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.

American local buying & selling startups will soon hit the monetization wall

American local buying & selling startups will soon hit the monetization wall
 

There has been a lot of buzz lately about a new breed of Craigslist killers. OfferUp and letgo are the leaders in that pack and are into the business of facilitating local buying & selling. They have collectively raised more than $300 million in VC funding. The thesis is that with the emergence of mobile, there is finally a clear gap in Craigslist’s product strategy and that gap is good enough for these startups to exploit and build their own network effects.

While I agree with this thesis, I believe there are some market truths because of which these local buying & selling startups will never be big businesses. They surely will be relevant and will be used by millions of users but they will never make the kind of money that will guarantee their rapid growth once the VC money is gone.

In the matrix below, I have plotted local buying & selling startups in the broader e-commerce landscape. Ads and listing fees are the two prominent ways of monetization for companies in each of the quadrants.

Matrix showing the position of local buying & selling startups in the broader spectrum of e-commerce firms

My argument in that local buying & selling startups won’t be able to monetize enough if they were to stay in their current quadrant (1) and that it will be extremely hard for them to move into the other quadrants (2, 3 and 4) which are better suited for monetization.

Quadrant 1 is difficult to monetize

History and future of depressed prices

This year, OfferUp is likely to facilitate $14 billion in e-commerce transactions but it will make almost no revenue because it has not started to monetize yet. Craigslist facilitates a significantly higher $ value of transactions and earns only about $400 million in revenue. One reason for this low revenue is the nature of local buying & selling as a business. Given that most of the transactions happen offline, it is hard for Craigslist or anyone else to make money on transaction fees because of significant leakage. Another reason is that Craigslist doesn’t want to make more money than required to meet its costs and it has been open about that. Because of both these reasons, the market for local buying & selling has had artificially depressed prices with consumers assuming that listing should be free.

One might argue that if provided with a better product experience, customers will pay. That could have been true had it not been for the emergence of the unique phenomenon called Facebook. Facebook groups for local buying & selling have been pretty active and are free. The problem for the startups is that Facebook makes money from ads and ad platforms swear by one principle: ensuring a high level of engagement on the platform. By allowing consumers to buy & sell on Facebook, it is giving them another reason to come back to its increasingly utility oriented platform. It will never charge them for buying & selling because ads will allow it to monetize their presence much better. Sure, selling on Facebook might be a bit harder but it already has a highly liquid marketplace which works on mobile. So, it is good enough and sometimes that is all you need.

Limited value proposition for advertises

Local buying & selling startups in their current avatar are not attractive for advertisers. Users come to these platforms only for one narrow use case of buying & selling of used goods and given that this need doesn’t arise as often, the engagement levels on the platforms are low. This is a structural problem and is unlike any other major ad platform (Google, Facebook, Snapchat, Pinterest, LinkedIn, etc.). Successful ad platforms mean different things to different people and even different things to the same person at different times.

Moving into Quadrants 2, 3 and 4 is hard

Attractive local categories are now taken

Given the leakage we talked about earlier, the safest monetization bet for local buying & selling startups is to charge upfront listings fees i.e. fees for putting a listing on the platform irrespective of whether it sells or not. Only a certain type of seller putting a certain type of listing would see the ROI in paying that fee. Majority of Craigslist’s revenue comes from listing fees in three categories: employment listings, real estate listings and car listings. People get that and therefore, there are already startups that are targeted specifically towards these categories (example: Upwork, Zillow, Beepi, etc.). Like local buying & selling startups, these startups are designed to take advantage of the gap in Craigslist’s mobile strategy. They have already built a sizeable user base and offer a user experience that eases the friction in the specific category they are in.

Even if local buying & selling startups were to diversify into these categories, they would not be able to offer the desired user experience. The result would be an inventory with a selection bias. A quick look at cars on OfferUp vs. Beepi would tell you the difference. OfferUp has cheap old cars that few would want to buy whereas Beepi has real good cars. There is a direct correlation between the amount of effort one is willing to put in and the value of her item. Even if Beepi is more work, one would be willing to go through that if it means she can earn more for her valuable car. However, when one knows that her car is crappy, she would rather limit her agony, put it up on OfferUp in 10 seconds and make whatever she can. Sooner or later, buyers would realize this selection bias in the inventory of these startups, resulting in these startups capturing only a small part of these more monetizable categories.

Traditional e-commerce is a different ball game

eBay has been trying a transition from a P2P marketplace to a more traditional e-commerce business and it has been incredibly hard. Even if we assume that local buying & selling startups won’t make the same mistakes as eBay, some real problems will remain, making the transition extremely hard.

One, to scale up, these startups need to be acceptable to more buyers and that is possible only if they provide them with a significantly more structured in-app product experience and also with a significantly better service in terms of delivery and return. Both of these can be accomplished only if these startups get small and large businesses and not consumer sellers to become the dominant part of their seller base. As they make this transition, they will need to change their feedback policies and products (e.g. listing tools) to suit these larger sellers. How do you think that will make the consumer sellers feel? Marginalized and unimportant. All the promises of these platforms being a free land where users can list anything in 10 seconds and sell immediately would fall apart, leading to an outflux of these sellers.

Two, as these startups scale, their brand will turn from an asset into a liability. The effort that their marketing departments are putting to position these platforms as go-to destinations for local buying & selling will come back to bite them. Perceptions are hard to break and play a big role when buyers are deciding which platform to do what kind of shopping from. eBay has had this perception problem; people still refer to it as an auctions website for used goods when only 15% of its GMV now is from auctions and more than 80% of the goods sold on it are new.

— — —

There could be some monetization tricks that these local buying & selling startups might have up their sleeve. However, as things stand right now, I am skeptical of how the future will pan out for these startups. Monetization winter for these startups might be around the corner.

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.

Fascinating experiments with business models for fashion e-commerce dominance

Fascinating experiments with business models for fashion e-commerce dominance
 

In my last blog post, I argued why fast fashion e-commerce is poised to take off. While that is something most of us could agree with, the difficult part is pointing our finger to a strategy that we all agree will succeed. The level of experimentation with business models that is going on to find the secret sauce is just fascinating and that is what I intend to talk about here.

For the sake of convenience, I will define fast fashion again. As per Wikipedia, “Fast fashion clothing collections are based on the most recent fashion trends presented at Fashion Week in both the spring and the autumn of every year.”. The pyramid below shows where fast fashion is placed in the broader fashion world.

To make sense of the business models at work in fast fashion e-commerce, we need to first align on the levers that can make fast fashion attractive. In my mind, there are three levers:

  1. Build trust: Fast fashion purchase is inherently a social experience because there is a level of style and fit experimentation involved on the part of the shopper while making the purchase. Finding some way to build that trust online can go really far.
  2. Reduce price: Fast fashion is expensive for majority of the shoppers. If e-commerce players can figure out any way to increase the ‘value for money’, it can work wonders.
  3. Inspire: Fast fashion purchase is about feeling special and getting inspired. Anything that makes it simple of find that inspiration will naturally lead to a jump in conversions.

Now let’s take a look at the business models and see how they move these three levers. I think of these models being of five types:

  • Collector led
  • Curator led
  • Brand led
  • Platform led
  • Ad led

Collector led

Lever(s) impacted: Build trust

Collectors are people who bring interesting inventory onto a platform. They do the end-to-end work from sourcing goods to putting them up for sale to shipping them. While a lot of platforms have collectors, the first being eBay, there are only a few which are designed to encourage a strong community of collectors and shoppers to form. Poshmark is one such platform. It is defining social commerce in fashion, allowing shoppers to follow collectors, thereby taking them through a journey in which their confidence in collector’s offerings continues to rise. This confidence is not only about trusting the collector’s sense of style but also about knowing their fit. A surprisingly high percentage of clothing on Poshmark has the collector as the model. So once you know their fit, you are more confident about how the clothing will fit you.

Scanon’s candid modeling for her collection on Poshmark

Curator led

Lever(s) impacted: Inspire

Curators are people who curate the inventory on a platform in a way that improves discovery for shoppers. Curation is the holy grail for retail but with the advent of online commerce it has become significantly more expressive and diverse. The Net Set and I PS You are redefining curation, allowing shoppers to follow curators who inspire them and can bring to them style ideas that they wouldn’t have imagined otherwise. These styles obviously link to items that shoppers can then purchase, making curators commission on each sale they drive. With mobile filling up an increasing share of empty moments in our life, the option of browsing through such inspirational content is something a lot of us would love to have.

Curators on I PS You (left) and The Net Set (right)

Brand led

Lever(s) impacted: Reduce price, Inspire

We all love brands but we don’t really get to explore a large number of indie or local brands and also don’t really get to engage with iconic brands as often as we would like. Brands are the masters of merchandising (presenting their goods in the most effective way) but as shoppers have moved away from stores, these brands have struggled to replicate that skill at a scale that reaches thousands of shoppers. Spring is helping brands do exactly that. It aims to be the shopping mall that gives brands the control of their brand image (through brand managed photography) while taking up responsibility for driving footfalls. What is more interesting is that by eliminating the middlemen (retailers/ vendors) and allowing shoppers to engage with the brands directly, it can promise to offer goods for cheaper than what they would have been otherwise, thereby making fast fashion more affordable.

Kenneth Cole store on Spring

Platform led

Lever(s) impacted: Reduce price

The second hand clothing market continues to explode primarily because income disparity has been rising steeply. The rich just have a lot of money to spend on clothing that they sparsely wear and can afford to dispose off for cheap. So, it is now possible to find pre-owned goods from great brands and in great shape at substantial discounts. The only thing that was needed was to present these goods in a manner that makes shoppers feel good about buying them. thredUP is doing exactly that. Claiming itself to be a consignment store, it photographs and washes pre-owned merchandise sourced from consumers and offers them at steep discounts, in the process making fast fashion more accessible.

Discounted blazers on thredUP

Ad led

Lever(s) impacted: Build trust, Inspire

This one is interesting and I am not completely sure how this will evolve. No brownie points for guessing who the key player here is: Facebook. While this might seem like an obvious case of social commerce, leaning towards the Collector led model I described earlier, there is an inherent conflict of interest here because of which I am putting it separately. The conflict is that Facebook makes money off ads and it won’t give up any opportunity to make more ad money. So, it is not going to allow you to simply follow Shops and then not charge Shops any money to get your eyeballs. It would rather charge zero commission/ fees for a sale unlike other e-commerce platforms but charge Shops ad dollars to advertise their goods to the right audience. It remains to be seen whether the cost of advertising turns out to be more or less than the commissions/ fees sellers pay on sale but that is another story. One advantage with Facebook is that it understands you (the shopper) very well, so irrespective of how it monetizes its e-commerce push, it will show you stuff that you can trust and will find inspiring but it won’t fit squarely into any of the models described above. That makes it an interesting business model to watch.

A shop on Facebook with 2.2 million likes

I personally think that all the business models described above have a lot of potential and we will see great companies come out for each or a combination of models. However, if I had to place a bet on one model, I would say the Collector led model with a strong focus on social will see the greatest traction.

Irrespective of what happens, these are interesting times and it is fascinating to watch the experiments in search of a dominant business model.

Fast fashion e-commerce is at the cusp of breaking out

Fast fashion e-commerce is at the cusp of breaking out
 

E-commerce has gone through an interesting journey over the last decade, colonizing categories one by one. While some categories such as electronics lent themselves to disruption early on, resulting in the bankruptcy of incumbent brick and mortar stores such as Radioshack, others such as fast fashion have been famous holdouts. However, because of the confluence of multiple factors, fast fashion is now set to get disrupted by e-commerce and many are scrambling to take a piece of that pie.

In this blog post, I will argue why the time is right for fast fashion e-commerce to break out and in my later posts I will talk about what the winners could look like.

What is fast fashion?

It is important to understand that fashion is not one thing. Fast fashion, which is the 4th tier in the pyramid below, is very different from the bottom 3 tiers. The difference lies not only in the buyer needs but also in the industry setup from marketing to supply chain. As per Wikipedia, “Fast fashion clothing collections are based on the most recent fashion trends presented at Fashion Week in both the spring and the autumn of every year.” In other words, clothing that is readily available on Amazon today and fast fashion are two very different things.

Why has fast fashion been a holdout and why is now the time for the holdout to weaken significantly?

Online shopping wasn’t as much fun a decade ago because a lot of customer needs that were met in the physical world were not met in the online world. That changed. However, the needs for fast fashion shopping are more nuanced and it is only now that those needs can be met online. Below are the conditions that will allow those needs to be met:

  1. Social taking the lead: Fast fashion buying is an inherently social experience. You try out different styles in the fitting room and seek opinion of your dear ones on what to buy. At the time Amazon was building its presence online, majority of its traffic was coming from search and customer reviews were not as elaborate. So, the experience was very cut and dry. However, thanks to the rise of social media, now more than 30% of the referral traffic on the internet (Forbes article) comes from social channels. Social is inherently trust based with rich reviews from people you know, and that is something that fast fashion shopping really needs to improve its low conversion rates.
  2. Less onerous returns: Online fashion is notorious for returns. Returns sit in the 40–45% range compared to e-commerce average of 4–5% and 8% average for brick and mortar fashion retailers. To reduce the cost impact of such high rate of return, scale and efficient logistics are a prerequisite, both of which e-commerce didn’t have earlier. In addition, returns themselves are set to go down with the advent of virtual trial room technologies using AR (Augmented Reality) and better fit probability estimation by using ML (Machine Learning) on previous purchases.
  3. Frictionless payment: All of us know how painful it can be to enter your credit card information separately in each online destination you visit. eBay solved that problem many years back with Paypal and Amazon has done the same. Unfortunately, that hasn’t necessarily helped online fast fashion retail because Amazon and eBay are not the places to buy that stuff. However, this is set to change with Apple’s announcement at WWDC 2016 that will make Apple Pay the backbone of online transactions on many retailer sites, thereby taking payment friction out of the conversion process. Given the higher price point of fast fashion, iphone users would cover a big chunk of the target audience.
  4. Personalization step-up: Electronics (say smartphone — a big success for online retail) and fashion differ significantly in the level of fragmentation in both the supplier (brand) base and buyer preferences. Fashion is very fragmented and this is plainly because our body types and tastes have infinite permutations and no one brand can cover them all. This is one of the reasons why the conversion rates in fashion linger around the 1.8% mark compared to the average conversion rates of 3% in e-commerce. However, with advances in ML (Machine Learning), for the first time this problem could likely be solved in a scalable manner. It is yet to be seen if the interface for personalization will be chat bots based or something else but there definitely be much more personalization to suit your tastes.
  5. Emergence of mobile: Fashion shopping inherently has a long consideration phase. You need to look through many styles before deciding to make a purchase just to be sure you are getting the best thing thing for yourself. Mobile, on the other hand, is an amazing platform that is set up to capture our attention in moments of downtime as evidenced by the amount of time people spend on Facebook and recently Snapchat. A good part of this downtime on mobile could be captured by fashion catalog browsing so that the consideration phase can kick in. With more frequent touch points via mobile during this consideration phase, the eventual conversion rate will improve and will also become more predictable. This will allow fast fashion retailers to have more confidence of selling season specific fashions in a set time frame, thereby saving themselves from junk inventory, the biggest problem in fast fashion. This wouldn’t have been possible in a desktop only world.
  6. More buyers: Buyers are now much more comfortable shopping online than they were a few years ago and this is critical because fast fashion is a highly personal and emotional category and in such categories mental barriers to not doing something can be very strong. A mindset shift to at least give online fast fashion shopping a try can lead to significant expansion of the potential user base. In addition, there are those people who don’t have access to fast fashion options in their neighborhood but have the resources and aspirations to dress better. These people can now access the fast fashion inventory as more of it comes online.

Evolution of fast fashion will be an interesting one to watch. Stay tuned for my next post on what the potential winners could look like.

Build the “middle class” for your marketplace

Build the “middle class” for your marketplace
 

Thanks to a discussion with a friend one afternoon, I got thinking on the need for a marketplace to carefully breed a “middle class” among its supply side community. Middle class here refers to the group of supply side participants of the marketplace who are dependent on it for a significant part of their livelihood.

I argue here that not only is it beneficial for a marketplace to have this middle class, but it is critical that it proactively optimizes for the metric: speed at which a no-one on the marketplace can join its middle class. Let us look at why this is critical:

  1. At the point a marketplace becomes important enough that its suppliers depend on it for livelihood, they will go above and beyond to remain competitive on it. This gives the marketplace the power to drive fundamental changes without significant resistance as long as those changes are for the benefit of the marketplace long term. An example is eBay’s transition to selling more than 80% of its products on fixed price (“Buy It Now” in eBay lingo) from being completely auction based a decade back. Initially, sellers were not willing to give up the high margins that auctions got them but when some sellers were able to increase volumes substantially based on “Buy It Now”, others made the switch pretty swiftly.
  2. New suppliers will aspire to join the marketplace thereby allowing the marketplace to offer the buyers the choice and reliability they need. I have met a bunch of eBay sellers who have built a respectable business from scratch in less than one year. These sellers were not born experts at selling sports memorabilia, vintage dresses, etc. but they decided to experiment and learn through the process and the marketplace supported them. The first few sales made them realize that it is not that hard to sell and they never stopped.
  3. It will prevent the supply side of the marketplace from becoming consolidated which in turn will make sure that the bargaining power of suppliers is kept under check and the marketplace earns enough margin to reinvest into the business. Air travel marketplaces have been suffering margin contraction from the ill-effects of a consolidated supplier base (airlines).

Product and business can play a big role in helping build this middle class and accelerating the speed at which more suppliers can join the middle class. One great example is Fresh Finds by Spotify which allows new undiscovered artists to get discovered. It helps Spotify to be less dependent on that one Taylor Swift who won’t put her songs on the platform. Another good example is Uber giving a 5 star rating to all drivers when they start. This means that riders don’t freak out when they are assigned a new driver. They discover that the driver is a newbie only if they talk to him or her during the ride. This obviously requires Uber to have high confidence on their own driver onboarding process. A not so obvious example is Facebook which shows you articles from publishers that your friends share irrespective of how big or small those publishers are. This allows small publishers to make a mark as long as they are producing good content.

To get an idea of a marketplace where this process worked till it stopped working, think of YouTube. How often do you watch a video from an unknown artist on YouTube? Not very often. It is true that YouTube has created some YouTube stars but those are an exception. It has started to resemble the concept of upward mobility in the US, becoming harder and harder. The web is full of articles about artists not being able to make enough money on YouTube. All the recent initiatives from YouTube around YouTube Spaces, Fan Funding and even the most recent YouTube chat are primarily focused on solving this middle class artist problem.

Building marketplaces is tough and requires many optimizations at the same time. You can build a successful business even if you don’t actively optimize for building a middle class but that business might not end up being a marketplace and it will therefore lack the flywheel that makes marketplaces incredibly resilient.

Unraveling product prioritization for marketplaces

Unraveling product prioritization for marketplaces
 

Marketplaces are amazing businesses if you get them right. Getting traction both on demand and supply sides is incredibly tough and product has a big role to play. Having been customers on some of the well known marketplaces such as eBay, You Tube, Airbnb, Uber, etc., a lot of us have experienced the demand side products. However, the supply side product is a bit of a mystery and that is where marketplaces create a lot of their initial magic. To keep this magic going, there is a constant need to prioritize supply side product features and I hope this post can help with that.

Before we get into the details, it is important to realize that there is always one supreme skill or asset that is the biggest value add of a supplier to a marketplace. For example, for eBay sellers, this skill is sourcing — our sellers bring a lot of unique inventory on eBay based on their intuition of what sells. For You Tube, this skill is the art itself i.e. acting, tutoring, humor, etc. For Airbnb, it’s not the skill but the asset i.e. the property and for Uber it is both the skill i.e. driving and the asset i.e. the car. Now all supply side product features can be bucketed into three categories:

1) Features that give back time to the suppliers

2) Features that give back resources to the suppliers

3) Features that try to directly enhance the supreme skill or asset

Features in the first two categories allow suppliers to spend more time or resources on their supreme skill or asset by taking time or resources away from non-critical skill or asset. For example, for eBay, product features that reduce the shipping hassle and simplify the listing creation process fall in the first category, giving sellers more time on the weekends to do sourcing. Similarly, product features such as sponsored listing fall in the second category because they give sellers the cash flow that they can then invest into sourcing interesting products. Explicit guidance on what to source would fall in the third category because it attempts to help sellers improve their supreme skill skill (sourcing) itself. For most marketplaces, product features that expose more data/ metrics are the most obvious first step in the third category.

Now the decision of which category of features to focus on depends on multiple factors ranging from the value proposition of the marketplace, the industry it plays in, the state of maturity of the marketplace, etc. When a marketplace is young, it should ideally prioritize product features that fit the first and the second categories. If it does a good job with those, then additional investment into product features in these categories will only yield diminishing returns. For example if eBay’s shipping and listing flows are sub-optimal to the extent that an average seller gets only 2 hours a week for sourcing when they need 4 hours, then any product innovation on shipping and listing would have great returns. However, if eBay’s shipping and listing flows are optimized enough that sellers can spare the 4 hours they need, then any additional product innovation there won’t add significant value except for maybe some added goodwill.

The only marketplaces that need to spend significant product resources into the third category in their early days are the ones that are trying to achieve a high level of standardization from a skill or asset that can’t be easily standardized. For example Airbnb did put and has been putting a lot of effort into taking beautiful pictures of hosts’ properties. Uber on the other hand has a good degree of standardization but then driving is a pretty standardized skill to start with, so, it didn’t need to invest a lot into the third category of product features in the beginning. Now if in the future it wants to capture trip data and expose it to its drivers to show them when they braked too hard or took too sharp a turn at high speed, then it will be playing squarely in the third category of product features. The need for the third category of product features can become more obvious though as marketplaces mature and become complex and more competitive. This happens because suppliers become uncertain whether their skill or resource still adds as much value as it did before. This is happening with eBay and when that happens, product features in the third category can definitely help.

To summarize, while a lot of product features might seem like gems that can help your marketplace get to the next step of awesomeness, think carefully about your value prop, your industry and your maturity to decide what kind of product features you should focus on. Having a consistent framework definitely helps. Challenge your framework and adopt a new one if the old one doesn’t stand the test of time but don’t be all over the place. As I mentioned in the beginning, marketplaces are not easy to get right and your product is one of the most important levers you have.