Startups

eCommerce Current Landscape: P5 Discovery

Large Problem: Across the web, no one has solved this problem—not even Google (for products that is). People are developing more content around products beyond just the description, which is helpful, but finding products is still really tough. Googling a product is useless, especially, since brands use different terms than consumers to describe a product (ie using the ‘cloud’ as a color is not the same or discoverable as ‘white’, but many brands and retailers do not get this SEO factor). Going to your favorite online retailers is your best bet, but if they are too extensively merchandised such as Amazon or Zappos, you are screwed. Endless.com has some of the better filtering experiences , but it is still hard to find exactly what you want within a retailer let alone across the web. The Paradox of Choice plagues us all and with an overwhelming amount of stuff on the Internets, we can get frustrated and exhausted trying to consume. Additionally, those with the best SEO will win even though they might not have the exactly right product you are looking for–you will probably just give up. Discovery is a HUGE problem. New angles on this challenge will gain traction , for example, ModCloth and Etsy have created great experiences to discover unique stuff. New companies solving discovery will emerge.

Due to this conundrum, there are a lot of prospects to solve the discovery issue and a lot of data to work with–not just search terms but leveraging personal elements (demographic, history, likes/social media conversation), social/influencer data, and better product information.

Models described below address this challenge in both technical and non-technical ways.

Curation: Typically, you discover stuff by browsing stores. Creating highly curated stores will make discovery more inviting. Sites like Ahalife and Everlane use interesting people/personalities that people can identify with and these people to a degree curate their stores . The older version of this was CSN stores or NetShops, which created super niche stores and bought the niche’s domain names to help with search. The newer version of finding interesting, indie products may include adding content (to help with search) and adding personalities for a consumer to identify with and who help source the goods among many other mechanisms.

Social: Shopping in the offline world is inherently social. You see this with ladies shopping in groups, getting opinions from friends or stylists/salespeople,discovering new items from friends or the sales people, and showing off your latest purchase to your friends. This helps for people to discover new items from trusted or relevant sources–other people with the same tastes or people you trust. With the explosion of everything being social, there are easy channels and adoption these social shopping habits. These behaviors have sparsely been mirrored in the online realm. So, there is opportunity to innovate drastically.A few examples include Pose , which allows you to get feedback from friends, or Snapette that allows you to capture, share, and discover products out IRL, which start to mimic these behaviors. Sneakpeeq uses game mechanics to encourage online sharing of wants and purchases. Yet, there is still ample opportunity to increase the ubiquity of these tools.

Influence: Beyond just feedback or sharing, there is , of course, there is the influence or ‘trend setting’ factor. This concept is nothing new.. In 1905, Richard Sears sent boxes of his company’s mail-order catalogues to his best customers in Iowa and asked each one to distribute them among friends and neighbours. Mr Sears collected the names of those who received the catalogues and, if they purchased an item, rewarded the “inﬂuencers” with a gift, in the form of a stove, perhaps, or a sewing machine.

However, now there are better channels and mechanisms for influencing. Anyone from friends to bloggers to celebs play their influencing role. Influencers are influential in certain circumstances. For instance, friends are not always the influencers in buying fashion since you might have different tastes, and rather celebs or bloggers might be those that sway your purchasing decisions. While some people love Yelp, I hate the 4 star default. Traditional reviews and recommendations on products/services no longer have influence on my decisions (I know I’m not the only one either), thus, new ways to get insights from various influencers that matter to you will arise. I know of a few startups tackling the ‘review’ and influence problem in a few different angles. Ultimately, different profiles and people have different levels of influence on the type of product or service and on the information you are extracting from them.

Behavioral incentives ( eg BJ Fogg’s persuasive technology, Dan Ariely (author)’s Predictably Irrational examples , or in laymen’s terms ‘Game Mechanics’ ), are driving ways to improve engagement and influence within the shopping realm. Beyond the monetary incentives of deals or urgency with flash sales, there are many other types of influence to incite purchases. Some examples are offering new ways to engage with more content and media surrounding products, point systems, sharing, which get you vanity, monetary, or entertainment rewards. Alternatively, influence can come from buying because it’s from trusted sources (people and stores), other people with whom you identify are sporting those goods, it’s personalized, it’s showing up at your doorstep, it’s a better visual or engaging experience etc…

A few companies are creating platforms to shepherd influencers to promote items. This model has been seen time and time again in various forms. This can be from influence as a special person such as a celeb (ie Kim Kardashian and Shoedazzle to BeachMint) or ‘host/peer pressure’ whether the Tupperware party and other Multi-level Marketing (ie Stella & Dot or Chloe & Isabel) , which are structured in ways to promote and incite people to buy (previously highly deal oriented).

Curation, social , and influence all help with not only the discovery but engagement and distribution of goods to relevant people online.

eCommerce Current Landscape: P4 Data access, data collection, data integration….

by eknopf

Retailers and brands have a lot of data offline and now online. Accessing this data by better collection tools for ecommerce, or tapping into existing external or internal data by leveraging 3rd party tools is starting to become more possible and cheaper. VCs are going to be very excited about companies that utilize all the data that’s out there to better optimize shopping.

Retailer: The biggest challenge of a retailer is leveraging its data into actionable items, which historically has been challenging because there is a lack of knowledge around the following:

Who the customer is Buying habits or tastes outside of the retailer. Pre-purchase data (ie ‘in the store’ or things in the shopping cart that do or don’t convert to sales, etc… ). Customized/personalized incentives/deals to up sell, come into the store, etc…

Data is still siloed in these old systems and is very difficult to extract or integrate, but companies are starting to unlock this data . TellApart is for example, is tackling customer segmentation and ‘data-driven’ marketing /re-targeting. They identify the most lucrative customers and help retailers target their marketing dollars towards them versus low-value customers.

Brands: For brands, accessing any kind of data has been a challenge since most of the historical data has not been shared by retailers (or at least very little has) in addition to being able to leverage that information across retailers based on customer demographics. In fact, most retailers that have large amounts of data still use EDI , making it fairly costly to provide sales reports to their brands. Thus, there is a huge lack of visibility into sales let alone real-time data. . Brands have lower traffic if they have a website (many of them are just now getting web presences let alone ecommerce shops–mind boggling for all of us techies but true).Thus, they don’t have very good data from their sites either and are typically less sophisticated than retailers since they have more aspects of their business on which to focus.

Connecting the Dots: Generally, there are HUGE opportunities if a company can plug into the back end of the supply chain and push forward, BUT in terms of timing, there is higher likelihood that something more disruptive will come from the consumer side (as usual) due to the slow moving nature of the enterprise and having to integrate with their systems or the sales cycle associated with business sales. Thus, the innovation will need to deal with the data (consumer, retail, brands, etc..) that is out there—and there is quite a lot!!! . Now that product data and personal data is out there, we need to bridge the gap . Companies like ShoeDazzle employ surveys to get some level of personalization, but this is just scratching the surface. With all the tech talent and data out there, someone is bound to make the recommendation engine more ubiquitous and cross-channel and cross-vertical. You have companies like Polyvore, Svpply, Pinterest , Lyst, and Fancy where consumers are curating their tastes in different ways. So, now there needs to be a way for companies to leverage that information in an actionable manner.

eCommerce Current Landscape: P3 Consumer Psychology

by eknopf

Social Acceptance: No longer is there the issue, IF people are going to buy online but what/how/with whom. We are past the psychological and trust issues in the earlier days of ecommerce. Now, it is much easier to develop that trust due to secure payments, general standards, general market education/acceptance, design, etc… The market is not in the education phase but online shopping is becoming a part of our daily psychology of how to consume goods. People are even purchasing stuff through their cell phones including large ticket items like cars. Now we want an experience or something exciting beyond just ‘buying’.

Deal hunting mentality: ‘Discounts’ and ‘deals’ will stick around for awhile. This is now becoming an expectation versus a luxury both due to the proliferation of deal sites as well as the volatile economy that has yet to really recover. Thus, in order to create value, brands and retailers will need to become more creative in terms of how they position themselves. Daily deals & flash sales have also driven more people online to actively engage in ecommerce thus accelerating adoption. Even SMBS are now more aware and gaining better exposure to technology as a byproduct of the outreach from the deal sites. . Here is a good HBR article on adaptive pricing.

Design/UX: This is under appreciated but is actually a crucial element in ecommerce. You have ‘transactional’ (ie less experiential shopping excursions through Amazon—where people typically shop due to price or utility) . However, an interesting or pleasurable shopping experience has been rare to find on the web. The focus and emphasis on design has only recently taken shape. This is one reason why a lot of brands had not engaged in ecommerce as extensively as one would expect. They need to represent their brand well, and if the medium cannot communicate a brand’s philosophy and potentially compromise its integrity, a brand will most likely not utilize that avenue. This historically was one of the factors for brands staying away from actually having an online presence (this combined with concerns around seeming ubiquitous and thus less ‘exclusive or scarce’). If they get online, the whole world not just a few block radius will see them. Thus, online risks could substantially damage a brand, so the adoption has been relatively slow. . Beyond the brand, sites are making sites much prettier and aesthetically appealing as well as functional. New forms of buyer engagement is taking form . It is no longer browse and buy but rather consuming, creating, and sharing opinions, content and media that surrounds a shopping experience.

eCommerce Current Landscape: P2 Decreased Capital Intensity

by eknopf

Development Costs: This applies broadly to startups. It has become substantially cheaper to test new models and get up and running. This is thanks to a lot of the ecommerce software, various SaaS tools, and AWS . Testing using current tools and infrastructure enables more models and approaches to be easily tested with limited initial investment. . You also have much better tools to facilitate ecommerce. Shopify , Bigcommerce , & Magento among many other companies are making online storefronts much more engaging and exciting. The cost to get this built and have a beautiful design is inexpensive relative to preceding tools. Additionally, they’ve created marketplaces and communities around their products. So, accessing new tools, and tool vendors distributing those tools are more cost effective for everyone . Thus, leveraging APIs has made a huge difference in integration both in time and money. While not limited to ecommerce obviously , Software-as-a-Service (SaaS), has enabled people to cheaply build and test their stores with limited commitment and get the benefits of updates and new features that are automatically pushed to their site . Integrating these various tools and data sources is actually extremely important in ecommerce more so than for other types of online businesses because of the supply chain. There are so many moving pieces from POS all the way back through the ERP to vendors/suppliers and then the vendors/suppliers to their manufacturers and warehouses. This looks different since supply chains can have many different parties and stakeholders involved in many different combinations.

Decreased Inventory/Merchandising Risk: Newer models such as the aforementioned flash sale sites are providing ways to mitigate the inventory risk. This is either through pop-up shops, shorter selling windows, deals, etc.. Beyond just the deal mentality, subscription services add an element of personalization to hopefully only show and even send a subscriber relevant items. This decreases inventory risk because you understand the tastes of your buyer much better , there is a decreased likelihood of returning an item because it’s just a pain in the ass for us lazy folk, or because you are seeing an item in person. . Additionally, sites are getting product or merchandising feedback from consumers prior to buying large lots of the item. This offers better insight into what will actually sell. Rather than relying on ‘buyers’ who edit the assortment for their consumers, these new sites are creating larger breadth of products to preview before making those selections. Quirky (company), Made.com, Moxsie, ModCloth, etc…. actually leverage voting and feedback via their sites, twitter, facebook, tumblr, etc… before producing or buying items. Even collaborative consumption and rental models (while the latter initially capital intensive) offer new ways to either not hold inventory or create different economic models.
Better CAC: You can get viral before you even launch. Getting distribution is much more cost efficient than previously due to all the various ways to share and engage with people. Thanks Facebook. Thanks Twitter. Thanks all the other Social Media channels. Below, you can see broadly that referral economics are extremely valuable. Fab.com has an amazing referral program and was able to just completely kill it within their first month because they were able to get people signed up before launch . These guys are quite Fab 🙂 ! Nice work, Jason Goldberg and the Fab.com team!!! Also see: Startup Traction: How did Fab.com get 200,000 signups before launch?

Source: http://www.satmetrix.com/pdfs/NP…
Supply Chain: Innovations are happening to decrease capital costs , but I get into this in more detail later.

Why did Private/Flash Sale Sites Reinvigorate eCommerce Investment?

by eknopf

First Flash Sales & Private Sales is a means to move inventory that garnered enough traction to be companies in themselves.

So, let’s first define the parameters to examine what was different to drive their success and thus capital investments.
The key innovations : moving inventory quickly thus less inventory risk
or higher sell-through and getting massive consumer adoption in a short amount of time (relative to their incumbent traditional ecommerce sites). Often times, these sites sell before they buy ( aspect of the strategy employed in drop-shipping).

[Note: You can get a full overview of the Gilt model from Matthew Carroll‘s answer:Gilt Groupe: How does Gilt’s business model work? ]

1.Model/Product Innovations

Model: Short-term sale of high quality or often high end goods with limited inventory seemingly available. The combination of the following made this approach innovative:

Experience
1.    Time frame
2.    Luxury goods
3.    Limited Supply

Operational
1. Cash cycle/Inventory risk
2. Fulfillment technology

These concepts are all utilized in brick & mortar establishments, but the
combination online was yet to be seen.

Experience: These guys actually make shopping fun & addictive! These sites were able to create a great customer experience from showcasing the items to creating a habit–like tuning into your favorite TV show at the right time (that is pre-Hulu, OnDemand, and DVR). People get excited to go to one of these sites at noon or whenever the new inventory goes on sale. There is also a sense of urgency due to a combination of limited supply AND time that motivates buyers . You know it would go fast, which is unlike traditional online sales that you typically have a decent amount of time before the sale ends or inventory runs out.
Product: Gilt and a lot of the private sale sites were able to get access to luxury items. Selling luxury goods online was (and to a degree still is) rare. This is for quite a few reasons that I won’t get into now. Yet, getting ‘access’ to this type of inventory that could be sold online was actually quite new. [ At the end of the day, the product, especially, for discretionary items, are purchased due to the product quality rather than a ‘need’. So, having quality merchandise was also a key factor].
Data Accessibility, Collection, & Analysis : For a lot of ecommerce sites, you would not know who would be on your site browsing until the person put in his or her payment info or perhaps had logged in. Private sale sites require login and thus know your buying habits/patterns . If you abandon your shopping cart, they know who you are and what you abandoned. RueLaLa even added a button so that you can automatically purchase it if they get more available. Thus, they have better data than the average ecommerce site because someone actually logs in. This is in addition to their sneaky tactics of being ‘invite-only’ or ‘private’ to get consumers excited to give up their email address.
Decreased Inventory Risk: Not all of the sites employed the consignment model, where a site could give back anything they did not sell, but they at least were better structured to take limited amounts of inventory available. Other sites do not touch or pay for the inventory until it is sold to the consumer. However, this was a great way to decrease their inventory risk. Gilt ultimately holds some inventory and fulfills, but they minimize the risks . Because there is limited supply, the sense of urgency and impulse shopping that these sites incite also move inventory faster than traditional sites. Thus, there is decreased risk in initial financial outlays/cash flow as well as holding inventory.
Fulfillment: In drop-shipping, a retailer sells an item without touching the inventory or making any financial commitments. However, if you want to control customers’ experience, you have to actually touch the inventory at some point. So, these flash sale sites utilize aspects of this concept and evolved managing inventory risk. They either did not touch the inventory until it was sold or it was held and returned if it was unsold. In each model, the former especially, new operational issues arise. You get your order , which includes multiple brands’ products, thus you need to efficiently get those items from the brands and then fulfill (pick, pack, and ship) the orders.

2. Distribution/Marketing Innovations

Email : Email was actually under-utilized as a channel to sell goods with the exception of DailyCandy & Thrillist. Private sale sites leverage email extensively , which if people even ‘open’ an email are much more likely to buy. Additionally, it’s not about a ‘spammy email’ but rather good content. Flash sale sites incorporated better content into their email marketing, not to the extent as companies like Betabrand or Ahalife, but they took it up a notch from the traditional ecommerce sites. Additionally, because it truly was a limited time offer, it is exciting to open the email because each day it’s new versus the stagnant inventory in traditional stores.
Initial Exclusivity: The ‘invitation only’ concept caught on because people always want to get into ‘the club’. This created some initial buzz , and thus got consumers excited to give out their email addresses .
Social Media: Because these sites were able to leverage social media channels , they were able to accelerate their growth faster. There is currently a lot of noise , but identifying new channels early on that cater to your demographic has a potential for a huge win.
Referral Programs: Because of social media channels, referral programs were augmented. They figured out how to create viral loops much more effectively and the right incentives to increase their subscriber base.
Market Dynamics & Psychological Shift: At the time of the economic downturn, the obvious discount combined with a sense of urgency magnified the adoption of these sites. There was in fact a fundamental shift in the way people think about shopping. Buying ‘full price’ for a Gucci handbag has become in a way embarrassing (somewhat overstated) because the conversation has shifted from ‘look what I bought’ (implying a luxurious, pricey item) vs. ‘look at the deal I got on this’. The bargain hunting mentality has become the paramount of shopping status. Plus, the market opened up where not only the 1% could buy Prada but now the 2% could .

3. Investing in Models not Technology

Technology as an Enabler not a Solver: I want to acknowledge, that the success of the ‘private sale’ sites are actually not from ‘technological innovations’ but rather distribution innovations, which , sure, you can argue are technological to a degree. Yet, these are about bringing people together or easily promote versus using technology to solve a hard algorithm. That is also why you see the proliferation of sites beyond just Gilt & RueLaLa—a low barrier to entry ‘IF’ you can get access to the inventory, which is really the barrier to entry (it’s a relational barrier that can be overcome versus a lot of the other problems have infrastructural or technological barriers) . With private and flash sale sites, these are actually fairly easy to start but hard to scale.

Implication: Thus, a lot of the current investment strategy is not due to technology but either from distribution or some under leveraged model both of which can be augmented by channels that allow for better promotion and distribution (ie FB, twitter, blogging, and perhaps closer attention to email—not necessarily true anymore).

Overall, the new model for selling was able to identify new ways to decrease capital intensity than traditional ecommerce and gain distribution quickly. Thus, despite a lack of technological innovations, these sites were able to prove economic attractiveness worthy of VC dollars.