The Future of E-Commerce

Thoughtful post by Chris Dixon today about the current state of E-Commerce and most likely where it’s headed.

I’ve been thinking about this a lot lately and these two paragraphs sum up my thoughts fairly well on where things are going:

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’s strange is that I’m with both the bulls and bears on this one. New marketing strategies are making it easier for startups and mid-sized E-Commerce companies to make inroads on the bigger guys. I suspect that the recent tidal wave of VC money and the nimble nature of smaller companies has something to do with that as well. The bear case is a little bit scary for that middle-ground. E-commerce has matured and even once untouched niche markets have become saturated. Those guys are going to get squeezed out one way or another, i.e. unless they find some other value outside of the immediacy or shopping experience.

So the question is, what value is left to compete on outside of those two things? Let’s look at a few options:

Customer service – Unlikely. The most you can hope for is to draw even with the bigger guys who will always have more money to provide a superior customer service.  Gaining fame for incredible customer service is played out. Zappos beat everyone to it and they certainly reaped the benefits from that. Now that the bar has been raised so high, you might go broke trying to raise it even further.

Product offering / selection – Unless you’re offering products no-one else is, also unlikely. Product manufacturing is getting cheaper across the board, so it becomes a more viable option if you’ve got the time, talent, money and creative energy to put into product development. Successful online retailers are using this as a major part of their marketing strategy. Just look at ThinkGeek. I bet their most successful and profitable marketing platform is the unique products that they manufacture. They are innately viral.

Price – Nope. Don’t even try.

Promos – Nope. You’ll promo yourself right into the ground.

Partnerships with like-minded companies – Yes, to an extent. Though this generally requires a sales force of some sort and as e-commerce matures and third party providers make the business of selling online much easier for practically anyone, the inherent value that e-commerce and the ability to do fulfillment has dropped somewhat.

Community - I think this is the big one that most online retailers are still missing out on. While content marketing is a part of this, it’s only part of the whole picture. I’ve always thought that if you want to sum up in one sentence the so-called magical formula (and I cringe at having actually put those two words together), to succeeding with any online business it’s this: Build an audience, then sell them something. Most online retailers have attempted to this backwards. Sell them something, then build an audience. Unless you were lucky enough to start your online store before the turn of the millenium, building a database of paying customers has always been more expensive and generally more difficult than building a non-paying audience and then converting them into paying customers. Now I think most e-commerce companies are realizing that driving customer loyalty needs to go beyond customer service, price, and overall shopping experience. They need to build a community around their brand or online store. Over the next few years, a passionate and loyal community is where many online retailers should look to in an effort to significantly impact both top and bottom line growth.