Answer by Matthew Carroll
This answer has been in the works for about 3-months, so I hope that it is something that is valuable to everyone. Here is the basic outline
1. Intro & Logic Drivers
[Lots of Charts and Graphs]
- Generation of Economies of Scale
- Individual / Product Dichotomy
- Recognizable Transition
- Direct Communication
- Strategic Focus on E-Commerce
2. Current Trends Supporting the Next
- Private Sales (Check out the chart on discount erosion over time)
- Mobile / Location
3. The Three Waves ofInnovation
- [Wave 1] Bespoke Curation as White Label Business Line for E-Commerce
- [Wave 2] Open, Vertical Integration of Demand Planning
- [Wave 3] Infrastructure as a Service
4. [Wave 1] The Deep Dive Analysis
- Personalization as a Competitive Advantage
- Strategic Advantage of Small – Medium Players
- Buying Traffic Sucks! Maximize Existing Customers Who Evangelize
- Play to Your Strengths (the Big Boys are Drowning in Data)
5. [Wave 1] Just-You-Style – Startup Business Modelsl
- Product Overview
- Value Proposition
- Pricing Model
- The Up-Sell
We all know that E-Commerce is accelerating its assault on brick and mortar retail. Let’s take a look at the overall Online Retail Market Revenue & Growth Rate:
One of the main segments of E-Commerce that is prime for disruption is Apparel & Fashion. Historically (i.e. before 10 years ago), if a fashion-savvy teenager wanted to purchase an item from Abercrombie & Fitch & there wasn’t one located in the local mall – there were two options: 1. purchase via mail order catalog or 2. wait until they took a vacation to a location that had an Abercrombie retail store. The web ostensibly flattened the playing field by enabling anyone in the contiguous US to purchase any item from an online retailer.
This article is going to focus on fashion and brands driving the next waves of innovation in E-Commerce:
Rationale for Focusing on Fashion & Brands Driving of the Next Waves of Innovation in E-Commerce
Social Facilitated the Generation of Economies of Scale of Users:
Prior to ’07, it was inordinately challenging to generate sufficient online traffic for most E-Commerce startups, brands, and online retailers in general. In order to generate traffic, an online retailer had to build significant customer mindshare, to even have, the customer “think” to go to their website to check out a brand or product & make significant investments to put online retailers in the workflow process of the user (i.e. sending an email with product information relevant to the users). In addition, the technology, required to power these systems, was expensive, specialized, and young/immature. Over the past 5-years, we have seen 850m+ people join Facebook, a massive boom in tech startups building & refining solutions for workflow process problems (i.e. email marketing), and a drastic reduction in the cost of implementing these solutions.
Hence in 2011, the process to generate significant audiences and thereby acquire new customers is much easier. As such, E-Commerce is one of the pillars to building a modern brand & a significant monetization tool for consumer web products.
22% Increase in the # of buyers in the marketplace (diffusion & tech. assimilation)
74% of ALL web users made a purchase online in Q3 ’11
Powerful Relationship between Individual & Product:
One of the most important aspects of fashion is that it is a highly emotional experience for purchasers of the products & the payoff of it’s use. Humans are inherently social animals & have a powerful desire to be accepted by the herd (i.e. social & professional networks) – thereby, your choice of what you wear is a direct reflection of who you are as an individual (or how you want to be perceived as a member of the herd).
Over several hundred thousand years of evolution, humans have learned to draw immensely on visual cues as a means of assessing character risk about the people we interact with &, therefore, leveraging apparel as a means of establishing an individual’s “similar to me” visual references (i.e. if I wear tight pants + gingham check collard shirt = SOMA startup hipster). Fashion is one of the main external manifestations of whom we are as individuals and serves as the impetus for visual feedback to observer about our personalities.
The purchasing of apparel online represents a systemic behavioral change from the old way of doing things (i.e. purchasing apparel from a limited assortment at a physical retail location). Everyone pretty much associates purchasing of apparel with physicality of being in a store, engaging in an economic transaction (i.e. purchasing product), and immediate satiation of the desire to purchase (i.e. walking out of the store with the product in hand). We were able to try on clothing prior to purchasing and we received immediate satisfaction from the transaction (we walked out with the product immediately following the conclusion of the transaction). Thereby, purchasing online separates the transaction from the satiation of the desire (i.e. the impetus for engaging in an economic transaction).
Brands have embraced the web & social media with voracious enthusiasm. Before the social revolution, brands had a tertiary relationship with the customer, whereby the customer had dealt with the retailer & the brand served as the product of the retailer. If the customer loved the brand, the retailer received the customers goodwill/happiness as the provider of the garment (versus the brand as the producer of the product – it’s a level of abstraction away from a direct relationship between product & consumer). The retailer controlled the relationship and therefore is the recipient of the customer’s projected satisfaction or enjoyment of the product (as opposed to the brand that created the product).
Social media transformed the ability of a brand to communicate with their target demographic – from a proxy relationship (brand -> retailer -> customer) to a direct relationship (brand -> customer -> retailer).
Strategic Focus on Building E-Commerce:
More so than most other areas of consumer products (aside from books, music, & video), brands have started to strategically focus on building their direct business with customers. Currently, direct business (brands selling product directly to the customer (via it’s website) has been an ancillary consideration to most brands (i.e. the direct business took the back seat to wholesale (Major retailers like Nordstrom & Bloomingdales). A couple of reasons behind this are:
Lack of Experience – One of the main reasons for this was that it was E-Commerce was relatively new and most CEOs didn’t have enough direct experience to champion investments in E-Commerce as a strategic priority. Based on this inexperience with this channel as a significant revenue driver, most CEOs have not devoted significant financial resources to cultivating this revenue channel. Conversely, the maybe stymied from investments in E-Commerce in the ’04 – ’05 boom that didn’t generate miracle returns (that’s a combination timing (just too early), technology assimilation (pre-Facebook & Pre-iPhone), and artificial macroeconomic growth incorrectly supporting dying business models).
Inability to Gain Considerable Audiences – Prior to the social media revolution, engaging in a direct relationship with a brand required a fairly substantive investment on behalf of the customer to find the brand. Supporting the previously mentioned Direct Communication trend, the customer associated a brand with a particular retailer (i.e. Nordstrom) and was accustom to, comfortable with, and meta-tagged as going to that retailer for the brand. Therefore, the Brand’s website (and subsequently the E-Commerce business) had insufficient traffic to signal an area of material concern.
After years of languishing in the single-digits, most brands finally “get it” & have made building their direct businesses as a core new growth opportunity. In addition, with the huge cost pressures that fashion is under fire from (See Secondary themes) along with retail pricing pressure – brands are turning to the 65-70% margins from their direct businesses as a huge opportunity. Furthermore, the ability to harness a direct dialogue and engage the customer in a long term relationship (through the massive adoption of social media) means that this represents a huge opportunity for most brands.
Let’s take a look at how this can impact margin.
Three Forces that are Fueling Future Innovation
Fashion is also the industry that leads tech trends in terms of marketing & branding – leveraging online tools to craft a relationship with customers that facilitates & fosters dialogue and aspirational affinity for the brand (99% of brands are aspirational in one form or another regardless of the market segment). In an effort to understand where the next waves are going to be, we need to understand the current waves that are driving the market.
1. Social is hands down one of the most significant influencers of the next wave of E-Commerce – that is driving the current wave of E-Commerce 2.0. Social (primarily Facebook) transformed web behavior (in the aggregate) from receivers of information (i.e. reading a news article) to interactive engagement (commenting or sharing – anything that basically promotes a user action). As incredibly important & transformative as Social is, it’s the current wave – Signs that tell you that this trend is in motion:
- Since Facebook Fan Pages/Like pages were introduced, Fashion Brands were socializing their marketing efforts to facilitate E-Commerce (i.e. “Check out our new collection”).
- Retailers like ASOS, Urban Outfitters, et al have Facebook Shops open – and major retailers are currently running major campaigns around informing the Retailer’s Facebook followers about the channel and developing the revenue channel
- Startups are currently being built around Facebook Commerce (Social) Commerce, ranging from white label stores (al la Payvment) to analytics (al la AddShoppers) – an ecosystem rising around trends supports it’s current position in the product lifecycle and state of diffusion – it’s happening now.
This isn’t really a new wave or an innovation – it’s just something that is a logical extension of the technology. We are in the early adopter stage of this trends evolution – it’s new, but it’s definitely not the “next” wave.
For example, Forrester Research predicted that Social Commerce would reach $14b by 2015. Granted, it’s a current trend in motion, but it is forecasted to represent ~5% of Online Retail’s revenue in 2015 – and that’s after ~10 years! (let’s say that the social trend really kicks off in ‘06 when Facebook is released to a wider audience – so that means this trend (by 2016) will be in motion for 10 yrs. Think about Google was after 10 years and the contribution they made to Online Sales development over the period – $14B is fairly muted when compared to overall theme).
2. Private Sales are a glorified email marketing fad that exploded onto the retail landscape and, over the past two years, has been quickly commoditized with 100s of players jumping into the space. This trend truly represents a wave because of it’s voracious growth over the past 4 years and subsequent crashing of this industry as a business model as 100s of competitors have ostensibly commoditized the industry out of existence.
Private Sale Sites and their corresponding incredible growth rates have imbued some profound developments in the marketplace:
Time Value of Economic Value – The most incredible development in E-Commerce was that Private Sales sites (al la Gilt Groupe, JackThreads, Rue La La, Plndr, HauteLook) conditioned the customer to trade cost savings for product delivery. Before this, Zappos was setting the expectation of Free Shipping & Gilt Groupe (primarily) fundamentally transformed this expectation.
Price is a Deadly Value Proposition – Competing on price is one of the most challenging positioning decisions in business. When a brand makes the decision to market itself purely on price (i.e. purchase these items at 50% discounts), then there is no place to go but down (citation Wal-Mart stalled growth as prices have continued to increase). By virtue of focusing on the price, you are inherently devaluing the product the Private Sales Site is purveying. The retailer is in a falling knife market environment that is extremely challenging to navigate and almost always ends up in a bad place.
The Pivot Out of Deals – Gilt Groupe has been the only player to being the transition (pivot) out of pure Daily Deals (into Park & Bond – but more on this later) – something that all of the Private Sales players need to figure out their pivot out of the deadly margin game. 90% of the time this is going to be a Private Label play that will support a blended margin near the levels of those Gilt enjoyed when it still held it’s first mover advantages.
[NOTE: To update & expand my most successful Quora article() – I am writing a follow-up about the industry and the state of the game – So stay tuned to a lot more on this front.]
3. Mobile / Location is one of the most powerful tsunami’s that was introduced in the marketplace in ‘07. The pervasive adoption of smartphones (lead by the
The smartphone revolution championed a new world of the internet as a physical manifestation of the digital world (al la led by the brilliant work of the laudable ). There are two major factors to this wave:
- Check-ins – a new interaction with the “on the go” lifestyle of most consumers to earn rewards and receive discounts based on the interaction of the real world and the digital world.
- – (Mobile Commerce) was an entirely new genre of E-Commerce whereby a user is enabled to purchase products regardless of geographic proximity to a computer.
predicts that will grow to $31 Billion over the next 5 years in the US – thereby doubling . Let’s take a look at ‘s estimate:
UPDATE: 1/7/2013 – Mobile Commerce Forecast updates
estimates that will grow into $31b industry, nearly double their forecast for (Hence why I am not very big on it becoming the Next Wave, when it’s a wave that’s already in motion) by 2016. Let’s take a look at how they predict the next 5 years will evolve:
This wave ofwhere an individual’s physical location facilitates purchasing of goods or services in three main forms:
- Purchase Online & Pick-up in Store
- Geographically Targeted Discounts
- Mobile Check-Ins for Loyalty Points & Discounts
However, like Social, the Mobile / Location wave is currently underway diffusing in through the marketplace and does not represent the “next wave”.
[Note: There are some fairly profound secondary / tertiary trends that support my position on the next waves of innovation, but these will be discussed in a later post. Some of the most salient secondary themes are:
- Experiential Development of Web Users – as people gain more experience with the internet, they will become more competent and willing to more fully integrate E-Commerce into new aspects of the their lives.
- Collapse of Inexpensive Foreign Goods & Increasing Input Costs – The era of cheap manufacturing is quickly dying with 20% YoY wage inflation in China compounded by BRIC’s ascension into the middle class. Competition for input commodities in all products will systemically change how we all purchase goods & services.
- Rise of US Manufacturing – With rising Chinese RMB and a depreciating US Dollar, the US is strongly positioned to champion a manufacturing boom over the next 5 -7 years (pretty much all the good t-shirt & jeans factories in LA are at full capacity. Made in USA will become increasingly important (as it was for 150 yrs prior to 1950s, when we GDP per capita (PPP) rapidly appreciated). Although this trend is in its infancy & has considerable hurdles (lack of vertical supply chain, a labor force (look at what happened to Alabama’s tomato crop after the immigration legislation), and infrastructure) to overcome – it is a major theme that could enable the US to realize something similar to what we are seeing with Germany’s GDP in Early – Mid 2011.
There are two really important themes that are necessarily Innovations in E-Commerce right now.
- Retailers Driving Content Creation: I first noticed this at the beginning of the year with a Carnival Cruise Web Commercial about a family on a holiday. In addition, tonight I read about Karmaloop (a street E-Commerce player that I reference a lot in my posts) having users upload vids to create a new web series. [More on this later (when I flush it out more but it’s pretty interesting).]
- Private Label: I have a REALLY long post on Private Label and why it’s becoming a critical aspect of the Revenue Development of a Fashion Brand. I would go so far as to say that it’s going to be one of the main pillars of brand strategy over the next 10 years – but more on this later.
These tertiary themes will be discussed in excruciating detail in a subsequent post – I’ll update with links]
Summary – These three trends lay the foundation for the next waves (all of which would not be possible without at least 1 of these trends. In addition, the next waves of innovation will be built upon these three trends. Therefore, for purposes of looking forward, the consumption medium has been set and the next waves will not be an entirely new means of interacting with or engaging in E-Commerce – the next waves of innovation will be within the same context (web-based & mobile).
Three Waves of Innovation in E-Commerce
All three of these trends are fairly independent – the order is fairly arbitrary
1. Curated Personal Style Subscription
Over the past 6-years social and E-Commerce have evolved into a way of life for the vast majority of internet users. However, recommendation of products pretty much sucks. For example, Amazon Recommendation Engine is useless (maybe it’s just my experience – but every single recommended item I have either purchased or a competing product that I have decided against purchasing) & the best in the business, Netflix, is only moderately insightful.
I am fairly well versed in machine learning & NLP, but have failed to see an implementation of recommendation algorithms on a product basis (although Hunch is getting pretty close) that present a substantively compelling recommendation that compelled me to purchase a product.
The next wave of E-Commerce will be services that fundamentally leverage the massive data sets in conjunction with expert curation – to drive purchases by introducing the product to the customer that presents a clear value proposition.
There are three salient aspects of this model:
1. Leveraging of Data: Online Retailers of all shapes and sizes have vast treasure troves of data that are currently not fully being employed – most of the time they are not even being connected. This next wave of innovation will involve the connection of various data sources into a central platform that delivers more insight into the product selection, procurement, & merchandising process.
2. Subscription as a Business Model: The first time that I really noticed subscription gaining product/market fit (in online fashion) was ShoeDazzle. Smaller E-Commerce Fashion Sites should be focusing on a deeper, more personal relationship with the customer – thereby leveraging the power of the subscription model to deliver more product and round out their cash flow cycle.
3. Expert Curation –> Personalization: As I mentioned before, pure algorithmic recommendations suck – I mean if Amazon’s “you would also like” can’t produce a decent recommendation so save it’s life – then I don’t believe that anything is ready for prime time. However, if done correctly, these algorithms could focus the selection criteria. Thus, making the work of a stylist / expert easier and more efficient.
There has been loads published in the last 6 months about the coming revolution in Men’s fashion E-Commerce into style curation (a la StyleBop – Buy the Look – and Mr– The Look & The Story). It is well understood that men purchase fashion very differently than women and want to buy style that is “put together” or curated (Man Shops Net – WSJ).
Here’s the real kicker – no one has fundamentally implemented this process into a product. The majors like Mr. Porter, Gilt Man, and ShopBop have jumped way out in front with editorialized content. However, their scale is an inherent weakness to the personalized approach that a curated personal stylist subscription model could offer for men. In addition, these major players are positioning themselves to compete with the Bloomingdale’s of the world with expensive items – Mr. Porter, for example, has most of their items at $500+ and there is a huge market for everyone else who simply doesn’t have this kind of disposable income to spend on fashion.
Why is this the next wave:
People Want Cool Stuff: The web will progressively become more individualized as users find their niche, form new relationship, and discover new ideas/products/art etc. This wave fully embraces this trend and delivers a service to monetize the relationship.
Tech. Maturity & Sophistication: To a certain extent, this evolution was not possible until probably 2011. The Social Web needed to mature (and an ecosystem built on top of it), users needed to mature and gain more experience (and sophistication) with the web and interacting with it (versus being receivers of the web al la Web 1.0), and the analytical environment to build a better web needed to mature as developers tailored their offering into the appropriate Product/Market Fit.
Personal Relationship: The web will become increasingly personal and E-Commerce must respond to deliver products and services that feel like they are “made for the user”. As you’ll see in the startup model, the relationship is paramount in delivering a subscription fashion service.
FULL Startup Business Model Analysis at the end of this overview – most of you know how I really hate it when authors give copy-blogger generics to shorten the post – or textbook over-simplifications that don’t really articulate the complexity of the real world. So I have added a full business model with screenshots & financials to showcase what a curated fashion site would look like, how it could be implemented, and what the potential revenue would look like.
Enjoy! Feedback, Flaming, Comments, and Funding (al la me!) available if you are so inclined
2. Open, Vertically-integrated, Analytical Demand Signaling & Planning
Fast Fashion (Zara & H&M) has fundamentally revolutionized the fashion-industry by upending the traditional “seasonal” approach* for retail primarily through their analytics driving a modern, vertically integrated manufacturing beast. This transformation is akin to Toyota kaizen (along with the other Asian car manufacturers) that reshaped the automobile landscape in the United States where foreign manufacturers wiped the floor with it’s US competitors.
The ability to transform actionable analytical insights into demand-responsive product compositions presents the core strategic value proposition for fast fashion & the driving factor that will revolutionize the industry as a whole (we are moving to a whole new level above the prompts “innovation” mandate).
The traditional way does not work and is ever increasingly augmented by the under-performance of traditional “seasonal” firms and out-performance by those fast fashion market leaders. In an effort to fully investigate this wave, we need:
- Understand the background as to how industry norms were established as a means to illustrate how disruptive Fast Fashion is.
- Define the push factors & technical developments that will foster in the next wave of E-Commerce.
- Layout the How the Solution Works.
There is an emerging trend for each E-Commerce site to try and harvest their own proprietary “demand signals” based on like / want data. For example, Bonobos has their new “Want” feature, Amazon has their yellow “like” button, Bluefly similarly with a “Want” feature. Individual players in the space are all trying to go it alone – which never results in a favorable outcome in the aggregate.
I completely understand the need to begin to harness demand signals based on analytics, but having every E-Commerce site build out their own functionality is ridiculous. What makes this ridiculous is that no one player has sufficient scale to truly capitalize on these data points to make constructive decisions. In addition, this information needs to be distributed to all stakeholders. There must be standardization for the implementation and utilization of demand signals.
In the traditional retail model, retailers guard sales data and statistics about product performance. Brands have been significantly inhibited for maximizing revenue & being a true partner in delivering the best product in the correct quantities to the retailer by virtue of the disconnect (and often discord) between the two player. Traditionally, brands have not had access to the retail performance data and have been forced to proxy methods for estimating demand &, therefore, production quantities for products. By retailers controlling this data today inhibits brands (vendors to the retailers) from delivering products that maximize the retailer’s merchandise offering. The current information asymmetries heavily rely on buyers (who let’s face it REALLY aren’t factoring customer mindshare, the brands level of diffusion, or the individual factors of the brand – buyers are buying in their overall patterns for the category as a whole). This is the same thing with proprietary demand signaling products like wants / likes as a proxy for understanding market & audience.
The one retailer in the space that I have MAD respect for is Amazon’s Vendor Central. They are definitely leading the charge, but it still needs a lot of work – to flatten data communication and leverage all parties working together.
Please don’t suggest that Facebook Like Button solves this – the company is evil and can’t put something like this together that will actually benefit other companies businesses. COME ON – It’s Facebook they won’t even let the users of their products have their data – do you REALLY think that they would do anything that presents monetary value to other stakeholders?
When you take a look around the internets, the only company positioned to do this is Amazon – but it has to be an open standard that:
What Does this Innovation Look Like?
Distributed System – This wave will be about massive distribution of a service that harnesses demand, centralizes and then distributes it to all the stakeholders
Vertical Integration – This wave embraces the spirit of the internet – pushing development to take on the “Man”. In order to compete with larger, better financed, and highly efficient teams – the web needs to pull partners together and build a better ecosystem. Although the 2011 prevailing tech theory revolves around
Retailers need to communicate better with suppliers to maximize capitalizing on demand based on supply-based opportunities & brands need to leverage marketing & promotion to drive the retail & brand businesses together.
Integrated into workflows – don’t make me log into another dashboard. The demand signaling product should push to(the fairly universal tool that everyone uses, even if they have more advanced analytics tools). This is a big limitation of in the fact that they aren’t making data analysis easy for me by controlling my analytics within their product – I’ll use your product more if you give me the data to put to work. The way that this tool is going to create value is by making data widely available and located in a place where people can actually see it & use it.
* The “traditional seasonal” approach is where product available for purchase at retail (i.e. what you see at the stores) is produced in two main production cycles – Spring/Summer & Fall/Winter.
Supporting Data Points
– So this is now hitting the general media culture after we started talking about it in 2011. Moral of the story – Quora puts you way ahead of the game.
3. Infrastructure as a Service – The Missing Link
This gilded age of the consumer/mobile web has it roots in the commoditization of technical infrastructure that Amazon championed stemming from their CapEx investments from the early/mid-00s (what ultimately becomes Amazon EC2 through Amazon’s excess server capacity).** Now as the incredible technical developments of the web gave rise to Amazon EC2, the huge growth ofE-Commerce will push the back-end infrastructure to innovate.
The world before Amazon EC2, tech startups were forced to engage in a massive CapEx build out. An article that beautifully illustrates this is Marc Andreessen’s Wall Street Journal OpEd – Why Software is Eating the World). This is ostensibly the same thing that is still happening in Online Retail & retail in general. The Major’s are building out the infrastructure:
Walmart Takes over Supplier Logistics –& (B-Net Article – )
wrings profit from fulfillment –
“They’re building out fulfillment because they realize that fast and predictable delivery of product is a huge driver of their business,” Colin Gillis, an analyst at BGC Partners LP in New York, said in an interview. “With the revenue growth rate that they have, it’s not like they’re doing this just because they want to. They’re trying to catch up to their sales growth.”
The investment in fulfillment centers last year – the company’s largest operating expense, at 9.5 percent of sales – brought the total number of warehouses to 69. To help further automate its order-fulfillment business, Seattle’s Amazon agreed to buy warehouse-robot maker Kiva Systems earlier this week for $775 million, the company’s biggest acquisition since its purchase of shoe retailerin 2009.
Urban Outfitters Prepares to Grow Online – Internet Retailer – (
Macys Breaks Ground on Fulfillment Center in WV – Internet Retailer –
Now these retailers have hundreds (and in some cases thousands) of different brands. For example, Zappos has 312 Men’s Footwear brands ALONE and Walmart has something in the order of 50,000. There needs to be a scalable, easily implemented solution for the brands that the retailers sell.
Think about how beautiful Amazon EC2 load balances and effectively responds to traffic spikes. It also is extremely easy to implement – even a pretty JV coder like me can get an instance up and running without much fuss. There needs to be a player that delivers order fulfillment & inventory management (remember we already established how much larger E-Commerce is going to become) in a capacity that enables leveraging of economies of scale through services only an aggregated player can provide.
Now there are two main players that kinda do this:
- Fulfillment – Shipwire is a specialized E-Commerce Fulfillment company that lead the industry in formalizing a pricing structure & delivering 3rd party logistics services as a service. Although they are small and relatively new, they are hands down one of the market leaders in the space and on the right track. They need to drop prices considerably and flush out their model, but all things considered it’s a good start.
- Amazon Fulfillment Services (Fulfillment By Amazon (Amazon FBA) – Amazon is currently operating a fulfillment service, but it’s not dialed and it’s pretty expensive. With Amazon operating 13 Fulfillment facilities in the US, and opening 4 more (as of the week of Sept. 12 Amazon made in-roads to opening fulfillment facilities in CA – W00T!). If the server infrastructure buildout of the early 00s is emblematic of Amazon’s future fulfillment capabilities in 5 years, then this could be in the innovation that the industry desperately needs.Here are some background resources on the investments that Amazon has made in building out it’s infrastructure:
Amazon added more than 7 million sq ft of distribution space this year (40%+ over 2010)
- $130 million on a pair of distribution centers in New Jersey:
- $135 million on a pair of distribution centers in Virginia
- $200 million in distribution centers in Texas
- $139 million in two sites in South Tennessee
- $150 million in southern Indiana
- 5 – 10 new fulfillment centers in California over the next 3 years at an avg cost of $150 million per 1 million sq ft ( )
- $750m – $1,500m in California (at least $500 million to open large distribution centers and other facilities in California that would create 10,000 full-time jobs –
The killer part about this is that there is already the physical infrastructure built – in every city there are 3PL (third-party logistics) warehouses that will store, pick-n-pack your orders. However, they don’t solve the critical aspect of inventory management.
Here is what the solution to this wave will look like:
Load Balancing Inventory Between Warehouses: By virtue of clarity in the demand signals, the new service can shift inventory from Warehouse A to Warehouse B (that’s located closer to the demand source) to drive cost efficiencies.
Long Haul Injection Shipping: The main profit center for United Parcel Service & FedEx is the volume of packages driven to any one location on any given day that allows them to combine hundreds of shipments into one large container. By virtue of aggregating hundreds of brands and coordinating the logistics, the entire ecosystem derives cost efficiencies from scale.
Great Clarity into the Supply Chain: A system like this will reinforce Wave 2 in that all players will better understand where their supply is and how to structure product promotion strategies accordingly.
Social Proof: Here are some recent developments that support this becoming a major wave:
Targets ‘s ‘Prime’ with 1-Day Delivery –
- Demonstrates the strategic priority of
- Illustrates market opportunity for new players with the resources and strategic alignment to get into the industry
- This problem is ‘insanely’ logistically complex – the math & algorithmic complexity of conquering something like is perfectly geared for
Said to Plan Order of 30 Wide-Body Boeing Freighters ( )
- $5.26 BILLION in CapEx for these 30 new planes – FedEx is a finance wiz and would not take a major order on like this if it did not forecast an even larger increase in volume
- 17 million packages will be shipped on Dec 12, 2011
- ~10.26%+ in shipment volume in 2011 from 2010
- 15.6 million shipments shipped on Dec 17, 2010
- 12 million shipments on Dec 15, 2008
- 10.6 million shipments on Dec 16, 2006
Tests Same Day Delivery in San Francisco
This follows‘s move into the space & ( )
Wave 1: Deep Dive Investigation into Curation
[Note: I want to define a couple of terms so we are all playing on the same level – here are some definitions that I am going to use:
Majors: The 800lb gorillas in Fashion E-Commerce like Nordstrom Bloomingdales (Macys), Saks Fifth Avenue, Net-A-Porter,Urban Outfitters. To get an idea of their scale:
Independents: These are the Online Retail / Fashion sites that are primarily focused on being boutiques -> they mainly sell the new, high-end consumer fashion. The main players in this space are RevolveClothing, Tobi, eModa (even though they suck and don’t pay their bills), and Karmaloop
Here are the push factors to why this trend will emerge:
1. Low Competitive Advantage in Product Offering
In the mid-late-00s the Majors (i.e. Macys, Bloomingdales, et al) were facing a problem – they all sold +/- the same brands, at the same price level, and were in the same locations – thereby commoditizing their entire retail segment by virtue of growth aspirations fueling homogenization (and thereby progressively destroying value proposition. During the Mid-00s consumption boom – the Majors all sold the same brands, focused on Jack Welch-Style Efficiencies & Synergies (like cutting customer service to increase profitability – , and ultimately destroyed any discernible value proposition that enabled them to be price setters in the industry. In the same manner, most fashion E-Commerce sites are in direct competition with the majors – offering the same brands and pretty much the same prices.
Back in the mid-00s the Major’s were still riding high on engendered brand positions & established customer mindshare (from the last 40 years of evolution – customers, only just maturing with the internet, still primarily held a mental association that “I go to Nordstrom to buy nice Clothes:). Most of these Major retailers simply didn’t understand the true threat that Zara & H&M posed to their core businesses – instantaneously responding to demand signals that delivers product in the emerging trend and at sufficient quantities that the customers wants.
Simply put – they had better product in the right places & the Macys and the Bloomingdales of the world could not compete (and arguably are still only in 2011 beginning to achieve substantive market progress in response to the massive changes in the macro-retail environment. Surprisingly, JCPenny is leading the charge through a fast fashion boutique approach with their Mango partnership.
(WSJ – Penny Introduces New Weaves of )
Currently, most independent online fashion sites are falling victim to this same trend (that Major Department stores did in the mid-00s – commoditized product offering). The Independents’ (or , or Karmaloop) compete with the Majors ( , , Net-a-Porter) – they have VERY similar product offerings in the consumer fashion space (i.e. not when it comes to High Fashion like Zegna, Loutboutin, Gucci, etc)
2. Portable & Effective Data Extraction Best Suited for the Smaller Players
Traditionally speaking, boutiques were a place that the shop owner knew who you were and was “the fashion expert” that provided some value add services (being in the know and having a relationship with the customer to make recommendations about purchases).
E-Commerce has exploded in the last 5-6 years as the process matured and more people have experience with it.
– The advantage of E-Commerce is the ability to emotionally engage your customer base by virtue of your smaller scale – it’s a lot easier to apply qualitative customers insights that fosters your customer development strategy
3. Buying Traffic Sucks! Play to your Strengths
- Google AdWords drives significant traffic to the fashion retailers & the smaller guys simply don’t have the financial resources to compete.
- The big boys have crazy, advanced tools, like Marin Software’s Pay Per Click Management Solution. In addition, they have the staff & the tools to blow the little guys out of the water.
- The Independent Players won’t have the ad-buying budgets, highly specialized Pay Per Click or data analysis staff, or advanced tools to win against the big boys. Even if you do have some of it, they major fashion sites will simply copy your strategy. For example, some of Internet Retailers most recent estimates have paid Search Taking up a significant portion of ad budgets:
4. Understand Your Position & Embrace Strengths to Maximize Value Proposition
- Leverage your small scale to have a direct communication strategy that emotionally connects consumers to the E-Commerce channel.
- Just think about it – trying to effectively segment an email list to 1m people (like let’s say Nordstrom’s) versus an smaller competitor who is segmenting a 4k email list is completely different. The smaller chains have the luxury of dealing with 000s of visitors/orders/customers versus the majors like Nordies that has 000,000s – use this to your advantage. For Example, a smaller player has the considerable strength of:
- Once you have built customer profiles over a couple of months, you can have more insights about how to segment an email list to effectively engage & communicate with your customers.
5. The Big Boys in Online Retail Are Swamped in Data
- Many of you know, that I have a personal vendetta against the “big boys” and believe that they scale inherently their ability to innovate.
- The big boys have xx millions of visitors per month & trying to add customer insights requires such a significant investment that it’s really not possible at scale
- As a smaller player you are at a significant advantage to have substantive insights that drive profound impacts on your product offering.
The Startup Model – Just-Your-Style
This is what I see Personalization site / Product line Looking Like:
Just-Your-Style Men’s Fashion Subscription Investigation & Analysis
(JYS) is a placeholder name for this prospective business model analysis that flushes out the personalization concept for E-Commerce next wave of innovation. This company is intended to be built as a new business line to the 100s of fashion sites out there so for example, it would exist on top of or or an application of Net-A-Porters Predictive Algorithm.
Just-Your-Style was one of the first fashion E-Commerce sites to fundamentally embrace the boutique atmosphere on the web through the “stylist approach” to fashion E-Commerce. Based on a couple of brief conversations, the Men’s aspect of Just-Your-Style has been an opportunity that Just-Your-Style has not completely dialed in.
Just-Your-Style should embrace that boutique/niche position and offer a subscription fashion model for men that replicates a stylist at a local boutique making recommendations for a guy about what to buy. It doesn’t make sense for Just-Your-Style to invest an incredible amount of resources into styling users without them coming back – This model employs a Subscription basis to realize the monthly benefits of recurring revenue from customers as compensation for the costs incurred for stylists time & energy.
Here are some of the main goals/aspects for the products design/development:
- Personally Selected Items – Just-Your-Style is a boutique and this model needs to begin at it’s core with a personal interactions between the Just-Your-Style Stylist and the Subscriber. This is something that the larger players like Mr. Porter & Gilt can’t do – they simply have too many customers to be able to fundamentally implement a project based on personality like this! Every time fashion is attempted to be recommended programmatically at scale – it consistently fails (i.e. Google & ).
Having a stylist to think about the wardrobe, make suggestions, & engage with the subscribers creates a compelling competitive advantage that will emotionally lock in subscribers
- Integrated Workflows – The subscriber is making a trade off when they sign up for this product “I (subscriber) will give you my monthly budget for apparel in return you make me look good without me having to think about it.” A product like this should understand that the guy is not going to log-in – otherwise, they would be making purchasing decisions for themselves.Emails that prompt the subscriber to complete explicit actions should be key. For example, on the simple mock-up on the next page – Clicking on the image of a shirt should lock in the selection for the subscriber’s monthly shipment
- Customer Insight – This subscription business line will enable Just-Your-Style to grab deep customer insight that can be directly applied to the main business. Utilizing the subscription business as representative samples for the demographic & style preferences of the overall men’s business at .
Value Proposition for Just-Your-Style
2. Markdown Planning (Profit Optimization)
I have received 4 emails in the last two weeks from Just-Your-Style about the “Summer Sale” that you guys are pushing pretty hard. One of the biggest problems of End-of-Season / Closeout Sales is letting the people know that these markdown items that they would want are available. This subscription model enables you to target people whose taste preferences are best suited for the particular inventory.
With this model you can direct inventory that you might be getting long on to their most effective source for acquisition & enjoyment by Just-Your-Style subscribers – only through the deep customer insights that this business generates can allocation & planning optimization be done dynamically as part of the standard workflow process of the company.
3. Cash Flow Stability
A monthly subscription models creates a fairly consistent source of income for Just-Your-Style that is less volatile than strictly relying on Email & Inbound traffic generation. In addition, the predictability of shipments means that out-of-stock items can be secured (reducing the opportunity costs of lost sales) weeks in advance and under-performing inventory has a new life to be appropriated to the right customer.
A subscription model enables the financial stability provided by the benefits of predictable shipping cycles for lean inventory management
4. Buying Traffic Sucks – A More Effective Revenue Generation Tool
Buying traffic through AdWords is an expensive proposition that turns markets the Just-Your-Style, but mainly as the purveyor of the item that the potential customer was searching for. Fashion E-Commerce has become fairly commoditized over the last two years and a great purchasing experience does not carry the same weight as it did 3 or 4 years ago when Zappos was King – now everyone has free shipping & easy returns.
A stylist-based subscription model builds on the core competencies of Just-Your-Style and can be leveraged into a distinct value proposition – a virtual boutique that understands the customer & is committed to filling out the whole closet.
Example Pricing Structure
– If the monthly $ value of the shipped item is below the Monthly Subscription Price, then it is carried over to the next month as a credit OR used to credit the Complimentary Good that is shipped with every order
The Up-Sell Model – Every Month Receive a “Wear it With” Item with the Shipment
Every month, the subscriber should be sent an additional item that complements the Subscription Items per their “Level”. The “Wear it with” items are specifically chosen to be paired with a piece from the current month’s shipment or from the previous month’s (As the service gets off the ground, the “Wear it with” item should specifically take into account items that the subscriber says are his “all-time favorites”)
Here is the beauty of the model – guys are lazy and (I’m willing to make a big bet) the overwhelming majority of the time, they are going to keep the “Wear it with” complementary item.
How it Works:
Every Month the subscriber is sent something that the Just-Your-Style Stylist believes will fill out their profile. In addition, an item is selected that “looks good” or complements the subscribed item. For example,
Subscription Item Complementary Item
Jeans → Collard Shirt
T-Shirt → Jeans
Collard Shirt → Jeans
Collard Shirt → Jacket or Outwear
Jacket → Collard Shirt
3 Days after the Shipment Arrives, the subscriber receives an email to lock in the order and provide feedback on the items.
Feedback & Improvement
When the item is delivered, Just-Your-Style sends an email to the customer requesting that they rate the complementary item. There are three elements that should be included in this email:
1. Subscribed Item
Rate It Automatically builds out your customer returns
How Did it Fit Add a 3 aspects (like Google is doing with Google Places)
Keep It Authorizes Just-Your-Style to charge the subscribers CC for the subscriber price
Return it Creates a shipping label & Feedback box for rasons
2. Complementary Item
Rate It Automatically builds out your customer returns
How Did it Fit Add a 3 aspects (like Google is doing with Google Places)
Keep It Authorizes Just-Your-Style to charge the subscribers CC for the subscriber price
Return it Creates a shipping label & Feedback box for reasons
One of the most successful E-Commerce startups of the last 5 years was Zappos – whose free shipping & free returns systemically changed the industry. By virtue of employing these two policies, the consumer was incentivize to purchase two items with almost zero risk for the purchaser. As a direct result of this program, Zappos experienced a return rate of 37% in 2010 or $374m – however, customer’s loved the fact that they got to try before they buy.
Sending a complementary good that the customer did not specifically purchase does present significant risks in this model. However, there are several ways to ideas
- Guys are Suckers for Hot Girls Approvals
On the packing slip, show a picture of a cute girl introducing herself as his stylist & why she thinks that he will look good in these choices – as a guy, I can tell you that I will wear whatever a hot girl says that I look good in. This also creates a sense of connection and social contract between the subscriber & Just-Your-Style – if Just-Your-Style gets these complementary goods “right” over a couple of months, then a significant level of trust and goodwill will be harvested between the subscriber and Just-Your-Style
Market the fact that by virtue of being a subscriber they got this 2nd item at a reduced rate – you increase the probability that the subscriber will keep the item simply because it’s a good deal
- Encourage the Subscriber to Photograph the Himself with the Return
If the subscriber elects to return the item, then he should be prompted to take a picture with his phone to show Just-Your-Style what he didn’t like (Also, the “take a photo” to return should be incentivized because the subscriber is having to do extra work & Just-Your-Style is extracting value out of it). Just-Your-Style grabs an incredible new piece of information, a visual idea of what the customer looks like – making the stylists job easier next shipment.
Building Out the Closet
- Stealing a page from , building out the wardrobe of a person is going to be shitty, time consuming, and hardwork.
- The solution to this is easy, build a web app, (much like expensify), have people take photos of the stuff that they like on a daily basis (or as they wear them).
- Additionally setup a forwarding email address so that people can forward email order confirmations for the items that are purchased online.
1. Style Image of What you Would Like to Dress Like
Goal: Have the subscriber qualitatively select the trend that they “want” to dress like
Defines: Defines the major trend that will be used to make recommendations – Example trends:
Americana Urban Sophisticate Euro-60s Summer Sendagaya-Hipster
2. Select a number that broadly defines where you think your style lies
3. Select the number that broadly defines where you want your style to be
4. Select the Looks that you could see yourself wearing
5. Do you have core/staple items (Jeans, Jackets, etc – generally more expensive items that will be gradually added to your subscription) that we should plan into the subscription?
6. Connect Facebook to personalize your recommendations (We won’t post anything to your profile)
Information that is helpful:
- Gender (Obviously, you don’t want to see recommendations for girls stuff, if you’re a guy)
- Location (If you live in NYC then the clothes for winter we suggest will be different than if you lived in the constant summer of Los Angeles)
- “Fans” (If you like house music, it implies certain aspects helpful for style recommendations – likewise if you listen to Dave Matthews, it’s incredibly useful for style insights)7. What items that you have purchased from Just-Your-Style do you love the most!
- Display Thumbnails of the items that the user has purchased
- Grab Feedback from the subscriber about fit & how much he wears it.
“Want/Like” Demand Signaling
- If they aren’t a customer, list items that fall into the Trends the user selected in Step 1 – have them “Want” the items that they like the best
- Want items will help the stylist to better understand what products appeal to the subscriber & present items that the subscriber is most likely to be stoked with.
For Google Search: