There a bold piece by Marc Andreessen in PandoDaily announcing the "death of retail".
As an extension to the theme of "software will eat the world" it's
smart statement of intent for a firm that wants to attract the best and
most ambitious of entrepreneurs. As an actual prediction it can only
elicit a smile, but the underlying point he's making is that we are only
at the beginning of what is possible in e-commerce (or indeed how much
tech still will influence offline). I'll subscribe to that !
It got me thinking about what I learned in e-commerce over the years.
I've been involved in marketplaces (PriceMinister, sold to Rakuten for
$250M, Seatwave), listings (Zoopla), an e-commerce delegation gone
wrong (InspirationalStores) and nicely recovered as a simple e-commerce
business (Motoblouz, the French #1 in motorcycle equipment) and a
private sales site (SecretEscapes, #1 UK player for travel private
sales) as well as closely following the development of Moo.com (custom
cards, great business). More recently I seed funded TechStars company FashionProject, but more on that later.
I've seen many investors attracted to the seeming ease with which top
line can scale; but it's easy to underestimate just how hard it is to
really generate value in e-commerce. E-commerce is attractive on the surface:
it's big ($200BN) and early (10% of retail), but it's a hard game in
which to build really valuable and/or highly profitable companies:
You need an angle.
A simplistic primer
Remember in this post I am only looking at businesses that are
shifting goods. If you think about the levers of the e-commerce
business, the equation looks simple. You're trying to make the
following math work : CAC – CLTV > 0.
Components of profitability and operating leverage are (simplistically) the following:
- Cost of Customer Acquisition
- Buy Side Margin
- Cost of Processing & Logistics, Fraud, Payments and Support
Say for example your Average Selling Price is $100 and your gross
margin is 45%. If you spend $20 attracting a client, have low
recurrence and 15% returns, you're contributing about $10 per order by
the time all your costs are factored in. You can build a business on
that but it takes a lot of orders ! Getting vastly profitable takes
serious scale (cue Amazon) and control of every aspect of the delivery
chain (cue eBay acquiring Paypal, GSI Commerce).
Plain old e-commerce is a thankless hard slog (and a scale game)
Commerce is about presenting the right product at the right
price with the appropriate level of convenience. It's simple in theory
but remarkably hard to do at scale in practice, especially if you're in
the game of generating extremely valuable companies.
There's a bunch of challenges when selling online
that can derail you. Customer Acquisition is ruthlessly competitive and
can destroy you. Customers are generally blind to your brand
and unless you're Amazon don't often fundamentally care where they
shop. Transparency is absolute, inventory fungible, and all shoppers
care about is price and speed. You can make assumptions about
recurrence, but most of the time recurrence is a mirage and (because of
weak attribution analysis) you end paying full CAC on your returning
customers anyway. Grey markets, private sales, returns can finish off
the job of killing your margins. In other words, it's easy enough to get off the ground with some capital but to build a profitable sustainable business is another story. You need an angle.
The top two e-players are two companies that nailed a specific angle
each : scale (Amazon) and marketplace dynamics (eBay). Arguably Amazon
was enabled by a visionary founder but also by capital markets that
were incredibly supportive of extremely long periods of high burn (i.e.
Amazon is the dot com that ruled the world). Both started leveraging
the amazing power of dynamic marketplaces early, to the point that
Amazon has de facto become the totemic company of the Cloud age.
Creating angles when shifting goods
Let's take a quick rundown of business that have solved one or more of these issues in a creative way.
Solving CAC and Buy-Side Margin : CSN Stores (now Wayfair)
CNS stores started out by setting up tens then hundreds of
bland single product sites that sold commodity products at attractive
prices. Wooden beds for your kids, side tables, you name it. In the
process they achieved two things: an SEO strategy that at the time they
started was incredibly efficient and extremely attractive buy-side
margins. Even though the average value of what they sold was probably
low, net contribution per order remainder attractive because their CAC
was super low and because they sourced directly in China and probably
achieved 90% gross margins that way. If you sell stuff for $50 but
you're making $45 gross and spending $5 to attract a customer, you have a
business. They were one of the industry's most discrete mega operators
until they rebranded as Wayfair and started playing the brand /
destination site game. I hear their revenues are north of $600M.
Solving Recurrence: Vente-Privee, Gilt
Private sales are powerful and there is a reason they have
proved so alluring. On the one hand they make inventory management easy
(take consignments, shoot beautiful pictures, liquidate inventory fast,
rinse & repeat). Perhaps more importantly, they leverage elements
of human behavior that are effect in driving sales : limited
availability, short sale windows, game-like competition mechanics.
They also rely on serendipity. I read somewhere that circa 40% of
e-commerce buys are unplanned. Present me with a continuous stream of
interesting and well curated products, add a price trigger, top it off
with limited availability and hey presto, you've created recurrence. If
a normal site gets 10% recurrence, they're lucky. I bet you Gilt and
the like achieve 4-5 sales a year for their core client base, which
would be in line with strong offline numbers (the store on your street
in front of which you walk 100 times a year). Recurrence is a holy
grail in e-commerce because suddenly you can start thinking CLTV and get
off the treadmill of customer acquisition.
The founder of Vente-Privee, the original inventors of private sales
AFAIK, refers to the "click-clack-Kodak" moment, referring to an old
Kodak commercial about the opening and closing of a camera shutter and
the capture of the magic moment.
This has since been leverage in re-segmenting every market under the
sun, such as Zulily for kids. Whilst common logic will tell you the
entire market cannot function on discounted flash sales, it's still
Hacking your way to Scale: Fab.com
Having started as a curated list (solving the paucity of
inventory problem) and establishing the reputation of being "the" place
online to find hot products they suddenly found themselves selling
$100M+ of merchandise and realized they had probably become the largest
high design site in the world. Hey presto, play the scale game and be
the Amazon of design. The smart move on the part of this company was to
leverage highly efficient ways to get engaged users (a gay social
network site) then leverage a highly efficient to start selling (flash
sales) then switch to the scale play with $$$ from Jeff Jordan. Wow. I
am not surprised by the pivot (after all, getting out of flash sales is
one great way to improve your margins) but I am amazed by the speed.
Here is the metric that has me falling off my chair : 2/3 of daily sales
from repeat customers. Oh wow. What a machine.
Scale Scale Scale Scale or Die
If you take a 5-10 years view, scale players suck the oxygen
dry from the market around them. If you're not playing the scale game,
you better have a damn good angle. Getting your revenues from $0 to
$50M means nothing. It's only when your business starts to really scale
that you will experience the pain of decreased marketing efficiencies,
inventory wars and so forth. And it's only when your competitors start
achieving scale that you will really feel the hurt.
When you're shifting products on the web, it's scale or die. If you're niche, you better have a good angle.
Cool niche plays
Resegmentation and specialized plays
Take marketplaces: the markets which e.g. eBay serves can be
infinitely resegmented and large plays can be built. If we look at the
maker market, Etsy for crafted goods and CustomMade for, well, custom
made products are good example. I'll write another day about the really
high hurdle to getting marketplaces to work : generating and sustained
liquidity. Marketplaces of course work equally well for services
(TaskRabbit, Uber) and the sharing economy (Airbnb, RelayRides etc).
Betabrands : my customers are my brand
If you haven't visited them, see how the poster child of social branding runs its business. Its customers are the brand. Zero marketing, incredible tribe affiliation, fashion innovation, smart positioning, community designed products. Sweet.
Bonobos, Happy Toy Machine: the custom revolution
The ability to customize clothing's and other apparel is of
course a megatrend and new manufacturers and brands are being built on
that. Guys like Bonobos offer minimal customization in the areas that
matter (fit) whilst startups like IdByMe (See www.moodbyme.com)
plays on the little customization touches that will make your clothing
unique. Nice. Another nice example of templated creation: allow kids
to design their own toy with the Happy Toy Machine.
Manpacks : the subscription plays
In my mind someone mistook a viral video for a good product
(the famous One Million Dollar Shave Club), but otherwise I am sure
we're going to some, not many, decent subscription plays. Manpacks (a
SaaS company that happens to sell underwear) and Birchbox (a promotion
company that sends boxes) both seem to have cracked some portion of
customer behavior. Subscription's a natural state for Netflix, it's
less obvious for goods and I'm not super bullish on the concept, though I
can see a few nice hits emerging.
By now your eyes are tired and so are my hands: we'll cover
social later. There's lot I wonder about: how does Pinterest move from
this "wonderful hell" of poorly tagged pictures to become an e-commerce
force, how can a former VC do something as cool as Ly.st, does anyone
really want social shopping inside of facebook & how did theFancy
get to raise $25M ?
If you want to win in e-commerce, you've got to be crystal
clear about the dimensions on which you are going to compete. Scale
will crush you unless you fully understand your angles. Without an
angle that helps you achieve better margins, whether on customer
acquisition, buy-side margins or recurrence, it's going to very, very
hard. We stand on the cusp of another 20 years of massive disruption
in the commerce landscape that are going to yield huge opportunities,
but don't be naive going in.
Fred Destin is a Partner with Atlas Venture in Cambridge, MA. You can find this blog post, as well as additional content on his blog located here. You can also follow Fred on Twitter (@fdestin) by clicking here.