Sites
Two things that have been declared “dead” of late:
Websites
Software
In the worlds of consumer experience and behavior, the two are inextricably linked. So much so, that in the Shopify ecosystem, for example, it’s hard to fathom a site existing without a series of apps.
The futures of both, perhaps ironically, are being questioning for different reasons. Yet those differences—like the products themselves—remain linked.
Ecommerce, to be fair, is difficult to pull off.
No one has framed it better than Andy Dunn, who did so 11 years ago in “Ecommerce is a Bear”
The entire e-commerce P&L is architected to make it almost impossible for you to generate EBITDA.
Between gross revenue and net revenue, you typically have a meaningful returns line item. Then to get to your gross margin, you either are selling other brands which is a tough and thinner margin business or you are building your own vertical brand, where the margin can be terrific at scale but is offset in the early innings by increased team and marketing costs to generate that brand.
Either way, after subtracting cost of goods sold, now you’re at gross margin dollars. Right? Wrong. At a traditional retailer, you’d be at gross margin. At a standalone e-commerce company, you’re only at what we call product margin, because you have to net out your (often meaningful) free shipping incentive to your customers to get to gross margin. Increasingly this is free shipping one or both ways.
Your gross margin isn’t really your contribution margin. You’ve got a host of variable to semi-variable SG&A expenses that are fundamental to doing e-commerce that are typically accounted for in SG&A. The cost of photography, merchant processing fees, customer service (being good at this is price of entry in e-commerce these days), and the non-freight cost of fulfillment, either through your own warehouse or a third-party logistics provider. Now it’s time to subtract your marketing spend to get to your true contribution margin.
Notice the list above doesn’t even factor in the website (aside from processing fees) or software. It’s just hard.
On the “software is dead” narrative, much of that is centered on the fact that public tech stocks are basically flat over a four-year period after exploding during COVID.
The cross-over here, of course, is that much of the DTC space has bemoaned the cost of software and whether its value is reflective of the price. At the most hyperbolic, many seem to have a wish that they one day run a brand without SaaS.
There is that saying, of course, to be careful what you wish for, and it seems relevant here. Because the other narrative (different, though so closely linked) is the “website is dead” narrative.
SaaS, though, isn’t quite the culprit advertising is. And herein lies the narrative progression: commerce won’t need a site anymore, because commerce can happen anywhere.
Though this has been a narrative of commerce futurists for some time, platforms—thanks to the walling of data—are now incentivized to verticalize the offering from ad to transaction.
The argument goes something like this:
As traditional advertising channels build out their native commerce solutions, these channels will siphon conversions away from the website. The need for this is centered on consumer data. More data makes ads more effective, which—by extension—begins to save brands who have build unsustainable acquisition funnels.
Weirdly, though this concept of saving brands may in fact kill them.
The problem with the idea of decoupling commerce from a consolidated website is that merchandising gets much more difficult if a consumer can seamlessly make a purchase from an ad on, say, Instagram.
Instagram’s incentives are not to drive up the price of the sale, because its incentives are tied to the data. Any take rate here would be minor in comparison to the amount of money it would retain, and continue to make it more effective advertising.
If that’s the case, Instagram’s incentive is to optimize the funnel for the highest possible conversion rate.
And this is the problem: Broadly speaking, the higher the conversion rate, the lower the average order value. Because shipping things on the Internet is expensive, collapsing the funnel in favor of more, smaller transactions would have significant effects on the economics of an e-commerce brand—unless, of course, the platform were to handle the logistics.
Weirdly, in this scenario, the savior for acquisition becomes lower average order value. Which leads us to a math problem that no one has yet to solve—except maybe Amazon.