There has always been tension between CPG (consumer packaged goods) companies and the retailers who sell their products to consumers. If a consumer will pay a fixed price for a product or service then the battle over who gets the margin in any sale is between the person who merchandises a product and the person who manufactures it.
This is an age-old marketplace tension where leverage often determines the value captured. This is true whether it’s physical products or media products. Think about the tension between media companies and cable operators like last year when Viacom threatened to pull Nickelodeon, Comedy Central, MTV, BET, etc. from Charter’s subscribers. This has obviously occurred in battles with tech platforms like Yelp vs. Google or Zynga vs. Facebook).
As always this battle is settled by the degree to which a consumer has a strong preference for a company’s product vs the substitute products it may choose instead. Many of us learned about substitute products in undergrad economics courses. If a perfect substitute can be launched for a product you often see the retailer create a white-labeled version because it then captures all of the margin.
When a product is truly unique and demanded a retailer willingly promotes and sells it en masse in part because it does get a margin on the good but also because it brings customers in the door who spend on other products. If the retailer can get the product “exclusively” (even for just a time window) then it hopes to get more customers shopping at its store or watching its video channel vs. its competitors.
As a product or service, you can often trade short exclusivity periods for the retailer’s willingness to spend marketing dollars promoting your product or give you better merchandising in the physical or virtual store.
So Why Does This Matter?
If you create a truly unique product that is defensible and doesn’t have easy substitutes you have the ability to win deeply loyal customers and grow large and profitable. If your product can easily be copied, as soon as you are successful it will be.
In an era where Amazon has become so dominant in the retailing and delivery of physical and digital content are there strategies that can succeed?
Here Are Some Ideas Of What I Believe Matters
Brand seems like one of these nebulous concepts to most people. What is it, really? Of course branding is many things and this post doesn’t attempt a master class. But if we can agree that it includes:
- Creating a product or service that is distinct
- Having an identity in which the consumer comes to know what to expect from your brand because it delivers a product that in a consistent way
- Having a name and often a logo that reminds the consumer of what the brand stands for
- Having communications and products that consistently reinforce the unique position and attributes of a company’s products
The name, logo, color schemes and even spokespeople matter way more than more tech founders understand because of the psychology of how humans make choices but I’ll leave it to you to read Cialdini, Kahneman’s Thinking, Fast and Slow or even any of Jonathan Haidt or others to learn this for yourself. I also often tell people the simple hack is to watch Brain Games.
We of course all instinctively know when we see a brand that is well established what it stands for — Warby Parker produces modern eyewear at affordable prices, Apple produces elegant, premium technology products, Netflix offers an enormous library of binge-worthy, unique video. You might choose your own words or emotions but we can all agree that these are three distinct brands and they are combination of products we consume and the messages these companies communicate to us to remind us of how they’re positioned in the market.
We seed funded a company a few years ago called Parachute Home that has grown 180% CAGR (compounded annually) and is now doing tens of millions of revenue with very little capital raised. I will use some examples from Parachute and some other portfolio companies to give you examples from our experiences of watching successful brands grow. I will avoid talking about Ring (for obviously reasons) but can return to how Jamie built an amazing business in a future post.
The founder of Parachute, Ariel Kaye, had a clear vision for what she wanted to disrupt and how she thought she could do it. She spoke of the experience of going into physical retailers like Bed, Bath & Beyond and trying to order products for bedding, bathrooms, dining, baby products, etc. and thumbing through undifferentiated products in plastic wrapping. She felt she could build a direct-to-consumer (DTC) brand that built high-quality, premium products to meet a more discerning customer who also didn’t want to spend his or her time in a megastore.
Ariel understood her customer — the modern buyer of home products — better than anybody we had spoke with and she had the marketing chops to know how to communicate this to her market once she designed & built her products. It starts with a category being done poorly, reimagining the experience, creating distinctive products and then constantly messaging this to the market.
What started as sheets now has dozens of SKU’s. If you tried to shop Amazon for just one of these categories — where would you even start in terms of product selection? If you know exactly what you want to buy on Amazon — boom! — but what if you need to do product discovery? Not so much.
Ariel built a strong brand where consumers knew what to expect when ordering her products (sheets, towels, table clothes, robes, etc.) and a differentiated feel in terms of fabric, design, sustainability, etc. The huge importance of this is that when you have a high-level of loyal customers you get repeat purchases that are significantly more profitable because you’re not spending new acquisition dollars acquiring them. I’ll give you some of Parachute’s repeat rates later in the post.
If you think about where Amazon excels it’s because they have a huge assortment of products, they have unbeatable delivery options & costs, they have very flexible return policies and they provide good value. It is on this last point where Amazon is best positioned to dominate markets.
If you’re in the market for pure functionality and you value the lowest costs, Amazon will always be a great bet. I bought my dad an entire kitchen full of new products when I moved him into a new home. My dad couldn’t care less whether his cutlery, plates, glasses and kitchen utensils are fancy or styled — he’s 80. So I was able to get tremendous value by buying functional products on Amazon. Personally I think if you’re going the functional route on any consumer product you’re in real trouble trying to compete with Amazon long term.
If you want to offer consumer products you need to build stuff that’s much higher quality than a functional offering. In certain product categories that means building in features & functionality that isn’t a commodity. In apparel it means you’ve got to have materials, design and logos that are perceived as premium or fashionable and offer more than utility purchases. Of course Amazon can create sportswear but Nike will continue to innovate on sports fabrics & designs and will apply its logo to its apparel as a signal to consumers that they are purchasing (and wearing) a product that represents a brand value of that is premium to a generic brand.
An example of quality has been the large number of products launched in the past decade that have taken out toxic chemicals like Skylar Body in perfumes or Ritual in daily vitamins & supplements. You see the sustainability of farms as a key attribute in The Bouqs or Green & Blacks chocolate.
In the case of Parachute, like many brands they now give visibility into their sourcing and factories by product types and spend time working with sustainable sources.
And like many modern brands a “give back” program popularized by Tom’s Shoes is also an important part of establishing a strong relationship with customers.
There are really multiple forms of “curation” that I think can build sustainable differentiation in products vs. the retailer that is selling them.
In the simplest form curation is the selection of similar products in terms of function, quality, design aesthetic and perhaps brand.
If you go to Parachute Home’s Website you find 150 main products to choose from in five key categories: bedding, bath, table, decor & baby. This is very efficient if you need these home furnishings and if it’s your style & taste you can shop the full line. Compare this to 5,000 products at Restoration Hardware. Of course you can go to Amazon if you know what you want to buy and you have a very efficient ability to search for and purchase the product. But in a world of nearly unlimited inventory, merchandising becomes a huge challenge and curation > selection for customers who want some help.
There is another form of curation that’s really powerful and that’s when you want a provider to help you actually choose products that they feel you’ll enjoy. There are various models of this but amongst the most successful I’ve seen executed is FabFitFun, based in Los Angeles. They provide a quarterly box with stuff that spans make-up, sports gear, nutrition and just fun surprises. These aren’t “sample sizes” but rather full experiences for women who trust FabFitFun to curate for them. A well-curated box where choice & style come into play is very hard to make generic and therefore this company has enjoyed spectacular growth. I don’t use the word ‘spectacular’ lightly.
Curation is obviously also a form of competitive advantage for companies like StitchFix, TrunkClub and DailyLook who offer stylists to help you curate your clothing experiences. It’s true that Amazon can (and did) launch a monthly box, but it’s far less likely that they’ll successfully launch premium stylists who will speak to you on the phone and get to know you and the highly curated selection of a DailyLook.
Amongst the strongest indicators of whether large groups of people will continue to support a brand and buy its product when there are alternatives is the feeling that one belongs to a community of like-minded purchasers. This is true of nearly even fashion category for people who buy handbags, watches or expensive sneakers.
The best modern brands embrace the sense of community and encourage their consumers to share the brands in social media, which leads both to affinity with other purchasers and aspiration in those who are looking for their friends or icons to help them with selection. Below you can see social sharing encouraged by Parachute who use this to drive 40% of purchases from direct vs. referred traffic and with much lower marketing budgets are able to drive 500% more content engagement than Bed Bath & Beyond’s social channels.
When we look at investing in companies we often look at their communities and the social engagement as an indicator of whether there is organic demand for the product (vs. companies that have to spend too heavily on customer acquisition).
In a world in which we all felt like the entire physical world might disintegrate as consumers wanted products just to arrive at their homes, ironically the best brands are moving back into physical retail where consumers can experience and live the brand.
Perhaps the first big pioneer of this was Apple who started opening stores in 2001, just when it appeared that the Internet was going to implode and when they went physical the industry trade magazines and press openly mocked them. They were the fastest retailer in history to go from $0 to $1 billion (3 years) and today they have 500 stores in 24 countries.
But if you look at the trends, many of the best DTC brands have embraced physical.
From Warby Parker …
To Bonobos …
To UNTUCKit …
And at Parachute Home we’ve also begun our massive retail rollout with our first two locations in Venice and Portland. And since I have data on this store performance I can tell you that 45% of purchases are repeat customers with strong EBITDA margins so having a retail location in market helps with brand loyalty and retention.
Parachute even took the “physical concept” one step further by letting you truly live the brand. In Venice, California they opened a “Parachute Hotel” that let consumers experience the product for a night in a world-class location. I think it was clever to launch a physical experience both in terms of marketing and product awareness. The press around the Parachute Home Hotel itself was worth the effort of having created it.
It’s hard to build a successful product company — even a DTC company — if you don’t know how to supply and service the large channels where consumers want to purchase products. At the end of the day, the mass of customers will be spending their time with Amazon, Walmart, Nordstrom, BestBuy and many of the other great places they discover products. In the long run it’s hard to build a successful company if your products aren’t in channels where people want to buy them.
But if you want to out Amazon, Amazon you need a really strong brand, with a high-quality and differentiated product, that is highly curated and develops a strong & loyal community. If you can achieve these things there remain very healthy profit margins and large, defensible businesses in eCommerce.
[This post by Mark Suster first appeared here and has been reproduced with permission.]