Thoughts

×××
I write for me; not for you. // I'm not a huge fan of pontificating. Most of what I write here is to solidify a lesson-learned or to clarify my coalescing thoughts.
  • The Best Kept Secret in Crypto


    Anonymity is not the same as obfuscation

    Cryptocurrencies have generated a lot of excitement over the last year or so, especially with the phenomenal price surges experienced in 2017. The ability to conduct peer-to-peer transactions through the blockchain has an added attraction. It cuts out government intervention and the role of third parties such as banks and financial institutions.

    However, apart from all the current hype around digital currencies, there is one major misperception about this market; most people believe that cryptocurrency transactions are fundamentally anonymous. Nothing could be further from the truth and, apart from a handful of the hundreds of cryptocurrencies on the market, most of them do not provide anonymity.

    The danger here is that most people entering this market do not understand the core technology. We get carried away on the wave of hype without checking our facts, making us vulnerable to misinformation spread by currency traders.

    How Much Can We Hide?

    Blockchain, the platform for cryptocurrency exchange, is antithetical to anonymity because it is designed to be fundamentally transparent.  The intention is to make all transactions available for public scrutiny while protecting our privacy. However, this doesn’t mean that they are anonymous; at best most cryptocurrencies integrate a level of obfuscation to obscure the origin of transactions and make them harder to follow.

    Blockchain technology uses ledgers with public addresses to facilitate transactions, which are encrypted 34-bit alphanumeric strings recorded on the blockchain. This technology gives us a false sense of security.

    Source: Cointelegraph. https://cointelegraph.com/news/blockchain-transaction-anonymity-is-necessary-evil

    Hiding identity on digital networks can be difficult and we often leave digital footprints in our transactions. Even though cryptocurrency transactions do not link directly to a person’s identity, physical address or email, this information can be tracked through IP addresses. Our identity can also be traced if we use a private Wi-Fi connection

    Bitcoin: A Case in Point

    Bitcoin transactions are not anonymous and can be tracked, even though blockchain encryption enables a level of obfuscation to provide some degree of financial privacy. The Bitcoin infrastructure is designed around a distributed, global database which stores every single transaction that takes place in the system.

    We can use Bitcoin software to create a new public key, using it as a pseudonym to transact without registering personal information. The problem is that pseudonymity does not mean anonymity, and our identities can still be tracked.

    Bitcoin’s answer to this problem is to use a number of obfuscation techniques to enhance financial privacy. One of these is referred to as “ambiguating obfuscation” which reduces the amount of information that a person can gather from a transaction. This could involve the use of a new pseudonym for every transaction.

    Another type of obfuscation, “cooperative obfuscation”, has become popular with users to fudge the origin of transactions. This can be done by mixing funds with other users through a service provider to obfuscate the flow of payments.

     

    Source: Zcoin. https://zcoin.io/the-difference-between-privacy-on-the-blockchain-and-hiding-your-ip-address/

     

    Other cryptocurrencies, or altcoins, have built stronger platforms in terms of privacy. As the original cryptocurrency, Bitcoin had to field much of the criticism by government of blockchain’s potential use by criminal elements for nefarious financial transactions. As a result, Bitcoin has opted to strike a balance on privacy levels to avoid a government crackdown.

    Bucking the Trend

    While many people don’t see anonymity as a big deal, others value their financial privacy. To cater to the privacy conscious, there are several cryptocurrencies that focus on providing an enhanced level of anonymity:

    • Monero. This cryptocurrency was launched in 2014 as a fork of ByteCoin and provides one of the highest levels of privacy in this market. While it uses the same basic transactional framework as Bitcoin, Monero uses ring signatures and address derivation to increase anonymity.

    Ring signatures obfuscate all the details of transactions, including origins, destinations and transaction amounts. Every transaction is signed and time-stamped with a ring signature, which is verified against a group of public keys while protecting the identity of the actual private key used in the transaction. This means that Monero blockchain transactions cannot be linked to a specific user.

    • Zcash. Zcash is an open-source cryptocurrency launched in 2016. While payments on the public blockchain are published, the sender, recipient and transaction amount remain private.

    Zcash uses zero-knowledge proofs, built on advanced cryptographic techniques, to verify transactional validity without revealing key information. This enables the network to maintain a secure ledger without revealing parties or amounts involved in the transaction.

    • Verge. Verge is another open-source digital currency that models itself on Bitcoin. However, Verge uses multiple anonymity-centric networks to keep IP addresses obfuscated and ensure the privacy of transactions.
    • Dash. This cryptocurrency model offers a decentralized mixing service, called PrivateSend, that enables the merging of funds. Funds and payments are mixed together on this platform so that an investigator cannot detect the sender, destination of amount.

    Nefarious Bitcoin Dealings

    Of course, there have been ventures in the cryptocurrency space that have almost ruined its reputation. Who can forget the notorious Silk Road bust? This was an online marketplace for drugs and Bitcoin was its lifeblood. It was shut down by the U.S. Justice Department in 2013, and its creator, Ross Ulbricht, was jailed for life. In 2017, the department claimed the proceeds from the sale of 144,336 Bitcoins, valued at over $48 million.

    In more recent times, Floridian, Anthony Murgio, was sentenced to five and half years for operating a Bitcoin exchange connected to hackers. This was used to launder more than $10 million worth of funds. In addition to these cases, illegal operations involving Bitcoin have been detected in other parts of the world, including Russia and Malaysia.

    So What’s the Big Deal About Anonymity?

    Although we can understand the need some people have for financial privacy, for the majority of users in the cryptocurrency space anonymity is not such a big deal. Well, it’s not their overriding consideration when choosing a cryptocurrency. Can you think of any non-nefarious uses that demand anonymity?

    Whether you’re particular about anonymity or not, please, please, please, before you invest in a digital asset, I implore you to check some of your core assumptions about how it works. Digital currencies are very exciting, and many of us believe that this is just the beginning of something really special. That’s all the more reason to be judicious, thoughtful and measured when making investments in this space.

     

    References:

    Emma Avon, Coincodex, 2017. https://coincodex.com/article/66/top-5-cryptocurrencies-for-anonymity/

    Sudhir Khatwani, Coinsutra, 2018. https://coinsutra.com/anonymous-bitcoin-transactions/

    Rishav Chatterjee, ResearchGate, 2017. https://www.researchgate.net/publication/320755472_Anonymity_and_the_Obfuscation_Issues_in_the_Cryptographic_Currency_Bitcoin

    Masterthecrypto. https://masterthecrypto.com/privacy-coins-anonymous-cryptocurrencies/

    Reuben Yap, Zcoin, 2017. https://zcoin.io/the-difference-between-privacy-on-the-blockchain-and-hiding-your-ip-address/

    J P Buntinx, Digital Money Times, 2014. http://digitalmoneytimes.com/cryptocurrency-open-ledger-vs-anonymity-obfuscation/

    Andrew Norry, Blockonomi, 2017. https://blockonomi.com/history-of-silk-road/

    Benjamin Vitaris, Bitcoin Magazine, 2017. https://bitcoinmagazine.com/articles/operator-illegal-bitcoin-exchange-coinmx-sentenced-prison/

     

  • When Are We Going to Learn?


    Cryptocurrency is supposed to be decentralized

    Getting it all wrong

    When Satoshi first wrote the Bitcoin whitepaper in 2008, she challenged the banking system as we know it.  She draws reference to the inherent weaknesses of the trust-based model.  The whole point was to build an ecosystem and economy that operated without these trusted third-parties. Yet, here we are, 10 years later, bastardizing that vision with gusto.

    The dichotomy in our response, as a community, is quite curious.  On one hand, we seem to understand these are really big ideas that have the potential to change banking and retail as we know it.  This explains the total market cap of crypto being about $425 billion as of Feb 25, 2018.  Yet, on the other hand, it appears as though a supermajority of digital currency users now use centralized exchanges like Poloniex, Coinbase, Bitfinex, Bitstamp, etc.

    Our collective lack of technical depth coupled with growing interest in the space has led many crypto enthusiasts to these trusted third parties.  Further, cash is still king in business, and these folks have made a lot of cash.  And, smartly, they’ve reinvested it in the form of massive marketing budgets.  Bitfinex is the trusted third-party to about 60,000 BTC worth of cryptocurrency trade daily. GDAX and Bitstamp, follow close with about 22,000 BTC and 16,500 BTC worth of crypto trade daily, while Kraken and HiBTC facilitate about 5,800 BTC and 5,200 BTC worth of crypto trading daily (chart above).

    We’re not actually better for it

    Perhaps the most ironic thing about digital currencies is that our misguided use of these centralized approaches does not actually result in that great of a user experience, as evidenced by:

    1. A hugely significant amount of money that has been stolen from centralized exchanges.  (More on this below.)
    2. Some exchanges experiencing massive slowdowns during peak times.  (Some caused, at least in-part, by congestion in the underlying networks of Bitcoin and Ethereum.)
    3. High trading volumes, or not being able to keep up with growth, leading to downtime on major exchanges.

    The reason not to rely on trusted third-parties is that of all the ways in which our reliance on them can hurt us.  Yet, here we are, getting hurt.  It’s almost as if today’s users of digital currencies would be perfect posterchildren for Satoshi’s 2008 whitepaper.

    The notion of privacy in crypto has also largely been a broken dream.  And that’s at the protocol level.  It does not even take into account how much we’ve made things worse with our centralized pattern of adoption.  Coinbase being subpoenaed for the personal information of 14,355 holders by the IRS only adds insult to injury in this respect.

    Centralization from the get-go?

    ICOs are centralized too!  In almost every case, those investing in an ICO are all buying from a central company or organization that they seemingly trust.  This is a far cry from the way Bitcoin was originally built and launched into the community.  First, we had a whitepaper.  Next, we had working software.  Finally, we had the creation of value.  No one bought bitcoin from Satoshi LLC after she posted the whitepaper online for the first time.

    Bitcoin was launched in a pure way, with people organically growing the network on proven technology before ascribing value to it.  Yet, here we are, investing in ICO after ICO, many of which have no technological progress-to-date.  We’re not banking on a community or a network at these early decision points, but instead a central organization with an idea.  The all-time cumulative ICO funding total stood at $8.74 billion according to CoinDesk as of February 19, 2018, with Telegram ($850 million), Filecoin ($262 million), and Tezos ($232 million) being the largest fundraisers.

    2017 alone witnessed 342 ICOs raising about $5.4 million. The year 2018 has already seen 92 ICOs till date, with $3.1 million being raised. So, just two months into the year and we’re already recorded 57% of 2017’s total raise.

    How much pain is too much?

    Apparently, the cost of trusting these third-parties is significant.  Billions of dollars have been stolen from exchanges since Bitcoin launched in 2009 with almost zero accountability on the part of the exchange in nearly every instance. Here’s a quick view of what centralization has cost the cryptocurrency community since its inception:

    When using the total market cap as a denominator, it appears that we are less safe with crypto than we were with old-fashioned money.  Perhaps that shouldn’t be surprising, given that our collective behavior since this revolution started has been antithetical to its premise.

    Where do we go from here?

    I’m left wondering why.  Why would we all believe in this game-changing vision with such fervor, and then proceed not to operate by its ethos?  Maybe decentralization isn’t the killer feature of these technologies, after all.  Maybe it is, and the community does not value it enough to actually use it.  Maybe we just don’t like to practice what we preach.  While those would be easy answers, they ring hollow to me.  

    Perhaps it’s that the usability of these decentralized technologies … leaves a lot to be desired.  Let’s face it, blockchain is pretty unapproachable.  Especially to folks who do not count themselves in the technical elite.  Whether we’re talking about cold storage of your private keys or the fact that you are sending money to a 34-character alphanumeric string that you better not mistype, lest you lose your money.  

    So maybe, just maybe, there’s hope.  Maybe we understand that decentralization is actually important.   And, we’re just waiting for the usability of fundamentally decentralized approaches to actually get better.  And, when it does, we will better align our actions with our beliefs.  The alternative is a lot worse: our behavior is simply based on a fundamental misunderstanding of these technologies and their value.  This would dangerous for all of us that believe in this technology and want it to win.  So I, for one, am holding out hope that it’s the usability.  

    References:

    1. Cryptocurrency market capitalization data as available on CoinMarketCap.com
    2. ICO data from CoinDesk’s ICO Tracker <https://www.coindesk.com/ico-tracker/>
    3. Cryptocurrency exchange average trading volume data from Bitcoinity.org <https://data.bitcoinity.org/markets/exchanges/USD/6m#rank_desc>
    4. Andrea Tan and Yuji Nakamura, 2018, Bloomberg L.P. <https://www.bloomberg.com/news/articles/2018-01-29/cryptocurrency-markets-are-juicy-targets-for-hackers-timeline>
    5. Cheang Ming, 2018, CNBC <https://www.cnbc.com/2018/01/28/coincheck-nem-hack-unlikely-last-for-cryptocurrency-space-analyst.html>
    6. Frank Chaparro, 2017, Business Insider <https://www.businessinsider.in/Some-of-the-biggest-crypto-exchanges-are-shutting-out-new-users-because-they-cant-keep-up-with-demand/articleshow/62272509.cms>
  • Are free returns right for your customers?


    It’s one of the big questions that every online retailer faces – should we be offering free returns?

    Whether or not free returns are even viable for your business is, of course, specific to your business model, but I can guarantee that they’re something you should investigate.

    Why? Because customers care.

    According to the 2015 UPS Pulse of the Online Shopper survey, 57% of shoppers consider paying for return shipping an issue, making it easily the number one issue encountered. 62% of shoppers consider return policy an important aspect of selecting whether and where to buy products at all.

    In an earlier ShopRunner/Harris Interactive survey, 81 percent of survey respondents stated that they were less likely to make more purchases from sites that charge for return shipping. This tallies with the findings of a study published in the Journal of Marketing (emphasis mine):

    “customers who paid for their own return decreased their postreturn spending at that retailer 75%–100% by the end of two years. In contrast, returns that were free to the consumer resulted in postreturn customer spending that was 158%–457% of prereturn spending.”

    This insight arms us with a conclusion that is not inherently obvious: a free return policy is so appealing to consumers that the process of going through it actually encourages repeat business.

    This makes sense – a consumer friendly return policy (especially once successfully used) creates a bond of trust between a retailer and customer. The customer now believes that the risk associated with making purchases from the retailer is inherently lower. So they have the emotional leeway to order more, feeling secure in their ability to easily return products they’re unhappy with.

    Why not offer free returns, then?

    Despite all the data pointing towards the benefits of free returns, only 22% of the online retailer’s assessed by the UPS study offer free returns.  There are a number of reasons for this.  First, certain retailers simply aren’t capable of offering these benefit, including low margin sellers who are competing on price alone or companies selling especially heavy or difficult-to-ship items.

    Another reason is that many online retailers continue to internally stigmatize consumers making returns as attempting to game the system.  Making returns too easy could open the door to borrowing activity.  Imagine buying clothes or a videogame for a one-time-use and attempting to return them once you’re done. While this may be the case for a minority of your customers, the insight from the above study suggests that offering free returns actually increases the amount of spending that takes place, making up for losses incurred from serial returners.

    The case for free returns in your business is ultimately predicated on the product you sell. Apparel, for instance, can see significant gains via a free return policy as consumers feel free to try out new styles or fits. Asos, for instance, goes so far as to ship their clothing in re-sealable packaging, encouraging returns, while Zappos was perhaps the original pioneer of the free online returns trend, offering shoppers an entire calendar year to change their minds.

    When it comes down to it, deciding whether or not to offer free returns is an investment in your customers. You shouldn’t do it simply to “keep up with the Jones’s.”  You should do it because it makes sense for your business and your customers.  Dive into your own data and keep an open mind.  My guess is that you’ll find some kind of friction-reducing tactic around orders and/or returns to be worthwhile.

  • When should you take your retail business global?


    You’ve got an awesome website.  A phenomenal product.  Loyal customers.  A growing domestic business.

    The next major question you are likely to ask yourself is: when should I start selling globally?

    The allure of a global market is simple – for businesses successfully cornering a domestic market, expanding beyond their borders opens up a nearly unlimited supply of new customers, capital and talent. In addition to increasing revenue, global markets can extend the lifespan of existing products and reduce dependence on a single market.  This reduction in dependence is particularly important when it comes to insulating from the risk of localized adverse economic conditions.

    So, given how easy it easy to articulate the benefits of going global, why doesn’t (or shouldn’t) everyone do it? The short answer – it’s complicated. From different cultural norms to foreign regulations, going global can get complex fast.  That’s not to mention the costs associated with an increase in supply chain complexity and new employees.  Expanding globally takes a sense of focus and purpose that not every company is interested in or capable of.  

    Perhaps the first and most important question to ask yourself as a store owner is this:  am I really ready to take the plunge into a running a global business? Here are some factors to consider:

    • How much organic traffic do you get globally? If your organic global traffic numbers have you feeling like you’re leaving potential customers on the table, you may well be operating in a segmented well-suited to go global. Not getting foreign visitors? It’s not the end of the world, but you’ll need to do your research and make sure global markets want what you’re selling.  Further, you will want to validate that you can do it better than the companies operating there now.

     

    • How many orders do you get? There’s no magic number here, but are you still growing in your domestic market? If you’re part of a small team with upwards sales growth at home, adding the employees necessary to make international expansion a success might be more complicated than meaningful.  You can always consider going global later.

     

    • How much control do you have over the supply chain? This relates to a number of other logistics factors that you’ll need to consider before deciding to expand internationally: Do you produce your own product?  How heavy is your product? How challenging will your product be to ship in customs? What is the holding cost of your product? Make sure you have a strong grasp of your domestic shipping capabilities. Whether through a third-party logistics provider or in-house, shipping globally adds complexity every step of the way.

     

    Once you’ve determined that you have potential international customers, a business capable of supporting global business complexity, and a shipping/logistics model capable of handling overseas orders, you’re ready to start putting together your strategy for going global. Be prepared for a rocky road – it’s not easy to take a business you know well into new waters.  That said, with enough research and a solid plan, it’s the best way to ensure diversified growth into the future.

    Check out part II in this series for advice on forming your global strategy and tips for making your international rollout a smooth one!

  • Gilt Groupe Acquisition and What it Means for Flash Sales


    Hudson’s Bay recently confirmed its acquisition of Gilt Groupe for $250 million earlier this month.

    As a company that has raised $300 million in venture funding, this is clearly a disappointing outcome for Gilt.  I remember meeting executives at Gilt back in 2009, when the company was riding high and approaching it’s $1 billion valuation1.

    It seems that a lot has changed for Gilt over the years.  It’s important to explore the story of the company, and take away what we can in terms of lessons learned for eCommerce more broadly.

    The Path to Success

    Companies like Gilt were part of the ‘back-to-the-future’ crop of new-age permission marketing companies.  While their business model was largely new, the overarching concept really wasn’t.   People have been giving businesses permission to send them messages on deals and company updates for many years.  (Think retailer-specific credit cards as just one example of this.)

    The difference with a flash-sale retailer like Gilt is that the site had a members-only appeal to it.  The idea was that you got access to private sales in exchange for creating an account and letting them email you sales updates each day.  As a consumer, you’d want to do this because you’d have access to deeply discounted products as part of these sales.

    Further driving conversion was the scarcity of these sales.  The sales would be one-day only, and most of the good products would sell out in mere hours…

    My sense of the contributing factors to some of the stagnating valuation are as follows.

    Communication Channel Fatigue 

    The problem with Gilt and the broader flash-sale category was the negative network effects.  The more flash-sale retailers there were, the less interesting it became to be a flash-sale retailer.  Why?  Because the more sites that a consumer gives permission to, the less likely that consumer is to actually see the marketing messaging.

    Plus, Gilt gets more than a third of its revenue through Gmail email campaigns, but Google filters marketing messages out of main inbox, making them much harder to get attention2.

    Also competing with that communication channel are specialty retailers and department stores in the U.S who are commonly offering 30-50% percent markdowns on new inventory and even better deals on older merchandise3.

    Gilt grew rapidly in its early days by selling heavily discounted excess inventory at a time when the economy was strained and big brand fashion manufacturers had plenty of excess inventory to unload. Now that the economy has strengthened and lux fashion brands have scaled back production, there’s less inventory to deal with. When they do have excess inventory, more outlets are available for distribution, including giant off-price retailers like T.J. Maxx.

    Too Big, Too Fast

    It’s called breakneck pace for a reason.  One of the dangers of growing in valuation and size as quickly as Gilt Groupe did is that it’s hard to operate efficiently when you are in hypergrowth.  With large infusions of cash (like the $138 million it raised in 2011), it can be very tempting to spend quickly and attempt to chase growth.

    If there is any lesson that venture-backed startups are doomed to repeat learning time and time again, it’s this one: An inorganic shape of growth is often a dangerous one.  Once companies hit an initial ramp of growth, venture investors expect that growth to remain constant or accelerate into perpetuity without any bumps in the road. The problem with this way of thinking, of course, is that company leaders feel like they have to chase growth at all costs for fear of being categorized as a ‘slowing-growth startup.’

    The reality of growing a business is often very different than perfectly up-and-to-the-right graphs of accelerating growth.  It takes material investment in product, operations, and talent to really keep a business growing healthy.  That’s usually a lumpy process.  And success is often a lagging indicator to these kinds of major investments.

    The reality of the flash-sale category is that from 2005 to 2010, industry revenue growth grew at an average annual rate of 76.2%, according to IBISWorld. Since 2010 to 2015, that has declined to 16.7% annual growth.4.

    Flash Sale Industry Revenue Trends

    Commerce Without Vertical Integration Is Dying

    Yep, I said it.  And I’ll say it again (more thoroughly) in another post.  eCommerce has changed retail forever.  Back before the proliferation of internet buying, having a cool and curated set of products was a differentiator and enough to grow a successful business.

    You could have the coolest little shop on the block, and it could have cooler products than other stores.  People would quickly find that they could come to your store because you ‘got them’ and their lifestyle.  Even if there was a store one town away that got them better, or had a bigger selection of product, they still might not shop there because of the additional time and effort associated with going there.

    This idea of winning on curation translated online, but only in a limited way.  That’s because the switching costs of shopping online are approaching zero.  It’s as simple as Command-T to open a new browser tab and check another site for the same product.  So it matters a lot less if a retail site ‘gets you.’  It matters a lot more if they have the best price.

    It seems only inevitable, in this new digital commerce world, that folks who sell the same product as everyone else are engaging in a race to the bottom in terms of pricing.

    The way out?  Produce something.  Make a product that’s the best in the world at what it does, and people will find their way to it.  If you control the methods of distributions, then they’ll only be able to buy it from you or a channel you control.

    Lessons We Can Learn

    I’ll admit that I thought Gilt was going to be worth upwards of $2 billion when I first met members of the team and watched their meteoric early growth.  Hindsight is 20/20.

    Gilt Group Revenues

    First and foremost, it’s important to think about competitive advantage that is sustainable and hard to erode.  I think for companies like Gilt, and most in the flash-sale category, this is difficult (if not impossible) to achieve.

    Vertical integration and having a product advantage is just one example of how a company can build a moat and defend itself from the competition. Vertical integration can offer many advantages5, including:

    • Lower transaction costs.
    • Supply assurance.
    • Improved coordination of production and inventory scheduling.
    • Better coordination of marketing and technical functions.
    • Higher barriers of entry for the competition.

    Ultimately, the issue related to chasing growth won’t go away until Silicon Valley gets better at understanding what slow and deliberate growth looks like.  The lemming culture around chasing hot deals (that just happen to have the right shape of growth for venture) is dangerous and will continue to lead to the destruction of shareholder value.


    References

    1. Gilt Groupe CEO Seeks to Prove Flash Sales Are No Fad
    2. Why Gilt Groupe Is Forced to Sell, Either to Saks’ Parent Company or Someone Else
    3. The Trouble with Flash Sales
    4. Why The Flash Sale Boom May Be Over—and What’s Next
    5. Is Vertical Integration Profitable?
  • Competing in Retail in an Amazon World


    Phew.  This is a big topic.  This post will be the first of a series on the topic.  In case you haven’t been shopping on the internet lately (or paying attention), Amazon is CRUSHING it.

    The company has done a phenomenal job of increasing its footprint in Global Commerce, going from $619 million in revenue in 1998, the first full year after it went public, to a projected $100.59 billion projected revenue for 2015.1

    Explore more AMZN Data at Wikinvest

    Perhaps the most noteworthy trend is that more and more US consumers are using Amazon as a starting point to search for products (as opposed to Google or another search engine). In a recent survey of 2,000 US consumers, 44% go to Amazon, 34% use a search engine like Google or Bing and 21% start on a retailer’s site.2

    Anyone selling in retail these days should be rightfully concerned about Amazon.  They offer virtually every product in the world, in just about every size, color and option you might imagine. Their sheer size allows them to win major concessions from vendors, making competing on price next to impossible. During just one week of the 2015 holiday shopping, Amazon Prime added 3 million new members.3 According to a report from the Cowen Group, Amazon’s growth in the apparel purchase market could see it replacing Macy’s as the number one apparel retailer in the US. (Just 4 years ago, Macy’s apparel sales were five times greater than Amazon’s). 4 As of January, 2016, Amazon’s distribution network totaled 138 active facilities with over 66.2 million square feet in the US and 237 worldwide, occupying 107.8 million square feet of space.5

    amazon1

    Most of the advanced thinkers that I know in retail are starting to form ‘Amazon strategies’ that encompass their strategic thoughts about how to compete, going forward.

    There is no one right answer to this question.  Here is a quick sketch of the the primary ways that I can think of to compete, going forward:

    • Vertical-integration: Have a product that people want.  Make it yourself.  Control the channels where people can get it. Control how the product is presented and at what price it’s sold. Eliminate multiple markups. Optimize resource utilization and avoid wasted costs.
    • Ship products faster: Find a way to optimize your fulfillment strategy.  Can you use 3PL?  Can you work with someone like ShopRunner or Shyp? Develop a fulfillment operation that delivers exactly what customers want. Honor delivery commitments without exception and don’t make delivery commitments you can’t keep. Ship orders in the smallest carton possible to reduce carrier charges by volume and weight, but use environmentally responsible packing materials and make it easy to open products. Locate fulfillment centers near shipping hubs. Implement a return process that flows seamlessly. Offer value-added services, like gift wrapping.
    • Have top-notch customer care: This is the price of admission these days.  Ensure your service is topnotch, not only during the transaction process but long after the sale. Regularly ask your customers what they want. Treat your customers like royalty to gain their loyalty. Have a specific protocol in place for handling customer complaints. Make sure all your employees buy into your company’s philosophy of excellence in customer service.
    • Be personal:  Depending on your brand and demographic, a personal touch can be as simple as associates that know your name or as complex as a fully VIP experience. Make your customers feel important and valued as individuals. Know your customer’s history with your business. Use their name when they call and remember them whenever possible.

    Retail is changing.  Commoditized products are going the way of Amazon and other marketplaces.  To win, you have to have a clear strategy of what will set you apart.  That, or you better have plans to start selling on Amazon.

    References

    1. WikiInvest – Revenue for Amazon (AMZN)
    2. Marketing Land: Amazon Is the Starting Point For 44 Percent Of Consumers Searching For Products. Is Google Losing, Then?
    3. GeekWire: Amazon Prime adds more than 3M new members in 1 week at peak of holiday shopping season
    4. Alibaba: Amazon Could Replace Macy’s as Leading Apparel Retailer by 2017
    5. MWPVL International: Amazon Global Fulfillment Network
  • What to Look for in Third-Party Logistics (3PL) Providers


    As your retail business continues to grow, you will probably find yourself considering using a third-party logistics provider as opposed to fulfilling your orders in-house.

    Third-party logistics is a big industry. In 2014, the Global 3PL Market expanded to $750.7 billion and the U.S. 3PL Market grew 7.4% to $157.2 billion. Two U.S. 3PL Market Segments experienced double digit growth.1.  Global companies all around the world, from REI to Campbell Soup Company, use 3PLs to enhance their fulfillment operations.  At the enterprise level, these logistics providers provide entire supply chain solutions.

    choosing-a-supply-chain-solution-ups-201303250745-750

    Up-and-coming retailers have very different needs than the much more established enterprises.  Most of us start out by looking to fulfill orders received through our web channel.  And most of us don’t have the size of business necessary to require a full supply-chain solution.  What we need is a logistics provider that solves our problems here and now and can also scale with us into the future.

    Specifics to look for in a 3PL

    Costs

    Are the costs detailed enough to permit you to make valid cost comparisons between providers? Depending on your specific needs, typical costs might include2:

    1. Setup fees—the most common of which are web store integration and EDI set up.
    2. Receiving costs—when products are accepted, counted, inspected for damage, labeled (if necessary), placed in their proper location in the warehouse and added to the provider’s inventory system.
    3. Storage costs—usually factored on a monthly basis and most often based on average inventory for the month. Rates may be set on a per-pallet basis, square footage basis or cubic footage basis.
    4. Fulfillment fees—which can vary substantially in part due to who provides boxes and packaging materials. Some 3PLs have been known to underprice fulfillment fees and make up for them elsewhere.
    5. Shipping—usually shown as a markup over their cost or a discount off of published rates.

    When comparing costs, be sure to consider:

    • What do the costs look like today?
    • What is the preview like of how the costs scale with you over time?
    • Are sample invoices in a detailed and easy to read format and does the 3PL have an invoice auditing process in place?

    Technology

    Cutting-edge technology can provide 3PLs with efficiencies that can improve performance. Enhanced management software analyzes and monitors the 3PL’s practices to help identify and eliminate inefficiencies. Cloud-based platforms and Internet of Things (IoT) devices have come into prominence within the 3PL industry, as well as the rest of the supply chain. A leading 3PL will have the latest systems that provide real-time data and feedback on supply chain operations and freight.3 How does the 3PL measure up when it comes to transportation optimization software to allow it to access and use the fastest, most efficient and cost effective routing methods?

    When comparing technology capability, be sure to consider:

    • How will the 3PL integrate with your existing ecommerce platform?
    • How do they keep inventory in sync?
    • What data security measures are in place?
    • Can you access the information you need when and where you need it, from any device?
    • How fast can the 3PL respond to IT requests?

    Speed

    Today’s consumer wants it now. The only way your retail operation is going to thrive is to give it to them. That means your supply chain has to be nimble and responsive to get the right item to the right place in good condition in the least amount of time. In part, the 3PL’s geographic proximity to your customers will play a role in your decision, but there are other considerations to keep in mind (especially considering the growing number of etailers offering same-day shipping). The speed of the entire process from transaction to delivery will have a bearing on how fast orders arrive at their destination.

    When comparing speed capabilities, be sure to consider:

    • How quickly can they ship product to customers?
    • How do they manage peak times such as the holidays?
    • How do they optimize routing to ensure that customers get packages quickly?

    Broader Capabilities

    Remember that the relationship with your chosen 3PL provider is a partnership and for the partnership to work effectively, you’ll need to work together toward mutual success. Consider whether the 3PL will share the same values, ethics and sense of responsibility. Cultural values may become especially important if you ship globally. Is the 3PL you’re considering willing to establish agreed-upon benchmarks for success, and willing to share measurement data so that both you and your chosen provider can work together to understand what’s working and what isn’t so adjustments can be made accordingly. Essentially, your metrics need to align with your 3PL’s metrics4.

    When comparing broader capabilities, be sure to consider:

    • Can they ship from multiple distribution centers?
    • How do they handle international distribution?
    • How do the handle emergencies and exceptions?
    • Will they customize services to meet your specific needs?
    • Can both sides understand and agree on what the specific nature of the partnership will entail?

    You should dig deeply into these questions when you talk with the sales team at the 3PL.  And, as always, the best way to get the real scoop is to talk to customers that are already using these folks.  Any good 3PL should provide you with references.  If you want to get exceptionally good data, try to source your own reference that wasn’t provided to you by the provider themselves. You’ll also want to consider the financial strength of the provider. When you think you’ve found a good one that meets your needs, you’re going to want them to be around for a long time to grow with you as your needs grow.

    References:

    1. Big Deal – 2014 3PL Results and 2015 Estimates
    2. What is the Cost of 3PL Services?
    3. 6 Factors to Consider When Selecting the Right Global 3PL Partner for Making Your Supply Chain Go Global
    4. Six Essential Strategies for Selecting a Global 3PL
  • How to build a retail brand that engages millenials


    Engaging millennials is one of the most compelling and complex topics of modern retail.  I’m often in conversations where people talk about how hard it is to appeal to millennials, and how it’s even harder to keep millennials as customers over the long-term.  

    Unlocking the millennial mystery has clear ROI, and can help brands better engage their existing customers and, perhaps, acquire new ones.  It’s a particularly interesting topic to me, as a millennial myself and someone who thinks a lot about building great commerce brands.

    Based on my experience in the world of commerce, I’ve seen a couple interesting characteristics emerge as it pertains to us millennials.

    Millennials are very discerning customers.

    Millennials grew up in the information age and are digital natives.  We’re engaged across forms of social media and are very used to consuming many streams of information simultaneously.  As such, we’re no strangers to noise.  Millennials see advertisements all over the web and are often pushed product imagery wherever we are.  We’re used to ignoring it.  In order to stand out, products need to be fundamentally compelling or unique.  Millennials are hard to please as customers because we buy online all the time.  We’ve seen and experienced wonderful customer service, and we know what mediocre looks like.

    Millennials have excellent bullshit detectors.

    Precisely because Millennials are exposed to so much information, we’re used to seeing a lot of bullshit on the internet.  Because we’re so at-home on the internet and on mobile, we have a little bit of sixth-sense when it comes to scammy content and sites.  We know when sites are not worth our time.  If the bullshit is repackaged, then millennials have likely already seen it before.

    Millennials have short attention spans.

    Again, because we’re used to consuming multiple streams of information at once, we get bored easily.  Very easily.  We don’t often read articles to the end.  We have a hard time watching video clips that are longer than a few minutes.  We have little patience for filler.  So, when you hit us with content, make sure it’s good.  And keep it short and to the point.

    Keeping the above characteristics in mind empowers retailers to rethink how they approach millennials.  There are a couple areas that retailers need to pay particularly close attention to in order to be successful in building lasting relationships with millennials.

    Merchandising evolves into storytelling.

    Your brand is not just about curation anymore.  That’s the price of admission.  You need to tell a story that resonates with the millennial customer.  What’s truly special about your brand?  What passion was brought to the inception and development of your product, and why is it the best in the world at its particular function?  Your humanity matters here.  What’s your story as a founder or leader of the company?  How did you get here?  What were the trials and tribulations you faced in building your brand?  What went wrong along the way?

    Customer service evolves into relationship-building.

    The millennial customer is so often exposed to empty superficial interactions that you have an opportunity to differentiate on relationships.  Will someone pick up the phone when they call?  Will that person actually know their name?  When they get live chat or email customer service, will the representative actually be useful and capable?  Or just someone keeping a seat warm?  When you reach out with updates and messaging, is it going to be the same old email spam, or will the content and information be valuable and useful?

    Online retail evolves into omnichannel selling.

    Millennials know how easy it is to setup a website.  And how easy it is to make it reasonably good-looking.  Just because you have a website doesn’t give you instant credibility with us.  So, you need to do more.  Do you have a pop-up shop in my area where I can actually meet members of your team?  Do you have events for customers and prospective customers?  Do you sell on other digital channels and marketplaces in addition to your website?  If so, then millennials have a clearer sense of your legitimacy as a retailer or brand.

  • eCommerce Buy Buttons and True Social Commerce


    For many years, we’ve talked about the rise of ‘social commerce.’  People have predicted that our social networks would curate products for us and that the lines between content, community, and commerce would blur and eventually become unrecognizable.

    While on one hand that progression has marched along, on the other, it has not progressed in the ways that many of us (especially me) expected.  eCommerce sites have remained primarily commerce-focused.  And social networks have continued to focus on eye-catching content that people mostly read/watch/listen to.

    We’re finally turning a corner on this trend, and it’s because the social networks themselves are starting to push users in this direction.  This may end up being the natural form of social commerce that the market has been waiting for.

    The change is happening in the form of ‘Buy buttons’ that enable users to purchase products without ever leaving the network.  These buy buttons are proliferating throughout the social web, and fast.  Each of the major players has either launched or is testing them actively.

    Let’s take a quick look at what’s out there:

    Twitter – Already out in the wild. 

    TwitterBuyButton

    With the help of Stripe’s Relay, Twitter has launched Buy Now buttons that can be embedded directly within tweets.  This functionality uses Stripe’s payment technology to process the transaction and send orders to the retailer.  Twitter has not yet released any major numbers associated with the success or traction of these buttons.

    Pinterest – Buyable pins live and seemingly growing quickly.

    Buy_it_on_pinterest

    Pinterest first previewed that Buy Buttons were coming back in June of 2015.  They went live with the concept soon after, and announced that 60 million Buyable Pins were available by August of 2015.  Pinterest also stood up a page that outlines the buyable pin functionality.

    Instagram – Promising, but not yet live. 

    instagram_buy_button

    Instagram, being the go-to destination that it is for trending fashion and beauty, is well-positioned to launch a buy button.  Their blog post on the topic was a little more broadly-focused than the others, talking about ad-units that enabled direct action of multiple types (including signing up on a website or downloading an app.)

    Google – Announced, but not yet broadly available.

    Purchase on Google

    Given it’s position as the much of the world’s primary search destination, Google is perhaps the most interestingly positioned player in the whole bunch.  It recently announced Purchases on Google in a blog post that talked about other retailer-focused enhancements.  What’s interesting here is that Google is alluding to integration with Google wallet, where users may already be storing payment methods.

    Facebook – Announced and in testing.  

    Facebook_Buy_Button

    Facebook announced that it was testing buy buttons for the first time back in 2014.  Things were relatively quiet until an October 2015 blog post drove more clarity about its intent to power shopping on Facebook.  It appears as though the intent is enable shoppers to checkout without leaving Facebook.  Even more interesting is the addition of the shop section on Facebook Pages for businesses.


    These buy buttons can have a lot of implications on commerce, especially mobile commerce, in the next 2 years.  The biggest hurdle is going to be overcoming the differences in mental-modes that people have when browsing the web.

    Many of us are in a content consumption mode when browsing social media and looking for content.  Separately, we are in shopping mode when we are searching for specific products to buy.  Breaking down this mental barrier, and getting content consumers more used to the idea of ‘switching lanes’ from consuming content to buying is going to be a challenge.  With that said, it seems like only a matter of time before behavior is changed and users adapt.

    Stay tuned for more analysis on this topic in the weeks to come!

  • Performance Linked Incentives for Engineers


    A friend recently asked me about how I might define performance for web developers. It was an interesting question coming from one startup founder to another. He was concerned with how to present performance-based incentives to his developers when performance itself is so hard to measure for engineering work. I had a few thoughts to offer him and I wanted to share them here. 

    What is Performance?

    Engineering has a complex and difficult work flow – it happens on a maker’s schedule. Understanding this, it’s extremely difficult to determine a fair objective/set of criteria by which to measure someone. Lines of code are simply not going to cut it. So what does? Shipped stories? Defect counts? As far as I’m aware, none of these have worked.

    However, if you kick the measure of performance up one level-of-altitude to overall business performance, another problem comes into play. Engineers don’t always have a direct connection to driving business value. They are charged with delivering whatever is on the product backlog in a way that is elegant, stable, and secure. Ideally, they also deliver it quickly. But whose fault is it when the backlog is less than actionable or badly organized?

    So why does performance pay at all? And, when it does, who should reap the benefits?

    This is an even harder question, and the answer varies from business to business. The core goal behind offering performance-based incentives is to ensure the business keeps working, and maybe even winning. This makes sense. And it probably makes the most sense to provide these incentives to people who are actually making the business win (i.e. managers and other strategic roles).

    The flipside is that everyone, in theory, should be incentivized to make the business win. Let’s imagine a hypothetical scenario in which this is the case:

    Step 1: Engineer looks at backlog. He realizes that the first three ideas suck.

    Step 2: Engineer pushes back because he want the business to win.

    Step 3: Product Manager reconsiders one of the ideas in the backlog.

    Even in this scenario there are potential flaws: would the incentives actually motivate the engineer over the hump of inaction? Are incentives enough or does it take a particular archetype to motivate themselves through these extra steps? (I know engineers who will push back on tasks they don’t like, even if they’re paid $1/hr.)

    What about equity?

    Startups, in theory, have a built-in incentive for all employees (or most, depending on where you are): equity. If the business sells for millions, each person will get their piece.

    But is that potential enough to rule out incentive pay? Probably not. In my experience, human beings are remarkably impatient. Most non-founders don’t think on the time horizon required to care about this outcome. Furthermore, even if the engineer does have the long con in mind, the average person needs small incentives to hold them over. (Imagine any video game. You don’t go from level one to sixty in one jump. You need all the levels in between to feel like you’re progressing.)

    So what do you do?

    I think it depends a lot on the type and scale of the business. In most creative product-focused startups, I would argue against non-stock incentive-based pay that is specific to tech goals such as lines of code, uptime, etc.

    However, I DO think that operating businesses (with real revenue) can benefit from goals that everyone can get behind (i.e. a quarterly revenue or profit goal). The case for a shared bonus pool here is reasonable, and I would argue net-positive. I like P2P systems combined with management-driven allocations. So your peers and your managers decide what slice of the total bonus pool you receive.

    The key here, however, is that it’s a BONUS. It’s NOT an excuse to pay someone less than they deserve.

    N.B. I didn’t use the term “market rate” above. I think that market rate is a faulty concept in startup land. Startups have been systematically over-funded in a way that makes bootstrapped startups totally unfit to compete. So what the market can bear doesn’t matter. What matters is how passionate someone is about the opportunity and what they are willing to work for. Generally, equity levels the playing field here.

    One final footnote: Decent bonus schemes act as a nice deferred comp plan for very early stage companies. Let’s say a new engineer wants $10,000 in annual salary, but you can only afford $7,000. You can offer that engineer $7,000 with a $3,000 bonus if the company reaches $X in revenue. This way, if you can afford it, you’ll pay it and the engineer is in a better position to bet on the company.

    In short, there is some room in an early stage company for a “company-wide performance” bonus pool. But goals have to be well-defined enough for everyone to know what they are marching towards (i.e. post-product market fit). An attempt to create a bonus system before such a time seems like putting the cart before the horse. Chances are your business won’t even work – so why create complex incentive programs?