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April 10, 2014

How to Effectively Compete in eCommerce

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Norwest Venture Partners is an active investor within consumer Internet, particularly in ecommerce. Through our experience partnering with entrepreneurs to build companies, we have found that the most successful ecommerce companies reflect a few shared characteristics. Successful ecommerce companies are those that own their merchant category and have founding teams that understand their particular customer base especially well. These businesses connect with today’s customers in a unique way that enables simple, yet strong, branding to draw in an avid and loyal customer base.

There are many challenges associated with building a successful ecommerce business, but two major questions that must be addressed are 1) how can you compete against Amazon and 2) how do you avoid Google becoming your dominant source of traffic, both paid and unpaid.

Competing against Amazon is particularly difficult considering it is a well-capitalized retail giant that has ample resources and human capital to optimize everything from supply chain costs to marketing strategies. In addition, Amazon has demonstrated its ability to quickly move into new categories of goods and to dominate those spaces efficiently.

While it is important to have diversified traffic sources (e.g. organic search, paid search, social media, affiliate, and email marketing campaigns) many companies end up with Google becoming their predominant source of traffic. Preventing Google from dominating your traffic generation is critical because Google is such a powerful force in monetizing that traffic. On the organic search side, companies can be affected by Google’s ever changing search algorithms.  If you are not careful, paid traffic from Google can become an arbitrage game, and the spread between what you pay to buy traffic and what you are able to monetize that traffic for becomes very small.

While ecommerce businesses face these challenges, the advantages that ecommerce businesses have are often overlooked. Amazon’s size and scale makes it challenging for them to foster a true community. Amazon also has yet to show much success in true merchandising, especially in categories such as fashion where that is important. Ecommerce businesses that demonstrate the ability to foster deep relationships with customers create powerful user communities with passionate consumers and advocates. This helps with merchandising and social marketing, addressing the two major pain points addressed above. Innovation of the mobile app experience is another area that addresses both pain points, as Google does not control usage of mobile apps for commerce as they do for web traffic to commerce sites.

One example of a business that is solving these pain points is Norwest portfolio company, ModCloth, an online retailer of vintage-inspired fashion and décor. ModCloth is continuously innovating in customer engagement by involving its customer base to further refine its products. This creates a strong user community and consequently provides operational advantages to the company such as lowering customer acquisition costs. ModCloth’s increasing focus on mobile usage further reduces customer acquisition costs and also increases loyalty and conversion without increasing its reliance on Google. Furthermore, by inviting the ModCloth community to comment on product descriptions and to vote on items from emerging designers, ModCloth is starting to democratize the fashion creation process. This has been a great way to extend its community into segments with pent-up demand for better products and better merchandising. ModCloth’s recent move into the “plus-size” market, a huge area that has been largely underserved since the beginning of online commerce, is a great example of this.

Other ecommerce brands also benefit from refining and optimizing their sites to create a unique personality that connects with their consumers. Quirky, another NVP portfolio company, focuses on crowd-sourced product development and has done a great job creating product-specific narratives for different products. One such example is Jake Zien’s invention of Pivot Power Genius. Quirky’s story-telling of the creation process, through text, images, and videos, provides powerful brand connection. Moreover, it creates loyalty and a desire to be a part of the community – as a customer, inventor, or contributor. The powerful consumer experience that Quirky creates is something that is incredibly difficult for mass retailers to replicate.

Other ways to draw customers from mass market retailers is to offer a differentiated business model and utilize value-added services. NVP portfolio company, Gemvara, is an online retailer of fine jewelry that offers a virtually unlimited selection of designs through its unique technology platform. By focusing on curated products, Gemvara offers products in the sizes and styles different consumers demand and is often the first to table new products and designs. This allows Gemvara to benefit from a strong buyer conversion rate, and offers a different experience than a customer would get with a mass market retailer. In terms of value-added services, for Internet retailers that do not already offer compelling free or discounted shipping options for customers (a necessity in online retail today), NVP portfolio company Clarus can be one such solution to do so. Clarus offers, a free shipping solution for ecommerce merchants to compete with Amazon Prime, as well as customized white label loyalty programs to support engagement and repeat business.

Ultimately, a common thread among all successful ecommerce brands is their ability to offer a unique and differentiated experience that a mass market player such as Amazon cannot replicate. In doing so, these businesses are able to build a remarkable brand that is not solely dependent on Google to drive traffic.