Your E-commerce Brand Will Probably Fail
Not every consumer startup needs to be an e-commerce brand. In fact, most shouldn’t be.
E-commerce has catapulted a number of consumer businesses, from Warby Parker to Casper. But while bringing traditional industries online helped differentiate these companies from those stuck in physical retail, deploying an e-commerce model is not enough to succeed anymore.
It’s not 2010. You need a more inventive strategy. Here’s why:
It’s been done before
The first wave of vertically integrated e-commerce came about seven years ago with companies like Warby Parker, Dollar Shave Club, and Everlane. At that time, the idea of disrupting an industry by bringing it online was still nascent.
But we’ve had a busy few years.
Now most industries are online. Being the “first” to bring a category online isn’t an option anymore and won’t help you stand out. And even if you can find an industry that’s resisted the pull of e-commerce, it’s so easy to launch an online store – thanks to services like Shopify and AWS – that you likely won’t be the only startup in that space for long.
You can’t compete against Amazon
Amazon accounts for 43% of online retail sales and more than half of the growth in e-commerce.
Amazon has set customer expectations for online ordering – including two-day free shipping, low prices, and nearly unlimited options – and those expectations are extremely challenging for new brands to meet. Superior customer service and aspirational branding can help startups stand out, but customer buying behavior is still driven largely by convenience and price.
And it’s getting harder to compete on price. While startups like Warby Parker and Dollar Shave Club were able to offer discounts due to manufacturing efficiencies and clever marketing tactics, the increased noise in e-commerce has driven up marketing costs, particularly on social media.
As a result, many emerging brands are now charging premiums for online products and that just won’t work. It’s nearly impossible to get a customer to pay more online or wait a week for shipping, now that they’ve been spoiled by Amazon.
Consumer behavior is still lagging
Food is the last major industry to resist the shift towards e-commerce. Less than 5% of grocery sales are online, and those are made almost entirely through Amazon. That’s because, in general, consumers still want to buy groceries in bulk, which steers them towards supermarkets and online marketplaces like Amazon over individual brands’ websites.
With the exception of meal replacements like Soylent (which are independent from the rest of a consumer’s grocery buying), food still isn’t likely to work in an online model until companies can convince consumers to radically change their purchasing behavior.
The Last Mile Problem
There are two key expenses to consider when launching an e-commerce brand: (1) customer acquisition costs and (2) shipping costs.
Shipping products to customers’ homes is expensive. For most industries it is, by far, the most expensive link of the supply chain. The inefficiency and cost of moving products from warehouses (bulk) to people’s doorsteps (individual boxes) is referred to as “The Last Mile Problem”, and it has yet to be solved. Fortunately, plenty of smart people are working on drones and autonomous cars to make shipping less expensive, but we’re still several years away from those solutions coming to fruition.
As a result, there are two models that currently work in e-commerce: (1) high price, high margin products like mattresses where shipping is a small percentage of profit and
(2) high frequency items like razors that can be purchased via subscription so customer acquisition costs are a small percentage of lifetime value.
There’s a rule of thumb that average order values should be over $100 and/or churn should be below 5% to get the economics to work in e-commerce. Anything else, and you might find marketing and shipping eat away too much profits.
What’s a new brand to do?
Selling products online is like rowing a boat in the middle of the ocean, hoping someone will fly by and find you.
In 2010, sending up flares was enough to get that attention. But now the ocean is full of other boats and it’s getting harder to catch the attention of passers-by. It’s unlikely a customer will find you online without spending a fortune on marketing.
This is why “multichannel” is the latest buzzword. Even the first generation of e-commerce brands are starting to recognize the value of using a multichannel strategy. Warby Parker has flagship stores all over the country. Glossier and Everlane employee popups to drive customer trial. Casper is selling mattresses at Target. The Honest Company is available on Amazon.
You probably need to go multichannel. But if you’re a new consumer brand, you’ll need even more to stand out. A new product in a new category. A truly unique brand. Next-level convenience. Delivery innovation.
Because, let’s face it: it’s getting harder to distinguish one boat from the next.