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.

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.