Cart-e Blanche: Navigating a Brave New E-Commerce World
While economists continue to debate the likelihood of a more widespread downturn, something that looks very much like a recession has been plaguing the e-commerce industry for months.
Rising inflation rates, supply chain uncertainties, a growing number of layoffs, and former industry darlings’ bankruptcy filings have become commonplace. Consequently, when it comes to investing in e-commerce, you’ll hear many VCs say they’re “waiting for the dust to settle.”
I’ve spent the last three months talking to dozens of e-commerce founders, investors, and industry experts about what happened to the e-commerce industry and, most importantly, where we go from here. Here’s what I learned.
How did we get here?
1. COVID (obviously). The pandemic fundamentally changed consumer purchasing behavior, pushing them online for every type of purchase. New and old businesses followed, creating a surge of new competition for consumers’ attention. However, consumers went the other way; with all the uncertainty at the start of the pandemic, consumers initially felt apprehensive about spending their discretionary income. Although the pendulum eventually swung in the other direction, this whiplash was challenging for many brands.
2. Advertising changes. Apple’s “Do Not Track” policy threw a major wrench into traditional digital advertising strategies on which almost every e-commerce company relied and, in turn, strengthened marketplaces (aka Amazon) that offered a one-stop-shop for purchases.
3. Inventory missteps. Supply chain and manufacturing slowdowns, global uncertainty, and a lack of understanding of customer buying behavior caused e-commerce brands to run into challenges managing their inventory, particularly when it came to accurately forecasting demand and securing items.
Where we’re going:
Customer acquisition gets creative (on a budget).
Brands’ budgets are tightening, and many are being pushed to reduce burn and chart paths to profitability. In response, brands are ruthlessly prioritizing results (or, at least, they should be) — especially when it comes to sales and marketing.
Performance marketing was once a steroid for company growth, enabling businesses to grow cost-efficiently as they only paid when they achieved desired outcomes. That’s no longer the case, for reasons Andrew Chen and Cody Plofker argue here and here. And it’s certainly not sustainable in this market; the lack of transparency from ad-tech/tech companies makes optimizing customer advertising costly and inefficient. The result: Customer acquisition costs are skyrocketing, and returns on ad spend are taking a nosedive.
Startups developing creative ways to personalize the user experience, identify customers through carrots (customer loyalty benefits), create a more frictionless experience, and generally reduce customer acquisition costs (in a compliant way) will be best positioned for growth in a post-performance marketing landscape. Regardless of the strategy, drawing a clear line to ROI — to sales, topline growth, and lifetime value — is key.
LA-based, Rise of the Rest-backed Superfiliate offers an example of a creative, brand-focused approach to customer acquisition. The marketing platform offers personalized storefronts for a brand’s customers, influencers, ambassadors, and affiliates, helping partners create a fully branded loyalty and referral program. The result: brands connect with customers more seamlessly and effectively at the point of purchase (thus generating more revenue).
Away from most headless commerce.
For reference, headless commerce is the idea that, rather than going with an end-to-end solution that does it all (marketing, fulfillment, delivery), your services are “dismembered” and stand alone as individual microservices.
Headless commerce must have had a great PR person. Brands were sold liberation from end-to-end platforms that turned out to be pricy and inflexible. They were told this would offer greater choice and more opportunities to embed the most modern technology into their platform.
While that might have been true in theory — or was perhaps the reality for a few 2021 bull market web3 companies — most startups can’t afford the time and resources it takes to string individual microservices together.
Now, many e-commerce brands are in a challenging position; they’re overwhelmed with the multitude of point solutions they’ve adopted, have smaller budgets to work with, and have fewer employees to manage these solutions.
Accordingly, I foresee e-commerce companies making significant cuts to siloed software. To be successful, headless commerce solutions are going to need to address the friction that’s inherent to onboarding and managing them and look more like traditional end-to-end platforms, thus enabling customers to replace countless applications with one platform.
FlavorCloud, a logistics SaaS platform that facilitates cross-border e-commerce, exemplifies this approach. The Rise of the Rest-backed startup centralizes and consolidates the international shipping process by integrating directly into retailers’ shopping carts and, from there, quotes the best shipping rates, guarantees duties and taxes, provides end-to-end tracking, and manages compliance challenges. What previously required countless apps and spreadsheets now requires just one easy-to-integrate platform.
Comprehensive inventory forecasting.
Customers crave greater communication from brands regarding fulfillment, expect orders instantaneously, and are quick to ditch any business that does not uphold this new unspoken set of commandments. Yet, when I asked e-commerce brands if they were investing in shipping solutions that would allow them to deliver items more quickly or communicate with their customers regarding delays, they said no because:
1. Brands don’t have a lot of power to move the needle when it comes to fulfillment. UPS and FedEx are really the only options, which might be fine if their costs weren’t rising and the experience each offered wasn’t “consistently mediocre” (their words, not mine…but I agree).
2. Customers know that their businesses aren’t Amazon. Although I keep reading about consumers’ growing demand for immediacy, in practice, this only applies to the Amazons of the world. In general, customers don’t expect their stuff to arrive overnight, so brands aren’t concerned about investing in a solution.
3. Existing platforms (i.e., Shopify) do a pretty decent job of providing customers with visibility into their order.
While I still believe consumer preferences and behavior have fundamentally changed, I no longer see quicker delivery or better communication as a strong differentiator. Instead, I think inventory solutions are the answer (said probably no one ever, but stick with me).
Demand forecasting and supply and inventory planning remain top of mind for e-commerce brands as the market continues to fluctuate and consumers push brands to engage with and sell on more platforms. And yet, most e-commerce brands I talk to remain dissatisfied with existing solutions because they don’t do a good enough job of capturing a comprehensive view of the customer and the business.
Search trends, competitor activity, and social trends can help reveal what customers care about and accordingly, help brands make better decisions when it comes to their inventory. Yet, these factors are often excluded from demand/forecasting solutions. Meanwhile, the multitude of procurement, inventory, supply chain, and accounting channels a business uses makes it challenging for brands to understand their internal data and get a clear sense of what’s currently on their shelves.
Turbine addresses this second challenge. The Rise of the Rest-backed company offers financial software for multi-channel businesses that manage physical inventories, helping them order the right items at the right time and operate more efficiently across procurement, inventory, supply chain/operations, and accounting workflows.
E-commerce today looks markedly different from even just a few months ago, and it continues to evolve at a breakneck pace. Despite the ambiguity and challenges that currently plague this industry — and have many proclaiming they’re “waiting for the dust to settle” — I’m excited and optimistic about the startups, technologies, and business models that are emerging as a result of these changes. Next on the docket: a deeper dive into various submarkets of the e-commerce industry, from return optimization to sustainability to social commerce. Stay tuned.
