that nobody can see because they are spending 8 hours a day on online spaces and platforms. One has to wonder, would a purely physical designer handbag, stored in someone’s closet, have the same value in the future, if people will be socializing in virtual worlds, or walking down the streets wearing AR glasses that allow them to experience hyperreal garments?
In order to slowly tackle this change in dynamics, luxury companies have to enter the space of virtual fashion. Indeed in 2021, the demand for NFTs exploded with the creation of dedicated marketplaces that allowed people to exchange, store and display them. The same will eventually happen to purely virtual fashion, however we have to wait for the necessary structures and platforms where people will be able to use them in everyday life until we see the big shift. The fashion industry can however deploy a different strategy and incorporate virtual pieces in a different way. Top executives are already predicting that within the next year most reputable fashion houses will sell most products with their digital twins in what we call a phygital strategy.
Phygital is a term that has come up repeatedly over the last 2 years and it is referring to the blend of a physical and a digital item, usually backed by crypto technology and blockchain. This dual offering is creating an entirely new space for retailers, brands and customers alike. In a world where technology is continuously evolving and integrated into our everyday life, the concept of phygital does indeed appear as a natural evolution. When it comes to our financial systems, we have already started to accept cryptocurrencies and blockchain technologies. This prompts us to believe that the same will happen with purely virtual items and phygitals. The “smart” products of the future will have endless possibilities, being able to track supply chain, purchase history, prove authenticity and many more. For example, a code can be placed on every physical product that will effectively link it with it’s unique NFT twin, microsite or utilities, all safely stored on blockchain.
Consumer habits are always at the helm of every strategic business decision. It’s no wonder then, that the turn to phygital is caused by the dramatic changes we have experienced over the last few years. Younger generations that were born into an already digitized world, were forced during the lockdowns to spend more time socializing online. This, combined with the latest innovations that happened to the experience industry, drove the rise of “gamification”. Gen Z and Millennials do not view the physical and virtual worlds as two different entities. The same goes for their consciousness and assets. A business meeting for example, means the same to them whether it is done in a physical boardroom or over Zoom. Simply put, there is no clear line between digital and physical when it comes to working, connecting with each other or sharing aspects of our personality.
With people spending increasingly more time on those spaces, collections of virtual assets are not only becoming expected, but necessary in order to allow for expression. The statistics don’t lie: Recent reports are showing that consumers are not only willing to spend good money on virtual assets but are also willing to spend even more money for a product that exists in dual form. Dolce and Gabbana’s successful Alta Moda collection named “ Collezione Genesi” introduced five physical creations with a digital twin that can be used in the virtual world of the buyer's choice. According to 47% of consumers, technology makes them feel connected with physical products (Accenture). Indeed, immersive technologies motivate customers in different ways: personalization, shopping for products online without having seen the physical version, experiencing products before buying (eg: AR makeup mirrors) and assessing additional product insights such as brand storytelling and events. This explains why Morgan Stanley is predicting that game character clothes and NFTs might reach 10% of the luxury goods market by 2030. Simply put, people are willing to spend money for virtual assets and ignoring them would be a business risk.
Phygital is the first step to unlock the Metaverse opportunity. Progressive brands have already understood it’s importance and have already structured detailed strategies. While “one size fits all” has previously been used in the fashion industry, this can surely not be applied here. So how could a brand use phygital in an effective way?
Brand and community building is one of the strongest tools that phygital can offer. Organizations should start by understanding the exact needs of their customers and how they can add value to their lives by offering exactly what they want in the places that they are. Virtual twins can help achieve that, by enhancing physical items, providing information about each product or inviting people to online communities, which will effectively revolutionize the way companies can build their storytelling and fanbase. Digital art and fashion can also successfully expand the way people perceive, view and use products. With people spending more and more time online (8 hrs/ day for Gen Z), offering a purely physical item seems insufficient. A digital necklace, for example, can change the way a user’s avatar looks, whether within a game or on a zoom call meeting. By doing so, customers can continue to wear their favorite pieces in all moments of their lives and thus get more value by the item. Phygital is also offering the incredible opportunity of testing virtual assets with consumers, instead of venturing all out with a purely virtual.
NFT Utilities, the linked offerings that NFTs can provide, will also prove important for the digital version of a phygital product. These can range from proof of existence tokens, to access to events, customer support and other features. This will not only enhance the product offering but also completely revolutionize the way that it is perceived by customers. Issues like sustainability can also greatly be benefited, since customers will be able to track (via the NFT version of the phygital product) the complete supply chain of a product. Interestingly, companies could produce physical products only after a customer has purchased the virtual version. This will diminish product waste as well as cut back on the excessive discounts that damage luxury positioning, but seem necessary for leftover products up to now. The additional revenue could be used to improve quality for the offerings and thus improve brand perception even further. Lastly, with multiple department stores and retailers out there, organizations can push direct-to-consumer and cut wholesale costs, by exclusively selling phygital products directly. The rest of their distributors and partners can only continue to sell the physical versions of the brands products. Top luxury houses such as Chanel are already closing concessions to focus on exclusively offering their top performing products only directly in their own boutiques. This ability to push directly for consumer sales, might prove to be the catalyst for many companies and drive them further into the adoption of phygital.
Despite the fact that the future appears quite clear, consumers will most certainly need to gradually get familiarised with the idea of placing more value on virtual items. While historically fashion and luxury companies were slow to adopt change, huge organizations have already started to move faster than expected. Nike for example, recently invested heavily in buying the virtual fashion giant Artifact Studios. Complicated issues such as the future of fashion cannot be easily answered. Humans will always continue to live their physical lives and thus need physical clothes. However just by looking at how we spend our time and use technology constantly, one can understand quite easily why believing in a purely physical future for our industry would not make any sense. The future is here and it most certainly is phygital.
