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.

Creating efficient markets

Creating efficient markets

Markets for goods & services are constantly evolving and are never efficient. Thinking of market efficiency as a milestone is delusional.

Efficient markets are defined as markets where buyers are 100% clear about what they are buying, how much of it is available for buying and how much they should be paying for it. Being clear about what one should be paying implies a complete understanding of the true value of the asset one is buying.

Though markets for goods & services might have seemed efficient at multiple points of time in the history, thinking of market efficiency as a one and done thing is delusional. Market efficiency is a moving target and the only way to create and sustain a great business is to keep chasing that target.

I have been fascinated by the small and big changes that companies make in their push for market efficiency, with the goal of being the “market makers” of their industries. Abstracting away, I have found three ways of thinking to be the most impactful in moving the needle on market efficiency.

  • Build a distribution channel that can drive fundamental change in supply practices
  • Leverage the distribution channel to bring in completely new supply into the market
  • Think about the “Job to be done” to find opportunities to compete

Build a distribution channel that can drive fundamental change in supply practices

Building a new distribution channel or rethinking an existing one can help create/shape demand, enabling one to push fundamental changes in supply practices, thereby setting the industry on the road of steadily improving market efficiency.

For example, let’s look at what Amazon has gradually done in the last couple of decades

  • When Amazon started selling books over the internet, it massively improved the access and convenience of buying books, primarily for titles that were not the hot selling ones. This activated the latent demand for these titles and gave Amazon a reason to procure these titles in bulk for lower price per book than one would pay for to buy the same title at a mom and pop store (if the title was to be found there!). Amazon was then able to pass some of the price benefit to its buyer base. These not-so-hot titles started to be priced closer to their true value, the sign of a more efficient market.
  • As online commerce grew, Amazon opened up into a marketplace, allowing sellers (most of them with warehouses) to be the conduits between the manufacturers and Amazon’s buyers. Not saddled with high real estate costs (unlike mom and pop stores), these sellers were able to sell the goods for cheaper and Amazon was able to push market efficiency in many more categories at once.
  • As the share of online commerce has increased, both Amazon and manufacturers (Nike for example)are finding it better to deal with each other directly , allowing both of them to capture higher margins while also offering better experience and lower prices to customers.
  • Now with online commerce becoming the preferred way of shopping for a large number of people, Amazon and manufacturers are finding that there is no longer a need to waste money on fancy packaging to draw attention of customers to products sitting on retail shelves. Fancy packaging had also made it hard to optimize shipping package sizes. With its Frustration-Free packaging, Amazon is truly demonstrating how a different distribution channel (here online commerce) can change supply practices and really drive prices down.

The net result of all of this is ever decreasing prices. Turns out what might have seemed like an efficient market with Walmart’s “Everyday Low Prices” promise was not efficient after all.

Leverage the distribution channel to bring in completely new supply

Differentiated distribution channels can also allow one to tap into a completely new source of supply that can change the market dynamics.

Take the case of Uber and Lyft. By making it so easy to start driving for money, they were able to tap into the private car market for drivers. These new drivers owned their cars anyways and didn’t have the huge loans/contracts (from medallions for example), allowing them to experiment with the new channel. The fact that the rides were subsidized, further helped in creating additional demand and supply. As a result, Uber and Lyft were able to reset the baseline on cab price in all the geographies, some of which might have seemed individually efficient prior to them entering those cities.

Think about the “Job to be done” to find opportunities to compete

Abstracting away from the product/service and thinking about the Job to be done can help one see new opportunities to bend the curve on market efficiency.

Take the case of Uber and Lyft again. The Job to be done is to get from Point A to Point B and there are multiple ways to do that, Uber and Lyft being one of them. While Uber and Lyft are great for medium/long rides, it is questionable if they are the best solution for rides shorter than 5 min (as long as you are not carrying grocery bags!). There should be a way to pay lesser for short rides. While Uber is trying to bring efficiency into this market with Express Pool, there is an opportunity to reimagine the solution for short rides. LimeBike and Bird are trying to do exactly that. By introducing a completely different product targeted towards a specific use case, they are driving further efficiency into the mobility market which might have seemed to already be very efficient with Uber and Lyft.

Another interesting example of finding opportunities based on the Job to be done is eBay’s new product page (iPhone example). Its an attempt to show buyers the spectrum of value (i.e. products in different conditions) for them to make a better decision on what to buy. While eBay can’t always compete with Amazon on offering lower prices for new items, by understanding that buyers have different Jobs to be done, they are still able to push the curve on pricing. eBay has been selling phones in different conditions for years but by simply showing its best pick for each item condition, it has simplified the buying decision like never before. While transparent pricing across conditions might not matter to some of us who are set on buying a new phone, it is definitely making the market more efficient for folks who want a good phone and are open to discovering what works the best for them.


In summary, the idea here is to drive home the point that markets are never efficient. Its wrong for established players to rest on their laurels and think that they can milk money since they are the “market makers” of their industries. Similarly, its wrong for startups to give up on markets thinking that they are already efficient and there isn’t an opportunity. Thinking deeply about the nature of the distribution channel and Job to be done is a good way to find an opening to move the needle on market efficiency.

Marketplaces and trust

Marketplaces and trust

Trust is one of the most important aspects of building a liquid marketplace, but trust is hard to quantify. Lately, I have been wondering if there is a playbook around building trust or does the answer depend on what type of marketplace one is building. I have landed on the conclusion that there is playbook as long as marketplaces can confidently answer the following question:

How likely is it that trust in a seller would influence the decision making of a buyer during a transaction?

This question is important because it helps bring clarity on how big a part of the trust equation should sellers be, resulting in a strategic decision on which of the two paths to take to build trust:

  • PATH 1: Deeply focus on building trust around individual sellers. Prominent examples are eBay, AirBnB, Thumbtack, etc.
  • PATH 2: Commoditize seller trust and build trust around the platform. Prominent examples are Amazon, Uber, etc.

To answer the question above, marketplaces need to have a good understanding of the uniqueness of the inventory on the marketplace as the buyers perceive it. PATH 1 is the natural choice if the perceived uniqueness of the inventory is high whereas PATH 2 is the natural choice if there are many sellers selling almost indistinguishable goods/ service. Below are some examples to illustrate the point.

eBay: Pioneer of PATH 1

eBay started as a P2P marketplace for selling unique items. Even if the item on sale was a Motorola Razr phone, there were many of them in many different conditions (on the spectrum of new and used). These conditions increased the perceived uniqueness of the inventory, effectively resulting in buyers treating them as different SKUs. In the absence of objective criteria for decision making, trust on the person who is selling (i.e. seller) became much more important. Buyers defaulted to sellers with higher positive feedback under the assumption that those sellers were honest about describing their products with details such as “the phone has a scratch on its back” as opposed to newer sellers who might be selling the phone for lower price but might be hiding something.

The figure below shows how eBay likely viewed its inventory. It considered that only a small minority of exact same items would be sold by multiple sellers. Given this view of its inventory, eBay defaulted to building a trust machinery centered around the seller and the platform receded in the background.

eBay: Only a small minority of exact same items would be sold by multiple sellers

Amazon: Pioneer of PATH 2

From early on, Amazon behaved like a retailer. It figured that by almost always selling new products, it can push seller trust to the sidelines and still kickstart a liquid marketplace. This made sense because if all the sellers on the platform were selling brand new Motorola Razr phone, the buyer decision making would simply be around price and possibly shipping. There would be no subjectivity around the SKU since it is brand new. That would put the platform in a position to commoditize seller trust as long as it was able to get enough sellers to create perfect competition among them.

The figure below shows how Amazon likely viewed its inventory. It considered that a large majority of the exact same items would be sold by multiple sellers. Given this view of its inventory, Amazon defaulted to building a trust machinery centered around the platform and the seller receded in the background. It built products such as Amazon Buy Box to truly commoditize seller trust.

Amazon: Large majority of the exact same items would be sold by multiple sellers

AirBnB: Best adopter of PATH 1

AirBnB almost replicated eBay’s model of building trust because the perceived uniqueness of inventory on AirBnB is as high as it gets. There is no SKU (room) that is listed by two or more sellers (hosts). Host has an information advantage and therefore, having trust in the host is important.

The figure below shows how AirBnB likely views its inventory. It considers that no exact same item (room) would be sold by multiple sellers. Given this view of its inventory, AirBnB adopted PATH 1, leading to it launching trust programs such as AirBnB Superhost.

AirBnB: No exact same item (room) would be sold by multiple sellers

The important question is that if AirBnB’s trust model is exactly like eBay’s trust model, then why do we trust AirBnB more in its category (travel accommodation) that we trust eBay in its category (goods)? The answer is that AirBnB is in a category that is hard to standardize; there isn’t an Amazon play possible at scale. And with features like Trips, AirBnB is trying its best to further deepen the uniqueness of inventory and make decision even more subjective. That is the reason I call AirBnB as the best adopter of PATH 1.


Now, how does this thinking about trust translate to services marketplaces like Thumbtack? Does it matter if the buyer is getting interior design from Service Provider A or Service Provider B? Yes, it does. How about plumbing? Maybe not, depending on how complicated a plumbing job it is. So, it is likely that some services might lend themselves to the Amazon model of commoditizing Service Provider trust while others won’t. Thumbtack has taken the approach of building trust via PATH 1. No surprise that Amazon Home & Business Services has defined the services (SKUs) very specifically and has adopted PATH 2, leveraging the trust it has already built as a platform.

For context, eBay has seen its focus shift towards selling new items and is experimenting with PATH 2 as evidenced by these fancy new product pages, applying the Amazon Buy Box concept.

eBay tweet.png

Overall, the decision of how to build trust comes down to the perceived uniqueness of the inventory of the marketplace. Being thoughtful about it, with an eye on how the category and the competition are evolving can make all the difference.

Marketplaces and pricing

Marketplaces and pricing

An approach to building for growth through pricing

Marketplaces help demand and supply connect and transact, and in return, they extract some value from the transaction. One of the biggest levers that marketplaces have to acquire and retain demand is pricing. When the supply is still scaling and the low price — high demand flywheel hasn’t yet kicked in, pricing is typically hacked and has no correlation with reality. However, to build a sustainable business, marketplaces need to invest in understanding the pricing dynamics of their marketplace sooner rather than later and they need to be methodical about it. “Pricing products” can help them build this understanding and in the process, they can make pricing a differentiator.

I define “Pricing products” as products built in the service of using pricing as a lever to drive GMV growth

“Pricing products” manifest themselves in three levels:

The pyramid of “pricing products”
  • Level 1: These are products focused on removing lack of pricing transparency as a barrier to decision making for customers
  • Level 2: These are products designed to opportunistically deploy pricing tactics and influence customer decision
  • Level 3: These are products designed to offer guaranteed pricing consistently on certain goods/ services, thereby locking-in customers

Level 1: Removing lack of price transparency

Bringing price transparency is the first step for marketplaces to start adding value beyond the obvious “allowing demand and supply sides to connect”. By doing this, they abstract away the noise in pricing inherent in a fragmented supplier base, and present the supply-side goods/ services to customers in a more consumable form. The idea is to make sure that pricing noise doesn’t become a barrier in customers choosing to use the marketplace.

The earliest scalable implementation of this was Amazon Buy Box which allowed ‘n’ sellers, all selling the same product ‘a’ to offer low price in result of their listing showing up as the default buying option whenever product ‘a’ showed up in search results. It was simple but it took off the burden on part of the customers to find the best price for the product ‘a’ they wanted to buy. eBay, on the other hand, still requires customers to figure out the best deal, thereby, earning the reputation of a flea market.

A more nuanced example is Amazon removing lack of price transparency across thousands of SKUs of CPG goods by distilling all pricing down to one specific unit of comparison — ounces. This is powerful because it has not only allowed Amazon to minimize decision remorse among buyers, but has also enabled it to successfully demonstrate to buyers the value of opting for CPG subscriptions as opposed to one-time purchases. Subscriptions, as anyone can guess, is a great business, leading to a much more stable revenue stream.

Amazon showing “per ounce” price for all toothpaste SKUs

Level 2: Deploying pricing tactics opportunistically

Pricing tactics are a collection of opportunities where marketplaces consider that by inserting themselves into the supplier pricing, they can fundamentally influence the customer decision. These are opportunistic insertions meant to drive goals on customer acquisition and retention, while maximizing the value they can extract from customers.

Uber/ Lyft, with their approach to surge pricing, have long been the visible leaders in pricing tactics. Their switch to upfront pricing is an extension of that tactic, giving them even more leverage. Not only does it address the problem of price transparency referred to above, but it also acts as the foundation for loyalty programs such as algorithmic push of promo codes that can make a customer’s ride to destination ‘x’ on Uber cheaper than that on Lyft, resulting in him/ her choosing Uber for that ride. Underlying that pushed promo code is the understanding that converting the customer to choose Uber for that ride is net positive (higher LTV) for Uber.

Level 3: Acting as a price guarantor

Pricing guarantee is the act of marketplace offering fixed pricing for certain goods/ services. It differs from the pricing tactics above in that these price guarantees persist for days or months and are intended to lock-in customers for those goods/ services, and possibly beyond.

While Amazon Prime has been one of the earlier implementations of a price guarantee (in this case shipping price), Uber/ Lyft are more interesting examples. Uber launched a monthly pass while Lyft caps the price of rides in SF. These are initiatives designed to build/ retain the demand base with the hope that supply base will scale to meet the demand, in process reducing inefficiencies and creating an incentive for suppliers to fund the discounts inherent in guarantees themselves.

Lyft’s fare fencing in SF

The ability of a marketplace to execute on the three levels of pricing products mentioned above would typically increase as it matures and captures more data. However, if done the right way, these products should be built in a particular sequence. It is hard to become a price guarantor without having experimented with pricing tactics to understand customer response. Similarly, it is hard to experiment with pricing tactics without removing price ambiguity in decision making. The first step in removing price ambiguity is to understand what the marketplace is selling and how suppliers are pricing it. The earlier marketplaces get started on that, the better.

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.