The brand “value chain”

The brand “value chain”

Consumers need for brands and their meaning is evolving. It will change where in the value chain most value accrues.

Established consumer brands have a good run for decades, servicing the majority share of increasing consumer demand. It’s no news to anyone that first the emergence of Amazon and then the emergence of DTC brands has completely disrupted the playbook of established brands.

The need for brands and the value they create is both changing. In a decade, the landscape of brands will look completely different, both in terms of the spread of brands that resonate with consumers and what they mean for them. Established brands in some categories will be replaced by no-name brands and in some other categories by DTC brands. This will change where the brand value accrues.

Evolving brand landscape and representative players in the value chain

Many no-name brands will be either Amazon’s private label brands or new Chinese brands selling on Amazon, and Amazon obviously will capture most of the value in these cases. Also, by being the virtual equivalent of a physical retailer’s shelf-space, it will capture most of the value for established brands as well, probably outside luxury brands.

In this post, I will NOT talk about Amazon’s value capture but instead focus on other entities that can expect to see significant value accruing to them as part of the changing brand landscape. These entities are:

  1. Platforms enabling DTC brands
  2. Secondary goods marketplaces
  3. “Social brand-network” focused on building communities around brands

1. Platforms enabling DTC brands

There is a lot that DTC brands have to get right when they are starting off. Mostly, there isn’t a lot of value in trying to recreate the technology (commerce) stack for selling to the customer. Platforms such as Shopify have made that commerce stack easily accessible. Below a excerpt from a recent article on Shopify.

What Shopify does is power all of that ability — from selling to payments to marketing. “We run the gamut of a retail operating system.” Like any platform, Shopify is building an ecosystem of developers, startups and ad agencies.

This evolution of Shopify from helping small businesses get online to helping venture funded DTC brands disrupt their markets is fascinating. It reminds me of how Nvidia found that its GPUs built for gaming are perfect for AI applications. As DTC brands increase in number and scale, Shopify (and other similar platforms) will accrue a lot of brand value. They are helping brands create their own virtual shelf space, not dependent on any retailer. As the needs of DTC brands grow, so will the tools that Shopify or other platforms offer to meet them, becoming the infrastructure layer for a part of the consumer brand economy.

2. Secondary goods marketplaces

Before the internet, brands were a proxy for trust. Buying from a known brand meant that you could trust what you were buying, short-circuiting the complexity of the buying process. So, it was enough for brands to just stand for trust. Today, Amazon has centralized trust, changing what it means to be a brand; this tweet captures it beautifully. Larger brands need to do more than just build trust. They need to stand for something to make consumers choose them over a no-name or a DTC brand.

This means adopting strategies that these brands would have scarcely used historically. Two come to mind, both centered around creating spikes of activity around the brand.

  • Taking a stance on social/political issue: An example of this is Nike’s ad campaign with Colin Kaepernick which led to significant increase in sales.
  • Engaging in product drops: Drops have emerged as a great way to create buzz. Streetwear brand Supreme pioneered it many years back and now more and more brand are adopting it. It creates scarcity for marquee products released in limited volume, giving the brand an opportunity to make itself aspirational and amplify what it stands for. Couple of examples of this are Adidas’ Alexander Wang drop and LV x Supreme drop.

In acknowledgement of these trends, Shopify has launched an app “Frenzy” to make it easier for consumers to know about upcoming drops and “buy at retail, not resale”. In my opinion, this only furthers the hype that these brands are trying to create, increasing the value of the products in the resale i.e. secondary market. eBay’s new ad campaign “It’s happening” speaks to this evolving strategy of brands. Below is an excerpt from the campaign.

Designed as more than just a brand campaign, we’re aiming to express to shoppers around the world what we’ve known all along: Everything that’s current, relevant and interesting is on eBay — and your audience can buy it now

The question then, as posed in this article around Supreme, is why would a brand let secondary goods marketplaces capture a significant part of the value it is creating. The answer is that secondary goods marketplaces help brands extend the buzz around them, increasing the brand value. They help more people feel part of the community that the brand is trying to create. They create a virtuous cycle in which both they and the brands benefit.

Secondary goods marketplaces have historically struggled at capturing the most value that brands create because of concerns around trust of the authenticity of the products. However, marketplace-provided authentication services (e.g. eBay Authenticate) are increasingly becoming a standard part of their commerce stack, resolving most of the trust issues.

With trust as a barrier mostly addressed, there is an opportunity for secondary goods marketplaces to more proactively participate in this trend. An example is eBay recently organizing it’s first-ever community sneaker drop, creating an artificial incentive for its sneaker-crazy buyers and sellers to trade on marquee sneakers, in the process increasing the brand value of the sneaker brands and accruing a lot of value to eBay.

3. “Social brand-network” focused on building communities around brands

As mentioned above, one of the biggest elements that makes brands valuable is the is sense that the customers of the brand get around belonging to the community. Historically one’s membership to the community could only come from one owning a product of the brand. That has its limitations; it can work well if you are a luxury brand but when millions of people own the brand, its hard to feel like you are a part of the community. There is a need for non-luxury brands to explore ways to build a network/community in a scalable way; this article articulates this very well.

As you would expect, internet has unique potential to help brands do that. Till date, social networks such as Instagram and Pinterest have been primarily helping DTC brands get off the ground by getting them in front of people. They haven’t built tools to continuously engage people around conversations with a brand. Glossier, a DTC beauty company that I highly admire, has been taking a community first approach to building its brand and its products, thanks to its origins from the blog Into The Gloss. It now plans to take the next step in its evolution by building a social network centered around beauty. Excerpt below from this article:

Weiss wants to build her own version of a social media and shopping mashup, something that will allow shoppers to get feedback from other users to find beauty products that are right for them. This is not a social network that sells ads for revenue: Instead, Glossier will sell its own beauty items on the platform.

While Glossier might be able to afford building a social media and shopping mashup to help it build a network of brand enthusiasts, most of the DTC brands won’t either have the resources or the category need to build a network of their own. That is where the opportunity lies for a NEW social network to think of shopping beyond lead generation and ads, and repurpose the concepts of forums, chat rooms, news feed, etc. to build a destination where consumers can truly connect with brands on an ongoing basis.

Instagram is the most likely candidate to build something like that with their new Shopping app but I am skeptical if they will be able to move beyond ads. Whoever ends up building such a destination, which I call a social brand-network, will accrue a lot of value that DTC brands are building. It won’t be a bad addition to Shopify’s commerce stack btw if they can pull it off.

 

As with any fundamental shift in any industry, there are winners and losers. Winners understand how the value chain is changing and how they are positioned to capture a large part of the value. The landscape of consumer brands is changing faster than expected. Amazon is without doubt the key driver of the change and capturing a lot of value. However, there is a lot of value to be captured elsewhere and I am excited about seeing how the different players rise up to the opportunities that exist.

Why are so many upstart brands in love with subscriptions

Why are so many upstart brands in love with subscriptions
Digitally native vertical brands are betting that subscription led bundling can counter Amazon led unbundling

New York Subway is a strange world, there are many things that one might be amazed by and ads are probably last on the list. But one can’t escape noticing them and recently I have seen so many DNVB (Digitally Native Vertical Brand — sorry, this is a doozy, but here is a good article on them) ads that I had to take time to make sense of them.

The one ad that really got me thinking was quip; they sell toothbrush on subscription, adopting the razor blade model, with the toothbrush head replacing the razor blade. My first instinct was why would anyone need this and why are so many upstarts foolishly trying to replicate Dollar Shave Club’s success. No doubt that CPG brands have been selling us overpriced products with very limited innovation for decades and they need to get disrupted, but why would I want to subscribe to a toothbrush!

Though I picked on quip, quick research will tell you that subscription model is all rage with DNVBs (MeUndies, Harry’s, Ritual, etc.) The interesting thing is that these brands don’t sell on Amazon! Contrast this to my recent post where I posited that Amazon marketplace is the AWS of brands which will (and has) led to an explosion of new brands, born on Amazon and selling to Amazon customers. However, these DNVBs are going for something else. They have an alternate vision of retail, one where they can co-exist with Amazon, owning categories and customers. They are betting on a brand led future of retail.

This vision is audacious and true success can only be guaranteed if these new brands can build (retain) pricing power over a large enough base of customers over a long period of time.

Building a brand led future of retail with subscriptions

The most important thing to appreciate around pricing power is that a brand can have it only if customers are coming to it directly and it has built defensibility against the hundreds of competitors that can challenge its portfolio of products, one by one. Selling on Amazon is inherently unbundled, it is search based and customers go about filling their cart one product type (detergent, deodorant, etc.) at a time. This exposes every individual product to head-on competition with tens of similar products, leading to an unsustainable race.

Alternate models of online retail: Bundling driven by DNVBs owning categories and unbundling driven by Amazon

DNVBs will build pricing power only if they manage to create a future where the bundled model on the left (above) can exist i.e. customers visit A.com (instead of Amazon.com) for buying all the products that they need for that category. DNVBs are hoping that subscription is the silver bullet help them get to that world. Let’s see how.

Subscription is a good test of customer need

Buying a subscription by definition means that a customer is agreeing to have a continued relationship with the brand; it is a privilege that the customer gives the brand. This gives subscription brands a better customer touchpoint than brands which model themselves around a one-time purchase. For sure, it’s harder to get a customer to buy into a subscription but simple trial plans (e.g. Harry’s) can help with that. Not all categories are suited for subscription but it is a model worth exploring for categories where product use is more frequent or a behavior around frequency can be shaped but no fundamental R&D is required to create great products.

Thinking “subscription first” pushes brands to design products and marketing that fits into the subscription model and see if customers are willing to give them that privilege to have the continued touchpoint. It’s a leading signal of a category’s readiness for disruption.

Subscription buys time

Customers get bored easily, novelty of products fades quickly, and there is always something that comes along that promises to change their lives. This means that customers are constantly prone to churning. So, one anchor product is good but brands need to keep it exciting for customers by making tweaks to the anchor product and introducing more ancillary products that make it worth it for the customer to continue the relationship with the brand. Doing this is not easy. With subscription, brands buy time to get to the point when they have more to offer to customers without having to reacquire them. This time window might be a few months, but it is still better than not having any.

Once DNVBs have solved enough jobs to be done for customers in a given category, they have likely given customers a reason to come to them directly, thereby proving success in the bundled model of retail.

Subscription enables building a product portfolio in a cost effective way

It’s well known that CAC has been rising steadily, requiring new brands to need more and more VC money to build a sustainable business. Given that CPG is not a winner takes all market generally (unlike tech), it is important for brands to figure out how to grow with less cash for the endeavor to make sense both for the founder and the VCs.

The secret sauce for CPGs historically has been that they have been able to cross-promote new products to their large customer base to ensure that CAC for any new product is under check. These products then sell on Amazon in mass (though at decreasing margins). Owing to an established touchpoint with the customer, subscription gives DNVBs a similar cross-promotion channel, allowing them to build a portfolio of products without spending exorbitant amounts of money and then selling them to a smaller set of customers but at better margins.

Subscription makes distribution more cash efficient

The need for high levels of working capital is one of the biggest issues faced by startups selling physical products. Inventory management costs and buyer/ supplier payment terms are a big part of that. By allowing better demand prediction and shorter payment terms, subscription allows them to be more cash efficient. Any cash conserved can then be put into product innovation or branding.


Overall, subscription is a great selling (distribution) model to explore and comes with many inherent advantages. Expect to see more of it with upstart DNVBs in commoditized categories with frequent product use. Online commerce is especially suited for experimentation around this model and, given the right incentives, there is always scope to shape customer behavior.

The AWS of brands

Amazon is building an ecosystem of features to power the next generation of brands

AWS is the single biggest reason for the glut of tech startups we see today. It has significantly reduced the time, money and skills required to go to market. There has been a lot written about Amazon’s recent push into online advertising and whether it could one day challenge Google and Facebook. While that is anyone’s guess, a direct comparison misses the point of how the world of brands has changed from the time when Google and Facebook were built and how Amazon is trying to build for the future.

Amazon is building an ecosystem of features, advertising being one of them, to fundamentally change the way new brands are launched. It is positioning itself as the AWS for new brand launches; simple, cheaper and better.

Over the last few years, there has been a secular trend towards DTC (direct to consumer) brands. These brands have emerged to fill in the need gaps created by years of minimal innovation in product and delivery mechanisms on the part of the incumbents. Recent acquisitions of Dollar Shave Club and Bonobos prove that these brands are creating something of value. While more and more DTC brands are coming up in all kinds of categories, discovering product-market fit continues to be a process of tying together multiple loose ends. One has to build a differentiated consumer website/ app, get consumers to visit it by deploying a range of social media strategies, and then make these customers cross the chasm to a sale by having them set up their account (and enter their credit card info).

There are so many things in this process that could go wrong that one isn’t able to get a clear signal on the value of the product itself. In addition, the fact that everyone is playing the same customer acquisition game creates a lot of waste, pushing up the cost of resources required to be successful. Consumers looking for a shoe aren’t always shown a recommendation for interesting shoes while they are shopping (like on Amazon) and are instead shown different shoes at different points of time on social media in anticipation of the moment they will actually buy a shoe. By allowing new brands to simply list their product and tell their story through advertising, Amazon is trying to be the quickest and the cheapest way to go to market. No hassles! Over the years, it has created an efficient infrastructure, designed for sales conversion, and it is now building tools to allow brands to plug into it at lower unit costs than elsewhere.

To be fair, Amazon isn’t there yet. It’s advertising formats are still limited and product discovery is tactical and therefore, not sufficient for different stages of brand building. However, a look at some recent launches, Spark and Interesting Finds, will tell you that Amazon is trying to close the gaps quickly. This is a replica of the approach Amazon has taken with AWS, building the infrastructure and then layering on top of it platforms/ services for different use cases.

Amazon Spark landing page

What makes me confident that Amazon will be able to build this branding engine is that fact that it has already been able to build a multitude of its own brands without us realizing it. This recent article gives a peek into the brands that Amazon already owns; Amazon Basics is just a tip of the iceberg. If you believe in the best customer theory as highlighted by Ben Thompson aptly in his piece on Amazon’s Whole Foods acquisition, then you can see that in it’s own brands, Amazon has found its best customer. Building a branding engine for “any brand” will now just be the application of this successful strategy.

Merchandising your homepage to win

Merchandising your homepage to win
 

One of the hardest but well understood aspects about building an e-commerce business is acquiring the breadth and depth of inventory that can keep shoppers engaged. However, the often ignored aspect in the online world is the art of exposing that inventory in ways that increases the profitability of the business. Physical retailers do a lot of up-the-funnel merchandising but until recently online players have mostly treated merchandising very tactically, limiting it to recommendations on product pages. While this down-the-funnel merchandising is efficient, it leads to a significant missed opportunity to increase the LTV (Life time value) of the already acquired customer.

Effective merchandising on the homepage can be used to engage the shopper at times when he/ she might not be considering buying from your online platform. However, getting it right requires a deeper understanding of user psychology. The problem is harder for players that focus on multiple verticals but solving it at scale can be very rewarding. It all boils down to what inventory to present, when and how.

In my mind there are four states that an effective merchandising strategy on the homepage could address:

  • Create consideration through FOMO (Fear of missing out)
  • Create consideration through needs that will likely arise
  • Shape consideration
  • Leverage previous purchase

Companies need to understand their core customers to know which aspect they should focus on more vs. less.

Create consideration though FOMO

This is all about capturing the fear of missing out. The idea is to drive purchase by creating a feeling of scarcity.

Daily deals: These are meant to get shoppers to come back for those small and big wins that they will feel great about. Everyone likes to win and deal hunting can be very addictive. These shoppers will visit your site few times every week just to check the new deals.

Featured deals (eBay iOS app)

Events: These are limited time events featuring curated inventory within a particular sub-category or for a particular interest. With or without discounts, the idea is to catch shoppers attention and show them what they are missing out on.

Curated sale events (eBay iOS app)

Trending: This is more reserved for hobbyists/ collectors/ arbitrageurs who like to be in the thick of customer tastes and capture either perceived or real value from it.

Trending (eBay iOS app)

Create consideration through needs that will likely arise

This is all about creating entry points for needs that will likely arise at some point. If your platform is there when the need arises, it is more likely to lead to a conversion.

Retail moments: These are inserts that funnel the shoppers into experiences that allow them to be smarter about the purchases they should make for special people on special days.

Valentine’s day insert (Amazon iOS app)

Seasonal needs: This is solely about capitalizing on the spikes in purchase patterns of your shoppers through the year before they go to any other site e.g. winters mean skiing, summers mean beach, etc.

Winter sports gear placement (eBay’s new homepage beta on desktop)

Periodic needs: This is about capturing the needs for consumables because guess what, consumables run out. Given the high frequency of this purchase, the rewards in terms of volume can be realized in short term though low percentage margin of the category might mean that the dollar margin rewards might take longer to materialize.

Frequent refill categories (Boxed iOS app)

Editor’s picks/ Deep curation: This is about convincing shoppers that what they are seeing is the best of the best and that they should consider bringing forward their purchase and not hold it for the future. The idea is to pick one product area and go deep into it with the help of rich images and content. It is easier to execute on narrow/ specialized vertical platforms.

Perfect backpacks (Spring iOS app)

Shape consideration

This is based on shaping consideration in areas where the shoppers have already shown some interest. If done right, this can lead to quick conversion.

Recently viewed: Very simple but effective way to ensure that the recently browsed products remain in the consideration set of the shopper while he/ she is doing price comparison across multiple platforms or simply waiting to make the purchase.

Recently viewed module (eBay iOS app)

Categories you browsed: This gives the e-commerce players continued opportunity to surface new/ interesting inventory in the specific sub-categories that the shopper was shopping in. Since it is not clear if it was the inventory or pricing or something else that led to the shopper not making a purchase, showing this module allows the platforms to convince shoppers to reconsider them.

Inventory from the recently browsed leaf categories (eBay iOS app)

Collections: Collections consist of community curated inventory that is expected to spike one’s interest. What makes them interesting is the personalization based on the browse behavior of the shopper. Showing shoppers collections from the sub-categories they were shopping in can help inspire them in a way that leads to an impulse purchase.

Collections based on shopper’s interests (eBay iOS app)

Top sellers in the categories you browsed: These are designed to close the trust gap that might be inhibiting shoppers from making a purchase from sellers in a category they haven’t previously shopped in. By showing the Top sellers and their followers, the platform assures the shoppers that the community has vetted the sellers and that they can trust them. Following these sellers can lead to continued future purchases.

Top sellers in the recently browsed leaf categories (eBay’s new homepage beta on desktop)

Leverage previous purchase

This is very tactical around making sure that the platform can make more of the already monetized shopper.

Buy it again: Straightforward approach to allow shoppers to buy the previously purchased consumables again.

Buy It Again module (Amazon iOS app)

Complements to what you ordered: The idea is to showcase complementary products to what has already been purchased. Not every purchase would fit this well but it can be a good way to create impulse purchase for some categories such as electronics, home & garden, cars, etc. In some cases, the shopper might not even have realized what complementary item he/ she is missing and this can help them figure that out.

Recommendations for fitness accessories based on Fitbit purchase (Amazon iOS app)

Merchandising is fascinating. The kind of merchandising a platform does tells us a lot about what the platform thinks it stands for. Its hard to get it right in the first go and that is what makes it so interesting.

The Apple-Android story will play out in product e-commerce soon

The Apple-Android story will play out in product e-commerce soon

“You can’t stop the future
You can’t rewind the past
The only way to learn the secret
…is to press play.”
Jay Asher, Thirteen Reasons Why

Times change. Industries change. Apple heralded the golden era of smartphones, and while it still is a dominant player, Android smartphones now have an 86% marketshare. Apple vs. Android battle has primarily been the battle of a closed integrated system vs. an open modular system.

A similar battle will likely play out in product e-commerce as it matures. In this battle, Amazon will play the role of Apple and other e-commerce players will play the role of Android. Apple will dominate but not to the extent we imagine right now.

Why Android equivalents will develop

Every industry goes through a journey of integration to modularization. When an industry is nascent, integrated players emerge to solve a tough problem. As the different components required to solve the problem become better understood and the interfaces between them become standardized, modularized players evolve. This is what happened in the case of smartphones. Apple defined the smartphone and then Android phones sprung up with different pieces of hardware and software put together.

Even after quite a few years of existence, product e-commerce is still a problem that has not been completely solved because of the heavy element of operations. Therefore, an integrated strategy still makes sense. Amazon is trying to pursue that strategy by owning the entire stack from logistics to merchandising. It is continuing to tweak on that stack and make itself more and more differentiated.

However, as e-commerce grows to capture more than just 9% of the retail sales in US, modularization will become more prominent. Logistics processes (packaging, shipping, authentication, returns) will become well defined and third party players will emerge (and are emerging) to manage these aspects. Similarly, thanks to Apple pay, Paypal, etc., payment will cease (and has ceased) to be as much a barrier as it used to be. All of this will lead to the shoppers becoming more comfortable with buying online from a range of websites (marketplaces/ retailers). Confidence/ trust will become less of an issue and the fashion and brand preferences of these shoppers will come to the fore. They will diversify beyond Amazon online the way they have diversified beyond Walmart offline.

How modularization will manifest itself

As this modularization happens, we will see the emergence of interesting buy-side experiences that will leverage the scale of more open marketplaces such as eBay. Specifically, eBay will become even more open and adopt a modular strategy to remain competitive. It has already opened up its inventory for anyone to utilize with the recent launch of its buy-side APIs. These APIs allow end-to-end transactions to happen off-eBay. However, it will not stop there. It will also partner with third party logistics providers to fill the gaps in its stack so that it achieves the baseline expectations of shoppers on delivery, returns, etc. Figure below shows the visualization of the stack.

Amazon’s e-commerce stack on the left and emerging modularized e-commerce stack on the right

Interesting buy-side experiences built on top of open marketplaces will fulfill very tactical but important needs similar to how Android filled the need of having a smartphone without going broke. A live example is Wikibuy, a Chrome plugin, that does price comparison when you are shopping online and tells you if it finds a better deal.

Wikibuy showing the savings if I was to buy this item on eBay instead of Amazon

More examples were highlighted in this WSJ article recently. Retailers such as Crate & Barrel are filling their inventory gaps by partnering with different intermediaries without owning the inventory. These intermediaries such as RevCascade (a dropshipper) are taking up a bigger role in curation and analytics to make sure only the best products show up on Crate & Barrel so that Crate & Barrel is able to maintain its reputation as a more tasteful yet exhaustive online retailer of home furnishings than Amazon. Retailers across different niches are also doing the same thing to make sure they continue to occupy the mind-space they had in the offline world in their domain (sports, fashion apparel, motor parts, etc.).

Why Amazon will continue to go the Apple way

While the industry transforms, Amazon will double down on the stuff that makes it special. This is obvious from all the investments it is making into things like Prime Air. This is the only way it will be able to make the billions of dollars it has spent building warehouses still count. Similarly, it would want to make the most of the economics of each shopper by not encouraging off-Amazon transactions. A shopper visiting Amazon’s site is much more profitable for Amazon than a shopper who completes the purchase off-Amazon. This is because of Amazon’s ability to sell ads which has become a $1 billion business already and the chance that it can promote bundling to limit its shipping cost as a percent of sales.

One not so obvious factor that will keep Amazon on it’s Apple like path is the competition with Walmart. Walmart wants to play the same game as Amazon which means Amazon cannot let go now.

The one big difference compared to the Apple-Android play in smartphones probably is that in e-commerce, I don’t see a Google that will dominate the modularized industry. That Google will have to be a player in the merchandising layer of the stack but it is not obvious who that could be. It might as well end up being multiple droids dancing.

The increasing centrality of SaaS players in e-commerce

The increasing centrality of SaaS players in e-commerce
 

Marketplaces thrive when their supplier base is highly fragmented. This ensures that they have a higher negotiating power and can, therefore, command a higher take rate. E-commerce marketplaces such as eBay, Amazon and many others have lived in this fragmented supplier state since they were founded. However, the accelerating shift of commerce from offline to online is changing these dynamics.

E-commerce SaaS players are inserting themselves as powerful middlemen between the suppliers and the marketplaces and/ or the buyers (graphic below). Serving multitude of seller needs, these players have become de facto gateways to selling online. In the process, they have become owners of large parts of the supply. Marketplaces can view this as supplier consolidation, and it will, sooner or later, lead to some of the margins shifting from the marketplaces to these SaaS players.

SaaS as the gateway to e-commerce

Shopify, BigCommerce and Magento are a few notable SaaS players, serving all businesses except the really large ones. Thanks to the convergence of multiple trends highlighted below, they will become increasingly important in the still young world of e-commerce.

Brands will push direct-to-consumer in a significant way

A lot of brands have not yet fully embraced the online world. They still honor and depend on the relationships with distributors/ retailers that they had established to thrive in the offline world. There is an increasing need and an opportunity for brands to go direct-to-consumer. They will need some offline distribution but not at the scale of what exists today. Online first brands such as Warby Parker and Bonobos have proven that there does exist a fundamentally different approach to sales and marketing, outside the old distributor/ retailer relationships. This approach is not only more profitable, but it also allows the brands to understand and serve their customers better.

As brands make this transition, they will look up to SaaS solutions to help them build scale online. They will invest in a stronger online presence, outside the marketplaces, to earn higher margins. SaaS players will help them build all the shipping, payments and merchandising solutions, and promise to keep them at the cutting edge. This will allow the brands to focus on what they know the best, brand building and delivering physical products that customers love.

Brands that rely on BigCommerce for their online presence

Offline and online integration will accelerate

As brands become more serious about online, they will stop treating it as an experiment and finally push to merge offline + online. This will mean that they will need a centralized view of their inventory, irrespective of where it is selling. They will demand that their point-of-sale (POS) solutions evolve to give them all the benefits that online has such as rich data analytics, seamless transactions and returns, etc. Again, they will look up to e-commerce SaaS players to make this happen. There is already an intense battle underway to own the shop counter and it is only going to get more fierce.

Shopify POS solution

SMB sellers will want to have a multi-channel presence

Small & Medium Business (SMB) sellers have historically picked their preferred marketplace, focusing first on building expertise on how to sell online. However, as the process of selling online becomes standard and more and more sellers come online, SMB sellers increasingly want to have a presence on multiple marketplaces to maintain their growth rates. Add to this the fact that marketplace policies/ algorithms can change arbitrarily leading to volatile sales, there is all the reason for sellers to want to smoothen out their cash flow by selling on multiple channels. A lot of sellers I have talked to sell on both eBay and Amazon. SaaS solutions are the best best for any seller who wants to do this. They offer a centralized administration across marketplaces much like Hootsuite does for social media.

Barriers to entry for new marketplaces will reduce

By owning the supply side, e-commerce SaaS players have solved the chicken and egg problem of starting marketplaces to some extent. Getting supply on-board is now a lot about partnerships. An example of this is Facebook’s partnership with Shopify that allows Shopify sellers to sell products using Facebook Shop. Shopify has similar partnerships with Pinterest and Twitter. The interesting thing about these partnerships is that they not only give the sellers using the SaaS solution (here Shopify) an additional way to sell, but also increase the bargaining power of the SaaS player by ensuring that the e-commerce ecosystem has more than a few dominant marketplaces.

Best seller products will come from the SaaS players

Even if we don’t consider the points above, there is a strong likelihood that many sellers will gravitate towards these SaaS players as their business matures and their needs evolve. This is solely because these SaaS players offer better seller facing products. They have the benefit of focus that comes from having a more narrowly defined job. For example SaaS Inventory UX solutions will always be better than that of Amazon and Walmart because Amazon and Walmart have limited bandwidth to keep on iterating on their Inventory UX. They need to invest on many more products including the ones on the buyer side.

In addition, SaaS players also have the advantage of being in an ecosystem of software developers who don’t feel the compulsion to make it big. SaaS ecosystem is full of apps that fulfill tactical needs such as drop-shipping, email marketing, SEO, etc. These apps just want to hook into the bigger SaaS platforms such as BigCommerce and make enough money to spin a profit. Marketplaces can never build the exhaustive set of such solutions. These solutions will help the bigger SaaS players capture a boarder seller base with niche needs. In addition, it will give them a chance to become deeply ingrained in the business processes of these sellers which always is the key to higher profits.

BigCommerce app store

Watching e-commerce SaaS players build a moat around themselves could offer interesting lessons for a lot of other industries that SaaS is trying to penetrate. It will be worthwhile paying careful attention to what happens next.

Leveraging the right User Generated Content (UGC) for your product

Leveraging the right User Generated Content (UGC) for your product
 

User Generated Content (UGC) is not new and is a pretty self-explanatory term. In fact, this post is an example of UGC. Companies have leveraged UGC in various ways to enhance their product and the world has quickly moved from seeing UGC as an innovative idea to facing a glut of UGC. The question now is, how does one decide what kind of UGC is good for their product?

In my mind, there are three lenses through which one could evaluate UGC for product fit. Note: In this post, I will limit the discussion to UGC for product focused use cases and not consider UGC for use cases in aligned activities such as marketing or customer service.

Impact on Serviceable Available Market (SAM)

Serviceable Available Market is defined as the part of the Total Addressable Market (TAM) that can actually be reached by the product (wiki). One’s choice of UGC can fundamentally change the nature of the product, thereby impacting its SAM. For example, eBay allows all kinds of HTML and Javascript in its item descriptions (example here); this makes sellers feel more in control and has historically helped eBay on-board sellers across multiple categories much faster, thereby expanding its SAM.

Example of product description on eBay

However, as online shopping has moved closer to retail standard, these differently structured descriptions for different items have led to a bad buyer experience. It is akin to navigating a flea market. While this experience still makes eBay feel like home to a certain segment of buyers, it severely limits its SAM because many buyers (especially millennials) are not comfortable with this user experience.

Alignment with the product and brand philosophy

The best way to explain this is to look at the contrasting levels of UGC on three e-commerce platforms: Amazon, eBay and Poshmark. Amazon behaves like a true retailer and makes sellers link their items to a product in Amazon’s catalog. The description for any given product in its catalog is user generated, with Amazon doing the final curation. This leads to a clean and consistent item description, resulting in a standardized buyer experience. eBay on the other hand was conceived as a true marketplace, designed to make any transaction feel more like a buyer-seller transaction than a buyer-eBay transaction. This led to it allowing all kinds of product descriptions, an example of which was shown above. Poshmark is a social e-commerce marketplace and therefore, it shows a range of buyer-seller chat content, from offers to emojis, on the listing page. It allows this content because it believes that this makes buyers feel part of a community and builds repeat purchase relationships. Something like this would be unthinkable for Amazon because retailers live and breathe standardization and elimination of distraction.

Example of buyer-seller interaction on Poshmark

Fit with the scale of the platform and the nature of its offerings

In the world of e-commerce, UGC is integral to the product and plays a key role at various points in the conversion funnel. However, what kind of UGC would work depends on the scale of the platform and the nature of its offerings. For example, user generated buying guides (example: this buying guide on antiques) are an amazing tool for platforms that sell items that involve significant upfront research from the buyer. Having good guides increases the probability that the buyer will buy from the platform whose guide he/ she read. Similarly, user generated collections (example: this collection on plush), which are a prominent part of eBay’s home page and are based on one’s search history, are great but only if the platform has enough breadth and depth of inventory across categories to be able to justify such prime real estate for them. They increase the probability of the buyer seeing something exciting enough that he/ she will buy it.

Plush collections on eBay homepage based on plush focused searches by the buyer

In contrast, Customer reviews, which generally are an awesome piece of UGC, could be a big problem for a mass platform trying to get into a niche category. Given it’s mass buyer base, platform’s niche items are likely to get bad or no reviews, which its buyers are trained to treat as a sign that an item is not worth buying. This could lead to such items getting into a vicious cycle that inhibits their future sale. Eventual result will be that the sellers in niche categories that the platform might have courted with a lot of effort will move elsewhere and the platform will be unable to diversify. To appreciate this scenario, think about why niche stuff sells so well on eBay. eBay buyers are trained to trust and experiment and not to rely on customer reviews because there weren’t any customer reviews on eBay till early this year! So, the choice of not having that critical piece of UGC (i.e. customer reviews) did work to reinforce eBay’s niche fabric.

Overall, while UGC is great, the decision on what kind of UGC to leverage is not straightforward. UGC can be immensely powerful as long as you leverage the right one and carefully harness it.