tech

E-commerce startups

Very few successful e-commerce companies were started in the 2000s. Since then, e-commerce startups have enjoyed a revival. Dozens of companies have gotten traction and venture dollars have followed. Phrases like flash sales, social commerce, and subscription commerce have entered the startup lexicon.

As Josh Kopelman points out, the list of the top 15 e-commerce companies has barely changed over the past decade, in sharp contrast to the list of overall top internet companies. This can be interpreted in one of two ways.

The bull case is that startups neglected e-commerce and are now waking up to the opportunity. The key equation driving e-commerce is: profit = lifetime customer value minus customer acquisition costs. New marketing strategies (“content plus commerce”, social commerce, etc) lower acquisition costs enough to make startups competitive with incumbents.

The bear case is that scale and brand effects make e-commerce incumbents nearly unbeatable. As one entrepreneur said, “If it has a UPC code, Amazon will beat you.” A lower price is just one search away. The only way to compete is to sell used stuff or make your own products (or provide a marketplace for those things). The fat head (large incumbents) and the long tail (artisanal shops) will thrive, but the middle of the distribution will suffer. (The public markets seem to agree with this assessment, e.g. Overstock trades at 0.2x revenues.)

What most people agree on is that e-commerce as a whole will continue to grow rapidly and eat into offline commerce. In the steady state, offline commerce will serve only two purposes: immediacy (stuff you need right away), and experiences (showroom, fun venues). All other commerce will happen online.

Categories: tech

145 replies »

  1. General thoughts on the eCommerce technology enabler ecosystem (demandware, channeladvisor, baazarvoice et al)? Asking the obvious question: how do you see the Fat Head/Skinny Tail effecting the development of that ecosystem?

  2. I think if they serve the small companies they are very interesting. E.g. Shopify, Stripe, Magento (ebay) etc. Not as sure about the ones who serve the middle of the distribution.

  3. I really like that post by Albert but I think he’s talking about something somewhat different that could end up helping incumbents. Transactions are one thing but supply chain, fullfullment etc are another.

  4. The bear case is correct if you compete exclusively on price. Too many eCommerce businesses focus on the product, when in fact it’s the customer list that is the real value in the business. Build a list of loyal customers who trust you, and they’ll buy from you again and again and again. How many of us have a relationship with Amazon? Or really trust the product reviews? Wouldn’t it be great if you could call Amazon and ask a customer service expert there questions about a specific product? You can’t. Build a list of customers that trust you, and your LCV will grow tremendously.

  5. But even if you help them, if they can buy it for 10% less somewhere else will they really stay loyal? I don’t know, but people who know e-commerce much better than me are skeptical.

  6. Always enjoy your posts Chris, especially this one! The closest thing to our artwork having a barcode is the artist signature. Disrupting the original art market is what we set out to do the past 6 years and we’ve been able to see the growth in collectors moving online with each passing month.

  7. Another factor that has historically inhibited e-commerce startups (says she with considerable feeling, having spent a disproportionately large amount of time dealing with this for
    https://www.makelovenotporn.tv/): the difficulty and complexity of putting payments infrastructures in place when working with old-world-order financial institutions and processors. Which is why challengers like
    https://stripe.com/ and
    https://www.dwolla.com/ are so welcome when it comes to democratizing the ability to do business and take payments online.

  8. Based on anecdotal evidence, I’d tend to agree with you Chris. I’ve definitely “TV shopped” at Fry’s and then ordered it at Amazon, for example. IN other cases on the other hand, I’ve willfully paid more for books at my local Books Inc (vs Amazon) because I think of it as a sort of service fee – ie, a subscription service allowing me to come look at all the books I want.

  9. I agree (note I’m biased as I invested in Stripe). In general I love the trend to make it easy for small companies to get online by providing payments, websites (shopify), marketplaces/marketing (ebay & etsy) etc.

  10. Great post as usual, except for the last line. It seems a tad bombastic to state that all other commerce except for immediacy and experiences will happen online. Unless your definition of immediacy and experience is so broad that it renders the two categories useless.

  11. If you allow consumers to discover new products on the e-commerce site and make it quick and easy to buy, they’ll buy from you. If they think, “I want a coffee maker” they’re going to amazon. If they think, “I’ve heard so much about X online service, I wonder what all the talk is about. I’m going to try it…” AND you’re able to engage, educate and entertain then the sale is yours. They’re essentially paying a premium because it’s time better spent on the engaging e-commerce site.

  12. Chris…

    Isn’t the real change that marketplaces are in many ways the new model as getting found by customers is really the larger issue especially in the artisanal model?

  13. +1on used goods :) We’re at the beginning of an ecommerce renaissance. Apparel alone is a $300B+ business and the vast majority is done offline. Ecommerce has nowhere to go but up.

  14. Here is my conundrum.
    I don’t have a good sense of exit value here. Both Diapers.com and Zappos traded around or slightly above
    1X revenues (which is right where BlueNile is). Will any of these companies see a superior multiple to that?
    Did the VCs that invested in these companies use 1X as their planned exit
    value? (maybe they did, I don’t know).

    I understand there is an old VC investment adage: “don’t go
    in the entrance unless you know what the exit looks like.”

  15. Great post, Chris – I think the biggest opportunity in e-commerce right now are vertically integrated companies that combine strong product design with a unique brand experience. Some examples are Shoedazzle, Frank & Oak, Indochino, Beachmint, Julep or Chloe & Isabel. It is hard to pull off though (with product design and supply chain management being the 2 toughest challenges)

  16. You may want to reconsider. Gumroad seems to be taking your approach. I can’t say how well it’s going for them but you may be on to something. What’s your user feedback telling you?

  17. sure – Amazon itself offers one way – service, via Prime & 1-Click. sometimes their other sellers are cheaper – right on the same page – but w/ Prime i get it much faster w/o friction.

  18. It depends how you define easier. I know many, many people who would much rather try on clothes and buy in-store even if they’re paying a little bit more. That could fall under “immediacy” but I think it speaks to something more implicit to the virtual shopping experience. For many things, people want to tangibly feel them and try them out, necessitating at least a third exception category that we might call “physicality.” I think cars are a great example. No one wants to buy a car straight from online. They want to drive and touch and feel the movement. I think in this case we have the element of immediacy, experiences, and physicality. Could be “physicality” is a culture thing that will wash out as more people get used to ecommerce or, and I think this is more probable, it’s an element of online shopping that will forever be missing.

  19. I think that’s the “showroom” argument. Offline will continue to be a place you go and touch stuff, but they will no longer hold inventory, do fulfillment, handle payment, etc.

  20. Online delivery will get down to a few hours but (the argument goes) there will still be times someone needs to run down the street for essentials or just want to buy and take something on a whim.

  21. Yes, the “bearish” people I mentioned all cited companies like that (also Warby Parker) as companies they liked, despite their skepticism of other e-commerce startups.

  22. A very seasoned and savvy merchant once told me, Internet commerce is good for two things – price and exclusives. Amazon will beat you on price, so you have to beat it on exclusives.

  23. Zappos was/is not the lowest price. There are a lot of price based shoppers, but I firmly believe a large segment of the market are value based shoppers. Zappos delivers value.

    I think one of the areas not fully explored yet is the democratization of product knowledge. Pinterest has a great start on the inspirational side of the equation, but the informational side is wide open. When one walks into Home Depot, they are often after a solution/method, not a product. The orange bibs deliver that solution. I don’t believe we have created the same effects with online commerce to date.

  24. Lots of room for ancillary tech in the space as incumbent platforms are not easy to replace, especially in established large business processes. As more
    manufacturers go direct to consumer growth should remain pretty self-sustaining.

    Business will not succumb to using third party channels for all distribution. Differentiation of brand will come from owning their own distribution, and adding as much value to the consumer as possible. I think the Target and Amazon break-up is a good example of such intent.

  25. Great post, some thoughts-

    One of the biggest reasons the e-commerce top 15 have faced less turnover is because 9/15 out of them existed before the internet existed, and have huge brick & mortar footprints. The top 15 for all web properties were fighting against companies in new industries with very little history & shallower moats – so the turnover has been brisque. This may slow down over time as internet incumbents get better at protecting their territory, we’ll see. Regardless, e-commerce disruption of the top 15 is more difficult when you have to compete with the offline footprints/histories/marketing power of the Walmarts/Ikeas/etc of the world.

    Regarding the “middle” of the distribution – a quick glance at the IR500 confirms how stark the dropoff in revenue is between Amazon and the rest of the e-commerce landscape. That said, we’re still very early in training e-commerce talent (not to mention launching e-commerce, even for brands/retailers that have been around awhile). We’re going to see more and more “medium”-size players grow up as they figure out e-commerce and get more sophisticated.

    Additionally, new brands are more often starting with an online launch; 20 years ago, they would have started with wholesale, catalog, and/or TV/home shopping before going into direct brick & mortar. 20 years from now, many of the new household brands will have started online. This to me connotes something so much more than artisanal or long-tail.

    Moral of the story – online consumer behavior and the e-commerce pie is growing at a CAGR that is leading to a ton of revenue to be made across the large, medium, and small guys.

  26. Thanks Chris! Though the first wave was about commoditization (UPC comment) this wave online and offline is about being a “merchant” (point of view, authority, experience etc). See Fab, Warby, bonobos etc. love the excitement in commerce, just don’t over fund so people end up doing crazy things (gerbils, sling shots, Super Bowl commercials)

  27. The people I talk to make a sharp distinction between Warby/Bonobos where they make their own product and Fab+others who don’t. Not sure I agree but that is the debate people are having.

  28. An additional important factor I think is that Amazon’s commitment to service and customer experience over short term profitability have trained consumers to expect more than most startups can really deliver. Free shipping + returns + fast response times are hard to compete against. Much harder than in the offline world for the new entrant or boutique to win against the scale player on service. Also just raises the costs to compete for everyone.

  29. Amazon trades at 1.5X trailing revenue , but that’s a leader premium. Now I’m curious to see if there are any recent examples at scale that disprove your theory.

  30. i’m in the bullish camp. i am the self-proclaimed world’s biggest amazon fanboy but even i must admit you can outperform amazon on all dimensions — products they don’t carry at lower and higher price points. and since amazon is a true platform company they got lots of stuff for ecommerce startups to utilize, so it is not really direct competition.

  31. Great post. If you’re selling something utilitarian the lowest cost/easiest transaction will always win. However, creating an experience for customers goes a long way, whether that experience is online or offline. The brick and mortar stores with the highest sales per sq foot are all brands that create unmatched experiences that customers are willing to pay a premium for: Apple, Tiffany & Co., Coach, Lululemon.

    The companies I find most interesting in the e-commerce space are combining online and offline experiences in disruptive ways. Chloe + Isabel, Warby Parker, Everlane, and Stylemint come to mind. After working for brick and mortar retailers we started our company, For the Makers, in order to create an actionable Pinterest. By combining online inspiration and tutorials with the supplies customers need to actually make something offline we’re able to provide value through that experience in a way that neither big box stores nor Amazon can. I can only imagine we’ll see new combinations of online/offline experiences in the future.

  32. I’m biased as well, (I work for Shapeways) but there is another group of commerce sites that are doing quite well. We call them ‘creative commerce’ sites, but you might look at them as customizeable commerce. These are companies that may or may not manufacture their own goods but actually allow you to create things on their site and then buy them. They escape the commoditization of ecom by creating unique content that may (or may not) be personal to you that you can’t get elsewhere.

    Simple examples of this are Spreadshirt, CustomInk, and Gemvara.

  33. My question is what will all those mobile saas serving local shops do if your case is right as they are marketing themselves as they have the answer to the impending switch to online ecommerce from offline?

  34. Don’t forget that Amazon has AWS, Kindle, and similar forces which may be driving this up. IMO, Amazon has been collecting a lot of puzzle pieces that haven’t quite come together yet, but when they do the company’s value will jump significantly. This makes me want to buy today despite that premium.

  35. Hey there. Jason Goldberg, CEO of Fab here.

    I thought I’d be brave enough to wade in here.

    As you can imagine given the company I’m running, I’m in the bullish camp. I mean, come on, we scaled Fab to $100M+ run-rate in less than a year and we’re tracking to do close to 150M for 2012. Low acquisition costs (social + mobile) have resulted in 6M+ members in 14 months and we just added 1M in July. July was also a killer month for us thanks to mobile + social. We were braced for a seasonally bad month but mobile especially led to a record setting month for us. I can tell you this with certainty, Fab’s iPad members are off the charts in terms of LTV and people who join Fab via iPad are more than 10 times more valuable to us right now than someone who joins via web. Likewise, users who engage in our social features have 3 to 4x LTV vs. those who do not. So, we’re at the beginning of some very powerful trends with mobile and social.

    Yet, despite all that, I also agree that it’s an Amazon world we play in. They hold most the cards in e-commerce. If you know exactly what you want, Amazon is typically the best place to buy it because they’re not so much a store as they’re the world’s best supply chain and logistics company.

    But, we (and others) can compete in an Amazon world and build a really big and interesting business.

    Here’s some of how:

    1. Selling stuff they don’t. >90% of the products we sell on Fab are not on Amazon. How do I know? We used Amazon’s own mechanical turk to find out. :)

    2. Better product discovery and browsing. Amazon is a catalogue. Fab is a discovery engine. As I said above, Amazon is the best place in the world to buy the stuff you know that you need; Fab is the best place to discover the stuff you don’t know you need.

    3. Mobile. Fab gets 30 to 40% of our daily visits from mobile. We’re building towards a world where mobile dominates. No one has yet solved for that.

    4. Social. We’re still in the early days of shopping with friends.

    5. Just making it fun, colorful, emotional. That’s how offline shopping is. Who says online shopping has to be so drab and transactional? We’re inventing entire new experiences.

    6. Making markets. Fab is still in the early stages of making a market for design goods. We’ve already created a platform that previously didn’t exist for tens of thousands of people who make stuff – designers – to promote their products to an eager audience.

    7. Building a platform. We’re hard at work on that. Early stages. But it’s quite possible.

    8. Building a brand. Brands are emotional experiences not transactions. There are still many great opportunities to build long lasting e-commerce brands.

    and more…

  36. e-commerce has been one of the major bright spots for many startups in the Arab world. Examples are Souq.com which is closest to Amazon in the Arab world as well as Markavip which has enjoyed phenomenal success as luxury e-commerce site. These sites are enjoying success for two reasons: first, they offer a business model with a clear revenue model which appeals to risk averse investors in the Arab world; Second, there are number of local issues such as e-payment system and delivery that make it difficult for a company such as Amazon to enter. So, I am bullish on e-commerce and even more bullish on those that successfully integrate mobile payments into their system

  37. Do you mean owning the marketplaces, selling through marketplaces, or both?

    With our fledgling startup, we’re finding that selling our product in a relatively new marketplace has helped a lot with our traction. The 30% marketplace “fee” that has become a de-facto standard is one of, if not the, biggest operational costs for us, but it has enabled sales we wouldn’t see otherwise. We’re in the midst of looking at the entire ecosystem of mobile tools / services to find who else has a marketplace that’s appropriate for our mobile modules (other than Appcelerator). While there aren’t many appropriate marketplaces yet, we’re seeing more and more marketplaces pop up and we believe that when marketplaces become a must-have, it’ll enable us to reach tons of customers and leverage tons of other companies’ marketing budgets (since we become success cases for them) for that 30% fee. A great value for us.

    I do wish we owned that marketplace, though :)

  38. The only interesting angles I can see from a VC/founder perspective to get venture scale returns or as you say build a moat are: 1) refactoring supply chains in fairly large verticals (e.g. Warby Parker), 2) marketplaces (ebay, etsy etc) which as you know are super hard to build but very valuable, 3) technology providers for the long tail (shopify, stripe), 4) perhaps something to do with new platforms like mobile.

  39. Another hurdle for me as a VC in ecommerce investments is that the operational complexity as you scale is a step-function. There are HUGE differences in handling 100 packages/day vs. 1,000 vs 10,000. In thin gross-margin verticals, this can lead to fatal missteps.

  40. If e-commerce has a problem, its that the purchasing experience hasn’t changed much in 15 years. New marketplaces and niche e-commerce are an improvements but not new as models. Marketing has improved with links to, and coming from social networks improving findability for the sites. These things have incrementally improved the existing e-commerce model that Amazon dominates but they haven’t created a better purchase experience for the consumer.

    At Chirpify, we believe that social commerce has the potential to change the experience by integrating the e-commerce into the networks where people are going to discover new products and offers. The component that completes the experience is enabling a frictionless payment experience. Thats a new model and one that disrupts existing e-commerce.

  41. I think long term viability and value of e-commerce sites, beyond the price-point competitiveness (let’s face it, no rocket science here, if you have the scale, you will have the competitive pricing), is very tightly tied into the customer experience and service. The dilemma is that very few startups will survive early hurdles for long enough for the CX to become the distinguishing trademark. And top-shelf customer service already comes at too high a cost to many in the early stages.

    I’ve been shopping online since there was anything to buy online. My aversion? Crap customer service and the feeling that I’ve been ripped off. That’s why I’ll buy a $500 item from Amazon rather than get it for $485 at some lesser known site. My loyalty comes from satisfaction and past problems solved.

    In contrast, one of the biggest e-commerce sites here in Turkey sold me a home appliance which didn’t work so I returned it. The process took 4 months (another two to get my money back) and was a nightmare. My emails were replied to on average in a week. There is no customer service hotline. No human being to speak to, to solve my problem of returning a faulty item. I hope their business fails amidst a mushroom cloud. (Yes, I’m a spiteful one..)

    E-commerce sites may enjoy plenty of advantages and conveniences over brick and mortar, but the moment they forget that the added degree of separation from the customer means they have to work much harder to get their loyalty, they’re cooked (as they should be)

  42. We are launching a new ecommerce approach that we term win-win commerce at flashpurchase.com where consumers and merchants are both empowered to create their own deals and then consumers joint together in a crowd purchasing effort which creates volume to obtain better pricing and the prevailing merchant gets a large group of consumers with just one transaction. There’s room for innovation in the space as long as the ecommerce company creates value for all participants which is our goal.

  43. The point you are missing, is the changing landscape of payments in the offline world. Where would you classify a vendor selling stuff and collecting money with square? when that gets coupled with location, offers etc, the whole thing is mixed up.

  44. I’ve been writing about this since 1994, and there is no such a thing as e-commerce any more. There’s just commerce. You can innovate in commerce with technology, but if you don’t have an “e-commerce strategy” today you’re not in business. So it’s all just commerce.

  45. The other area where I think e-commerce will do well is in fulfilling the long forgotten vision of mass customization (think J.Hilburn). Holding consumer information yields greater loyalty, opportunity to create better non commodity margin structure, and differentiate versus traditional retailers.

  46. just a quick touch on the equation in the article: profit = lifetime customer value minus customer acquisition costs. you’re either discounting what “lifetime” means as one engagement set, or your equation must factor in customer re-acquisition costs. the lifetime value of a customer for most e-commerce businesses, limited to those that experience cyclical customer behavior (and nearly all successful ones do), is more heavily dependent or re-engagement of paying customers to further draw out revenue. in short:

    profit = n * (avg. cyclical customer value – customer acquisition cost)
    where n0 represents customer acquisition, and n1, n2, n3… are customer re-engagement/re-activation costs

  47. 1x revenue wouldn’t be such a bad thing if VCs didn’t have to stuff $25-50mm into a company to make it have $100mm in revs. I’ll take a company that needs $5-10mm to get to $100mm in revs and a 1x multiple on exit any day.

  48. Generally I agree VCs are stuffing too much money into successful web companies. But I’m told in the case of e-commerce you really do need boatloads of cash. I tend to agree with you, Bill Gurley, and others that e-commerce seems like a tough sector for VCs.

  49. I think you forget that a majority of the U.S. feels going shopping is entertainment.

    There are many things that people do that defy economic logic. I give you Atlantic City where $31B of slot gambling results in $2.5B in win for casinos. (that is significantly down, because Atlantic City sucks and more casinos have opened)

    Yes I’d rather be poked in the eye than go to the Mall but for my wife and kids its a fun adventure. On the few times I do join them finding a spot proves they are not alone.

    I think this is the challenge we have when we assume everybody is like us.

  50. As I said in Josh’s post, the issue is physical presence. Its easy for technologists to dismiss that, but come watch one of Amazon’s warehouses being built (million square foot one 5 miles from my house)

    Yes, I can get five people together at a hackathon and build a cool tool, but there will be hundreds chasing me. Putting up presence like that? Not even on the same scale.

  51. Agree, that’s what I meant with “showrooms.” The imagined future is a place like Macy’s just becomes a mix of entertainment and showroom but inventory, fullfillment etc is handled online.

  52. I don’t know, bringing home the “stuff” carrying it the bag is like holding a trophy, it is an essential part of the experience.

    No different than the physical aspect of a slot machine. Look it would be much easier to just put the game on your phone and let you play it in your room. Been tried. Failed.

    Look I hate stuff. I haven’t bought a single item of clothing since I was married (my wife does). I buy four pairs of the exact same shoes online so I don’t have to do it for another two years.
    Paul Graham wrote a great essay about “stuff”

  53. If you’re a multi-brand retailer that doesn’t manufacture your own products or offer some experience/niche to connect with a shopper in a different way than Amazon, and your vendors use Amazon as a channel as well, it’s going to be brutal to compete. Amazon will likely win.

    But – the medium guys I spoke of will be specialty brands with a significant quantity of SKUs that offer an ability for the consumer to connect directly with the brand or a unique experience. I work primarily in the apparel space, so those are the ones that come quickly to mind – J.Crew, Brooks Brothers, Coach, Orvis, Under Armour, etc. All of these companies do $100m+ online/direct, which in my mind constitutes medium – nowhere near the magnitude of Amazon, but not artisanal, either. And there can be brands/retailers with minimal offline footprints that fit this mold as well: Bonobos, CustomInk, ModCloth, etc. They’re not necessarily $100m+ businesses yet, but all of the online-focused retailers/brands are young in the grand scheme of things. Many of the multi-brand retailers with a niche business are doing brisque businesses as well – Motorcycle Superstore, Freshpair, etc. Overall, we’ll see a few of these specialty retailers creep up toward $1b in revenue online. L.L Bean does $2b online.

    Consumers want to connect directly with brands and unique shopping experiences – we’re going to see this category grow bigger and bigger. But Amazon, Macy’s, Home Depot, etc are unlikely to be unseated from the Top 15 any time soon.

  54. They may not be VC size returns, but I think there is an opportunity for founders, who can pioneer the sale of products that appear hard to sell online, and show the Amazon, Walmart, Targets, etc. of the world how to do it.

    This to me was the story with Zappos and Diapers. Amazon, in those cases, has shown it is a buyer of retail ideas where the retailers created deep connections with their customers, selling products that traditionally are sold easier offline, which was the case with Zappos (customers like to try on shoes and there are a lot of returns) and Diapers.com (low margins, bulky shipping, and diapers being loss leaders for Walmart and Target).

    When these brands succeeded in creating the customer connection, this created an opportunity for Amazon or other acquirers (I know in at least one of the situations above there was deep interest by the other big retailers in acquiring the target) who potentially can turn these niche companies (I don’t mean niche in a condescending but in a relative way as all the named companies are in huge markets) who have concentrated on gaining a customer following by offering “WOW service” into more profitable companies by offering a broader portfolio of products to stick more goods into customers’ packages, a key to profitability in online retail.

    This can be great for entrepreneurs, as business plans built on “customer connection” rather than “IPO profitability” may be easier to execute in many niche areas.

  55. I think he is referring to Shopify (or similar platforms)

    For businesses selling online, the main differentiator between having your own shop or selling through Amazon has to do with their online identity.

    Amazon is a great channel to sell your products, but I believe that businesses (also) want to have their online shop in order to protect their online identity and show a more professional image online.

    IOW, it’s not a zero-sum game.

    Full disclosure, I am the founder of OmbuShop (eCommerce SaaS solution for Latin America) so I might be a little biased.

  56. Yes, but the one thing Amazon won’t give you is any sort of expertise. This is where start-up’s and boutiques can win. There’s tons of value in deep domain expertise and helping customer save time by not buying the wrong thing.

  57. Is this not true of any business though? The hardest thing for an upstart to overcome is always the incumbents infrastructure; be that physical, software, IP, etc.

    The key here is for upstarts to leverage existing infrastructure, starting with “virtual” inventory (dropship), then taking profits and investing them into physical presences (warehouses).

    This can be done without VC, but it is a long road and even with it, the time frames to get to a comfortable level is likely longer than other models upstarts may be considering.

  58. Excellent post and discussion. Agree in general with offline steady state premise.
    My bullish pov on how non-transactional shopping sites can add customer value and can rise above the noise… I think there is a significant gap with respect to shopping/product discovery (Pinterest addressing) and decision making (our aim at Decide.com). Most online retail experiences (including Amazon) do very little to help consumers intelligently decide what to buy. Shopping, like core/general search, will move from tired, 10 blue product links to curated listings (expert or data-driven – based on knowledge extraction across signals, such as reviews and prices).

  59. It is true for all businesses. But the issue is how much money for what return. I am saying in this case the moat is size and low margins.

    If you buy 1,000 times more than I do you will get a better price, same for shipping, warehousing, payment terms, cost of capital.

    If margins are low all those savings mean you will be making money and I will be losing money at the exact same price.

  60. Chris,

    I get and generally agree with your argument, but what’s interesting is when you peel the onion on Amazon:
    * Amazon ecommerce is two businesses: 1P – First party where Amazon is the retailer and 3P – what we all call the marketplace business.* Amazon actually makes a good bit more profit on 3P than 1P
    * 1P is growing ~30%, 3P is growing north of 65%
    * 3P is now 40% of ‘paid units’ on Amazon

    Amazon is transforming from a retailer to a marketplace+services provider over time. That fact actually is kind of the opposite of what you+JoshK are saying.

    * Who are these 3Ps? why are they able to essentially able to compete with Amazon on Amazon and win?
    * Certainly they are smaller than Amazon?

    So there’s this case in the middle of bull and bear – why take all the costs and DIY when you can ride on Amazon’s infrastructure investment, customer base and FCs. There’s some interesting companies doing that with a lot of success.

    Scot

  61. Ecommerce companies come in waves, based on there being a scalable, “inefficient” customer acquisition channel open up. The most recent one was FB CPC, and that is what drove the flash sales, “shopping as entertainment” startups etc. I did a guest post on this topic here – http://pandodaily.com/2012/06/20/why-do-ecommerce-startups-come-in-waves/

    Exit valuations depend more on a multiple of contribution/gross margin than revenue IMO. e.g ASOS trades much higher as a revenue multiple than Zappos/Diapers/Blue Nile, because they have a better contribution and gross margin. If you’re selling a commodity product then its hard to defend margins. Vertical integration makes it easier since you can’t price shop direct comparisons. Example economics here – http://lsvp.wordpress.com/2012/02/03/why-so-many-hot-apparel-ecommerce-startups-are-vertically-integrated/

  62. Completely agree. That’s why we built Shoply.com. A social shopping marketplace which connects talented independent sellers with customers looking to discover and support them.

  63. One way to differentiate yourself from the incumbents is to offer impeccable customer service. From my experience with e-comm customers, they pretty much expect mediocrity, so when you reply to their concerned emails and act like a human being (includes using normal English) it makes them very happy. It especially helps if you can fix their problem swiftly, instead of going through layers of management to make a $17.99 decision. All of this in turn results in good ol’ word of mouth.

  64. Taking your side in this part of the discussion, Philip. Chris, you and I are guys, and while not all guys are the same (and of course not all women are the same), there are differences in what constitutes enjoyment for different people.

    My wife and (grown) daughter make a day of going shopping. They would scream if they made selections and then had to wait for the item to be shipped. They check the item they want for flaws, fabrication quality, nuances of fit, etc. And then they want to come home and go through it all again.

    Not saying Chris is entirely wrong for some sorts of products, but there’s a big segment(s) that will not accept his proposed scenario.

    For myself, if I go to the trouble of going out to look at something, I’m not going to accept receiving it “tomorrow” in most cases. I order a ton online, and frankly want it when I complete the check-out. But if I drive down to the Apple store or any other shop, I’m not going to accept ordering from a sample at a showroom. And what happens if the item shipped the next day isn’t up to my expectations, fits a bit different, is flawed, etc? Now I’m pissed and have to ship it back or drive it to the showroom for refund.

    We may see some hybrid models, but not the full showroom concept except where it’s used for significant price cutting.

  65. This argument is valid for comparing big retail (online) stores (like Amazon) but should also focus on the new e-commerce service providers like SaaS, mobile apps and new payment gateways.

    I would like to compare the gross sales of all Shopify stores (wikipedia says 25.000) with these big players.

    This is a very fractioned market and there are many other SaaS new players:
    – BigCartel, for artists and bands
    – SolidShops, Europe
    – Goodsie, custom templates with only mouse clicks
    – JumpSeller, Latin America / Europe
    – StoreEnvy, marketplace with free shops (like hostel world for e-commerce)

    Then there is Stripe, Braintree, Chargify as the core payment systems used my all the above.

    Connecting the offline and online, Square and the PayPal Square clone are / will also make a big impact on the market.

    I see the e-commerce market as a fast growing and innovative place but there is still, and thank good, no winner takes it all situation here.

  66. I would argue that Warby Parker’s key differentiation is their ability to build a brand in prescription Rx eyewear category. There are several competitors in the space (e.g. Coastal Contacts, EyeBuyDirect, eyeglassUSA, etc), but Warby Parker built a brand.

    This also brings up my second point — I agree with most of your points. However, I think brand plays an important role in e-commerce. In the case of Warby Parker, it’s a key differentiator. In the case of traditional retailers such as William Sonoma. it allows them to continue to charge a high premium price, and not discounting in online channels as much as mass online merchant.

  67. I directionally agree, but think you might be over estimating the importance of paid channels. Incumbents are pretty quick to catch on to new paid channels, and anecdotally it seems a lot of startups have lowered CAC through organic channels. Also, none of the startups post dot-com bubble have gotten really big, so I’d say the jury is still out.

  68. eCommerce customization has existed for a decade (cafePress, Shutterly, Vistaprint) and yet none of these businesses are thriving. I’m not sure customers want customization, I think they want great brands and great design, and they want to be told what they want.

  69. can you offer any data to support the idea “ecomeerce as a whole will continue to grow rapidly and eat into offline commerce”? certainly some obvious situations come to mind — amazon crushing barnes and noble and borders and best buy. but wal mart has not been negatively affected by ecommerce. nor has costco, target, and grocery retailing. plus exciting new truly successful offline newcos continue to pop up, even as none pop up in ecommerce — lululemon. restoration hardware. gamestop. i 100% agree ecommerce is mighty an d exciting and growing and growing. i just see little evidence of the decline or even erosion of offline commerce, the death of which (like so many things) has probably been greatly exaggerated?

  70. Obviously I don’t have data from the future, but ecommerce continues to grow rapidly year over year and with some exceptions like Walmart it is eating into offline. Latest data I saw put ecommerce at 8% of commerce. Even if it just goes to say 20% over next 5-10 years that is huge growth rate.

  71. There is probably still value in the “showroom” aspect to places like Williams Sonoma. Most people I talk to think they will adopt a hybrid model eventually with showrooms + online fullfillment, shipped delivery etc.

  72. Traditional ecommerce models (i.e. c2c marketplaces, b2c storefronts) in
    emerging markets may be a fifth angle. Look at the success of Alibaba
    Group, Mercado Libre, Rakuten, perhaps 360Buy. Those companies all have or will generate venture scale returns for investors.

  73. sorry not asking for data from the future. the present will do. agreed, ecommerce is growing, and seems destined to grow for some time. but in what way does that mean its a zero sum game? cant ecommerce prosper *and* offline commerce also prosper? thats what seems to be happening, at least based on what data i see. particularly striking given the severity and length of the recent recession, which might have been expected to ravage retailing much more than it seems to have done?

  74. Agree with Jason. My company, Catalog Spree, is seeing significant opportunity in e-commerce simply buy not playing along the traditional lines of “search-find-buy” but instead in delivering a fun, social, mobile/web, discover experience. Jason’s points 2-5 hit home with me.

  75. One of the reasons I like 1$ shave club and the WebVan redux instacart.com. If there was ever a retailer who can and should be disrupted its WAG (Walgreens).

  76. Jason, Fab is awesome but I think the question of scale is at the heart of this post. To be a top 15 retailer means that you have to be doing $2bn+ in GMV. Amazon does $50bn. While $150m is no mean feat, Fab still has a way to go. I don’t believe you can get there as a discovery engine or a design marketplace/platform.

    Every one of those top 15 retailers has either built their brands off the back of other more famous mass market brands or vertically integrated to make and sell their own products. Fab will have to do the same to join the Top 15 club.

    There’s no question Fab is in a position to become a sexier IKEA for the digital age but you’ll need to get into the dirty business of retail to make that transition.

  77. Chris – one point worth mentioning here is whether or not being in the Top 15 is actually relevant to defining an e-commerce business as ‘successful’? If you look at the financials of a few of those listed – Best Buy, JCPenney etc. – it’s notable that they are dying business models regardless of their traffic volume or revenue.

    Given you approach many of your thoughts from an investment perspective, I’d ask what a reasonable investment strategy is for those eyeing the e-commerce space. If I were a VC, I’d be adopting a portfolio approach and back a few piranhas rather than trying to go whale hunting. Vertically-focused retailers with lean operations and the potential for global scale are strong bets for the future. Anyone else is Amazon fodder.

  78. Hi Chris, Warren, CEO of Gloople here and I could not agree more and thats why we built Gloople, to help SME’s build their online store and have a multi-channel environment to finding consumers on Facebook, Mobile, Google, Amazon, Ebay etc.

    Then allowing consumers to do what they have been doing for centuries …Sharing their opinion, purchase, like’s, dislikes all in 1 place – We need to think more about what the customer wants and build a brand to be social and from the heart.

  79. Few ecom startups that I see have any idea of SEO or digital marketing. That kills them before they get going, as they fail to bake this into their products

  80. Very interesting read; 2 points I’d like to make. 1) I believe the correct forumula would be CLV (customer lifetime value) – total costs (both acquisition as well as ongoing). In the formula stated above it’s assumed the only costs associated with your customers are at the point of acquistion which is false. You have overhead associated with keeping those customers (email sends, employees powering those emails, segmentation tools, etc). 2) I completely agree that online will continue to take more share aware from offline sales; yet I think offline has 3 specific advantages over online right now. -Immediacy (great point as you mentioned) -Experience (I would describe this both as ambiance/fun as well as tactile like size/fit which you can’t get from online right now). -Scarcity/lack of online presence; think of cases where things have sold out via online channels but might still be available at local store selves as well as things like antiques which have not been thoroughly indexed and recorded/posted online. I think of shows like “Picked Off” or “American Pickers” where these guys dig through barns and find items that have great value yet the people that currently possess them have no idea what they are or even that they had them. I think cases like this (in certain categories) will exist for some time. You can find a lot online right now; but you still can’t find everything….at least not yet. Ben Galbrecht

  81. PC Home in Taiwan has been doing 24-hour eCommerce shopping/delivery since 2007 for electronics. They have a 97%-98% hit rate and granted the island is only 1/10th the size of California, it hasn’t destroyed retail chains that sell the same things. It’s been building off the value proposition of convenience and dependability.

    Amazon or eBay may have the resources to execute this too, but in the end it really boils down to how comfortable the end consumer is buying things online, and what percentage of their total purchases are shifted there.

    Given your average consumer in the US is nowhere as tech-savvy as those in Silicon Valley (let alone where I am in Asia), I think there’s still a way to go for offline retail to be completely dominated as others have suggested.

    I do agree with the long-term trend, but I believe Millennials and the younger generations need to make up a larger % of the core demographics first for this to really happen.

    Would love to dedicate an episode of my eCommerce show to discuss this further if any posters are interested. (Build My Online Store in iTunes)

    – Terry

  82. that’s where a reliable and experienced 3rd party fulfillment partner can help tremendously. Don’t invest in additional (wrhse) space, technology, and personnel. Keep that as variable cost(s)

  83. I agree with this especially in Arfrica. People use to say Africa is the black continent therefore most eCommerce companies do not enter this market. I also know that payment and logistics have been an issue as well and that is why my startup Keejul plans to bring ebooks to Africa. I wonder @cdixon:disqus if there is a clear market in Africa when it comes to something like books and then Amazon decides to come in 5 years later do you think they will crush the current market leaders. Or because these other companies have the brand, reputation and understand the local market it will be more difficult for Amazon to make an entrance.

  84. The other thing that hasn’t changed much over the past decade is the discovery paradigm – search and browse. Obviously Google has improved quite a bit in search, and most commerce sites have re-jiggered their browse tools + added adjacent product suggestions, but the discovery method remains the same.

    What’s very new (as you know Chris) is today we have a truly meaningful global social graph across at least 2 networks (FB and Twitter) and gobs of useful data and new discovery channels with which to fuel social discovery. Music and content have already seen large gains from this discovery channel – and commerce is now getting it’s turn too. We see very small sellers in the long tail getting amazingly high order/fan count percentages because they have learned how to optimize for social discovery (a long topic in and of itself).

    The main question, as you point out, is can an Amazon be unseated by a challenger who hyper-optimizes for social discovery? Too soon to tell, but it’s going to be an interesting next decade to be sure!

    @jimstoneham (CEO, Payvment)

  85. Heya, Ron Gura, CEO of The Gifts Project here (now eBay Social Center in Israel) –

    Very interesting post, agree that the vast majority of our offline purchases will be immediacy or experiences but think that the former will gradually decrease as well – even improved shipping alternatives like “eBay now” and consumers redefining “immediacy” with more planned shopping (leaving only impuslive to the offline world, getting closer to experinces and show rooms again..).

  86. Hi Jason,

    Congrats on your company’s success. I work for the Managed Marketplace’s team @ eBay working on various Shipping initiatives (formerly worked for PayPal Global Finance).

    I am ashamed to say I knew nothing of Fab before you posted. So I decided to visit the site and make a purchase to understand the flow. When it came to “check-out” this disappointed me (see pic attached). 14 – 23 days for Shipping time…. Is this typical or was this a one-off problem?

    Thanks,
    Tyler

  87. $150M in year 1 is a nice start towards your $2B. I’ll note also that we’re already generating 25% of our sales outside of the U.S. which is a lot given the relative early stage of our business.

    Our ambition is to be an IKEA scale business. IKEA does $30B GMV/year, of which only 11% is in the U.S., 13% in Germany. IKEA was not built in a year either.

    I’ll note also that IKEA got where it is today because it reinvented the entire supply chain. We’re starting to do that by working with many designers and manufacturers to make products exclusively for Fab. Like today we are launching a line of Blu Dot furniture that was made exclusively for Fab. We’re also sourcing thousands of products just for Fab.

    Down and dirty retail? We’re up for that. I’ll put it to you this way: Last year at this time Fab bout 0% of the inventory we sold up front and 5% shipped through our warehouse. Today we are purchasing the majority of our inventory and >75% goes through our warehouse.

    And, we just getting started…

  88. This is part of our transition from “sell first” to taking inventory. Unfortunately the product you selected was still part of our older sell first model in which first we sell it, then we buy it from the designer, and then they ship it to us, and then we send it to you. We’re in the middle of a huge shift in our model to “buy first” where we purchase the majority of our inventory and have it sitting in our warehouse before we sell it. By November 70% of the products we sell on Fab will be in inventory before we sell it and will ship anywhere in the U.S. in 1 to 4 days.

  89. Bill – I would venture to say that the trading multiples for Diapers and Zappos were in direction relation to them selling commodity products = low contribution margins. Scaling these businesses has to be on both the GMV and contribution model side, with CM being more important over time. Harder to do on commodity products, easier on value-add unique and hard to buy products.

  90. I wish I’d seen this when it first came out. Hey Bill I think you have to focus on merchandising aimed at a specific customer.

    Look at companies like companies like ASOS which trades at 3.9x earnings. They’re vertical web retailers and have a mix of products they’ve curated and their own products. They’ve traditionally focused on 18-25 year old women. They’ve merchandised in such a way their audience will go back again and again to discover fashion.

    Nastygal is another company that quietly went from eBay to 128 million run rate in 4 years. Again it’s fashion & they focus on women 18-25.

    These girls are not going to Amazon to discover anything. They’re are not hunting down the best price. They’re looking for ideas on how to dress and immediately buying whatever it is they want.

    And that’s just a few examples in fashion.

    I think what we’re going to see is that vertical web retailing +
    merchandising aimed a specific customer and tailored to how they shop in a particular market is going to yield powerful results. These are going to be the kind of stores that chip away at Amazon in certain sectors.

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