MBA Mondays: Revenue Models - Commerce

Commerce has to be the oldest business model. Sell something to someone. Or maybe it was barter back then. In any case, ecommerce revenues topped $200bn in the US in 2011 and are growing at close to 10% annually. Global ecommerce revenues are at least double that, maybe as much as $500bn depending on who you ask. So selling something to someone online is a big business and getting bigger.

Retailing is by far the largest component of the online commerce market. Retailing is buying a product at wholesale and selling it to the customer at a markup. Retailing involves inventory. You stock up on inventory so you can provide the goods quickly to the customer.

Amazon is the world's largest online retailer. Amazon's revenues in the past four quarters were approximately $55bn. Clearly some of that revenue is non-retailing but let's assume their retailing revenues are about $50bn annually. They are roughly 10% of the global ecommerce market.

Retailing is a tough business. The difference between what you buy the product for at wholesale and sell it at retail is called your gross margin. Amazon's gross margin ranges between 20% and 25% depending on what time of year it is. The holiday quarter brings the lowest gross margins because retail makes up a larger perecent of revenues. At Amazon's size, a 25% gross margin turns into a lot of money. But a smaller online retailer can really struggle at these margins. Let's imagine a retailer of bicycles on the Internet does $50mm in revenues. That sounds great. But that means that only $10mm to $12mm a year actually stays in the business. The rest goes out to the bicycle manufacturers. And then the retailer has to pay for the website, the traffic acquisition, the staff to operate the business and a lot more. Pre-tax margins for online retailers will typically be in the sub 10% range, often less than 5%. To put that in context, the bicycle online retailer that generates $50mm in sales will keep a couple million pre-tax at the end of the year. It's a business for sure but not an easy one.

The reason that online retailing is so tough is that it is hard to differentiate one retailer from another. You want a new mountain bike? Go to Google and see what's out there.

Mountain bike
Retailing has always relied on location to provide some margin protection. There is no "location" on the Internet other than SEO. So gross margins online are going to be lower than they are in the real world. And on top of that, you have the capital outlays required to stock up on inventory and the markdown costs associated with getting out of unsold inventory. And then there are the shipping costs which increase the price to the customer unless you are willing to eat them.

I have never invested in online retailing. I don't like the economics of this business even though it is a huge market.

Beyond retailing, there are a number of other ways to do commerce on the Internet. The next is marketplaces. Marketplaces are places where buyers and sellers come together to transact. Marketplaces have always existed in the offline world. It turns out that the Internet is a terrific place to create marketplaces. And they have much better economics. There is no gross margin for the marketplace operator, just a transaction fee. There is no inventory. There are no shipping costs. All of those costs are born by the seller. I have invested in quite a few online marketplaces. I love the economics of these businesses. I plan to write an entire post in this series on peer to peer business models and marketplaces will be a large component of that post, so I will move on.

One way to get past the gross margin and differentiation problem on the Internet is to make all the goods you sell yourself. This is called "vertically integrated retailing" and it is a growing trend in online commerce. A great example of this model is Warby Parker which makes and sells a line of fashion eyeglasses. Warby Parker has no stores (at least they didn't when they started out). The Internet is their store. Vertically integtrated retailing has better economics because your products aren't commoditized by Google and the other search engines. Customers seeking your products must come to your website to purchase them. But these businesses have other issues. Building a brand is tough, particularly from a standing start. Manufacturing, most likely overseas, can be a challenge. The capital costs remain high because you still need to stock up on inventory. And you can face markdowns if your SKUs go out of style. Although I like this model much better than straight up retailing, I have never invested in this model either. The Gotham Gal has made a few investments in this sector though.

Another flavor of retailing is flash sales and daily deals. This is not a new concept on the Internet. There have always been clearance sales in the retailing world. But the Internet brings new tools to drive immediacy and rapid transactions. A french startup called Vente-Privee brought the concept of the flash sale to the Internet over ten years ago and it has been adopted widely across the globe, particularly in the past five years. Flash sales have better economics than traditional retailing. They are often acquiring the product at discounted prices. The inventory costs are lower because they blow out of the product quickly. And there is no competing for the buyer's loyalty on Google every day. Flash sales sites leverage mailing lists to bring their customers back again and again. The issue with flash sales is customer burn out. It is difficult to maintain a vibrant flash sale business over many years.

Auctions are another way to drive commerce online. eBay is the canonical company in this category. The nice thing about auctions is they leverage a set time frame to drive toward a clearing price. It is game of sorts and can be quite addicting and engaging. Auctions work particularly well in marketplaces where there are unique items to be bought and sold. eBay's gradual adoption of the "buy it now" model suggests that there are limits to the auciton model at scale and that consumers prefer a straight up retail model because of its simplicity. I suspect that auctions make up a substantially smaller percentage of online commerce revenues than they did ten years ago.

The revenue model hackpad includes a number of other forms of online commerce which I am not going to dive into in this post. If you have questions about any of them, I would be happy to take them in the comments.

In summary, commerce represents the largest and most common online revenue model. But it is not an easy one to execute profitably. It lends itself to commoditization and margin compression in most cases and the economies go to scale players like Amazon, eBay, and Walmart. While there has been substantial venture capital investment in this sector, particularly in recent years, it is not a sector that I like very much, other than marketplaces which to me are really peer to peer businesses. I will cover them more in a few weeks.

#MBA Mondays

Comments (Archived):

  1. Kasi Viswanathan Agilandam

    Yes. Auctions are for rare commodities and many a times fetches more than what the seller expects and takes the seller sometimes by surprise depending on the buyers love for that product.ebay is moving towards auction-with-MRP model.

    1. awaldstein

      Auctions were the golden child of the web for a very short period of time. They went from birth to old age in a snap.I know this well as I was early in Moai which did just that in the 90s. Tech interesting enough became a piece of the supply chain sourcing model which is where it plays well.

      1. Kasi Viswanathan Agilandam

        in india there are about 3-companies giving a good fight with ebay … I think those guys have an edge over ebay in terms of customer understanding (trust)..What these guys have done is create separate site for each city/town in India … about 100+ sites for auction and ad …Indian’s don’t buy used products with trust from any seller (don’t trust any seller). So, The creation of 100+ sites makes it easier for the customers to actually see and feel the product before buying. I do think they are doing good business than ebay in India.In India e-commerce has succeeded only in travel ticket booking ( to give a figure … Indian Railways sells out 10 million tickets every month) and hotel booking… that is because they can actually see and feel before using them. I think this comes from “what if the product i intend to buy is not actually what is told or shown”…

        1. awaldstein

          Great comment, thanks!

          1. Kasi Viswanathan Agilandam

            thanx Arnold for the complement. My day is done πŸ™‚

        2. Wavelengths

          Great point about regional and cultural differences.I think this also pertains to type of product. For example, apparently a regular scam is to sell “designer dogs” online and then fraudulently tack on shipping, licensing, delivery charges, etc., and even ship dogs that aren’t the breed that was represented.I cannot imagine buying a dog that I had not met. But then again, I wouldn’t be the person who would marry a mail-order bride. πŸ™‚

          1. Kasi Viswanathan Agilandam

            ha … ha… that is the difference.(in the name of culture).Here it happens all the time … mail-order-bride and mail-order-groom :-)We call it arranged marriage … I donno the exact number but has come down from 100% to 90-odd% now.

          2. Wavelengths

            πŸ˜‰

  2. Kasi Viswanathan Agilandam

    Fred Can I say you are interested in”large network of engaged users”and not interested in”large number of product for users”:-)

    1. fredwilson

      Yes

    2. Brad

      Our large network of engaged users pay to help create more product users. I believe that network users eventually have to pay to play to create value for all users. Retailing is a tough game, for all the reasons Fred gave, but we need more retailing and product entrepreneurs in this country.

  3. jason wright

    what is apple’s gross margin i wonder?

    1. fredwilson

      Very high. Its reported. You can find it on Yahoo Finance and Google Finance

      1. kidmercury

        but under pressure……part of why it’s stock price has been getting embarrassed of late

      2. jason wright

        found it.high, but starting to contract.

        1. Avi Deitcher

          Gotta love those 10Ks…Use them every day in evaluating a potential deal, acquisition, etc. for clients.

      1. jason wright

        thanks.

  4. jeremystein

    “So gross margins online are going to be lower than they are in the real world.”this is not necessarily true for industries with grey market goods. manufacturers frequently create authorized channels thereby creating support for margins whether online or offline.

    1. fredwilson

      That’s interesting Jeremy. What is a good example we can look at?

      1. Cam MacRae

        Watches.

        1. fredwilson

          Got it. Thanks

      2. jeremystein

        my industry– luxury watches. manufacturers hate discounting. if a dealer has the power to sell online, it has to be at list price. in reality, you can probably get that watch through an authorized channel for less offline. so in many cases, margins are actually lower in the real world. happy to chat more offline. i think youll like what were building.

        1. Cam MacRae

          Ha! Pipped you at the post, sorry.Checked out your site — great idea.

        2. AbbeyPost

          @jeremystein I spent 6 years running a business very similar to that, though in my case there was no authorized channel outside of the manufacturer.I created a $2M lifestyle business focused solely on the sale & resale of authentic Hermes handbags and accessories. Not only does Hermes NOT condone resale of their items, but they make it really hard for buyers to just walk into a store and buy the thing they wanted, with fictional “wait lists” and all sorts of nonsense. Basically, they treat well-off clientele like crap, and expect the buyers to keep coming back because they’ve historically had no choice if they had any hope of “scoring” the item eventually.Because I was transparent, it was clear what I had on offer at any given time, and I treated them with care, people lined up to pay me $12-$15K for an item that they could potentially have acquired themselves through an the manufacturer for $8K. I never owned a piece of inventory for more than 4 weeks–ever, in 6 years. It’s a fascinating business, really.

  5. William Mougayar

    How about B2B commerce? Do you plan on covering it as part of this segment? That’s a huge market, not as visible as B2C, often mis-understood, and sometimes equated to marketplaces.Ironically, when the hype machine took over the web in 2000, so-called “B2B marketplaces” were a big factor in precipitating the bubble’s bursting.

    1. fredwilson

      I don’t think I am qualified to post on that

      1. pointsnfigures

        @wmoug:disqus is correct. But B2B and the way firms differentiated themselves was misunderstood leading to over investment and losses.

        1. AbbeyPost

          That’s an understatement.

      2. James Ferguson @kWIQly

        Fred – How about finding someone who is to guest post. Much of the value is in the discussion (as you know) – this is your perfect facilitation opportunity.

        1. fredwilson

          I could do a bunch of guests posts at the end of this series like I did on other series. Great suggestion!

    2. awaldstein

      Just to clarify.Where are you drawing the line between b2b and a marketplace-b2b2c?Selling stuff to businesses, like accounting or crm or even marketing tools is one thing.Selling stuff to businesses, like access to a funnel of customers, like Etsy, is another.In the later case I would argue that they are really a consumer company with products as content and the revenue stream from the merchants.

      1. William Mougayar

        Actually I would have lumped those 2 segments you mentioned together, because they still involve selling stuff to the enterprise. The distinction to be made would be for the segment where you interconnect companies’ supply chains with one another and conduct business transactions over that way.

        1. awaldstein

          Always the marketing guy I consider these completely different ;)I can’t help but approach building markets by where the core value is and how you find those who care.In a consumer funnel b2b2c (or wherever you put the c), at it’s core is a consumer play. The merchants pay cause you fill the funnel (Etsy). The other, think CRM for a sec, is just straight biz sales as you are simply filling a business not necessarily a market need.

  6. JimHirshfield

    Peer to peer marketplaces won’t be so interesting if the sellers’ margins approach zero. I suspect your protection there, is marketplaces like Etsy where the seller has a unique product (non-commoditized), as outlined above in your Warby Parker example.

    1. fredwilson

      Yup.

    2. laurie kalmanson

      handmade, artisan, unique; etc.i think there is plenty of room for craftsmanship small businesses, from pickles to hair bows

  7. awaldstein

    I’m liking the hybridization of these models more and more.Building a brand, finding customers online is getting harder. Much harder.Nothing builds an online community of purchasers more than face to face interactions. True of pure communities of interest, true for transactionally based markets as well.Etsy has a pop up now. Lots of stores have online catalogs obviously. The change and the hybrid model I like is where online variants of offline businesses become a brand extension that sells, that is not just a place where things are bought.

    1. James Ferguson @kWIQly

      >> Nothing builds an online community of purchasers more than face to face interactions.This is the huge benefit in territorial distribution models. Often cross-sales can be captured from face-to-face particulalry because of the trust in a relationship. When we were consulting we couldn’t count the times we were asked – “And what do you make of solution X or approach Y” -There is only one thing for loyalty better than Brand – its personal credibility. Think Miracle on 34th street and what Chis Chringle does for Maceys – I took your “me-centric advice” and it was good! – That’s personal experience not just brand

    2. ShanaC

      Hybrid gives more brand touchpoints. Hence the importance.

      1. awaldstein

        True….but I take it further.Some things categorize very poorly. Wine especially. Some things don’t exist in specs, even in pictures. Some things require people to sell them or communities to refer them.Sure you need brand (like your local merchant or winery or designer) to give them a try the next time around, but its really about the human touch and the living story.

  8. Avi Deitcher

    A key point in retail (as in all businesses): cash gap. It is part of what makes retail so hard. You need to buy inventory *now*, so you can have it in stock when a customer wants (or for free two-day shipping), so you pay for it now, but it sits in your warehouse for days or weeks until a customer buys it, and only then do you get the cash.Cost of carrying your inventory is a huge drain on most physical goods retail businesses. I remember some accountant/economist argued that inventory should be listed on the balance sheet as a liability instead of an asset.I remember in the 90s Dell was a poster child for negative cash gap: they managed to charge your credit card, and only then pay for and get parts from suppliers. Great way to run a business, but not enough to win.

    1. Kasi Viswanathan Agilandam

      Every established company has a credit period … if you can produce your product within the credit period it is good and fun to have for the CFO … but has the risk of price of the part going down within the credit period.(especially imported)…then over a period of time you will be making losses without even noticing it.We recently had this issue of credit period of 6-months with a part … $ Vs Rupee went up by 10-15%

      1. Avi Deitcher

        I understand what you are saying in the second paragraph about credit risk, although that is true with every business working across currencies: you invest $10MM in R&D for a product of which you expect to sell 100k units for $1000 each, with 80% overseas, and the dollar drops due to loose monetary policy (hmm, I cannot imagine that…).What did you mean in the first part? Either way, you have the cost of carrying your inventory.

        1. Kasi Viswanathan Agilandam

          I essential mean the same thing what you said … credit also carries a risk either because of different currencies or general drop in price of that commodity (eg: seasonal fruits/veg and some electronic components etc.,).

          1. Avi Deitcher

            You mean, even in addition to the cost of carry, you might lose even more because of commodity price changes or FX risk? Got it.

    2. fredwilson

      Fantastic point

    3. jason wright

      I’m seeing ‘pre-order’ more and more with some small online retailers. they don’t stock the inventory, but will get it in once i’ve paid for it.

      1. Avi Deitcher

        Does it put them at a disadvantage? If I order from you for 5% less, but then have to wait an extra 3-4 days until you get it and ship it?Or is there more of a drop-ship structure going on?

        1. jason wright

          there is delivery delay, but rarely a % discount.

          1. Avi Deitcher

            So why order from them?

          2. jason wright

            exactly

          3. Avi Deitcher

            When Dell did it in the 90s, you got a discount for it. Fair price to pay. But without the discount, why would I wait?I have Amazon Prime. Nowadays, I get the Amazon price *and* free 2-days shipping. Good reason Amazon has 10% of global retail ecommerce.

          4. Avi Deitcher

            Wow!

          5. falicon

            Especially when it comes to revenue models, there is a fine line between A/B testing and being slimy…it seems the larger a company gets and the more ‘middle management’ put in place, the more likely they are to tread towards the ‘slimy’.More people will need to make noise about Amazon doing this if we really want it to stop (you pointing it out today is the 1st I’ve noticed/heard about it — so kudos to bringing the light!)

          6. Cam MacRae

            I don’t know whether it’s slimy or simply an artefact of a complex system. Either way I’m not amused and won’t be renewing my Prime membership.

          7. kidmercury

            do you have a retailer you like as a substitute for amzn? i’ve been shopping slightly more at overstock.com, which i view as a partial substitute, but i still find amazon the best option for value shoppers 90% of the time even with their price shenanigans.

          8. Cam MacRae

            I don’t, no.

          9. ShanaC

            how so?

          10. falicon

            How is it slimy or how do we go about stopping it?

          11. ShanaC

            how is it slimy?

          12. falicon

            Different prices for the same product…based only on who the customer is (and what you know about their purchase history)…I don’t think that’s a very upstanding thing to do.I understand that, from the business side, you want to try and figure out the highest price the market will allow…and you should try to get the maximum price from each buyer…but from the customer point of view, I shouldn’t have to pay a different price for the same thing as other people (especially if that different price is *more*).It’s a slightly different story if you are saying that you let certain customers *earn* a discount…but in this case, what they are doing is actually charging their best customers more without any added benefit/bonus/service…slimy might not be the right definition for it, but it’s def. not something that feels right to me (or a very good way to keep your ‘most likely to buy’ customers)…

          13. ShanaC

            I mean, yuck, but isn’t this illegal? ISn’t amazon et al who do this opening themselves up to serious prosecution (since you can’t charge different amounts based on credit vs cash, for example)

    4. LE

      “It is part of what makes retail so hard.”Not directed at you but I’m really confused by this entire “so hard” way of thinking. To me “hard” is where opportunity is. If something isn’t hard then anyone can do it and be your competitor. That’s going to happen anyway but you don’t need, as the saying goes, “everyone and their brother” as competition. Many times this is the thinking by the way of financial people who have never really operated an actual business and made money that way in the physical world. And if they tried they would fall flat on their face with the daily decision making and risk all tied up in one thing. They only analyze numbers and figures and use that to make money (which is fine)[email protected] made a point about buying a research report from a geologist and making an investment decision. He spent the time to know about investing (I think I don’t know him personally) and even the fact that getting an investment report from a geologist like that is possible. It’s certainly not something I have ever thought of and I don’t believe reading a book or a few articles would make me anywhere near as good at what he does because of the most likely constant effort he puts into understanding his business over the years. While he might enjoy that (as I enjoy what I do and find it fun) I wouldn’t say it makes things hard. Retailing is hard but Sam Walton enjoyed it. To some people, difficulty is actually fun. To me if something isn’t hard it’s boring.

      1. Avi Deitcher

        I don’t think anyone here said, “hard therefore don’t do it.” But, yes, there are businesses that are harder to succeed in than others. Some of it depends on your temperament, some on your environment, some on the industry.Ever read Michael Watkins’ “The First 90 Days”? To use his grid, I love a turnaround or start-up. Those are very hard, but they suit my temperament very well. To each his own.I think the point here is that retail is a tight margin, tight cash flow businesses, and requires some serious scale to really do well.

  9. Vineeth Kariappa

    Could you please tell, what you don’t like “about the economics of this business” ?

    1. fredwilson

      I did. Gross margins, capital requirements, net margins. Its all in the post

  10. ShanaC

    What about digital goods?

    1. Kasi Viswanathan Agilandam

      digital goods don’t have BOM (bill-of-material) … Ideally they should be free after 2x the production πŸ™‚

      1. fredwilson

        Yup. We just made essentially the same reply

        1. Kasi Viswanathan Agilandam

          2-compliments on a single evening… i am logging out of net for the day :-).Have a good discussion guys.

      2. ShanaC

        true, but then what are you selling, and how do you account for it

    2. Avi Deitcher

      It certainly solves the cash gap issue.

    3. fredwilson

      That’s a post in and of itself. Digital goods are tricky. Their marginal cost is zero. Actual coat trends toward marginal cost.

      1. pointsnfigures

        MR=MC

        1. kidmercury

          i wonder if things are changing and this equation is no longer applicable. i was initially very skeptical, but it seems to me digital apps/goods/media is a huge and growing sector. i wonder if other equations that factor in fixed costs and target audience size are of greater use. personally i’m happy to pay $100 (along with 1,000 other customers) for premium stock research on a natural resource company from a geologist as i view it as better than spending $100,000 to hire a geologist to go visit a property and write a report on its economic viability just for me.

          1. pointsnfigures

            I don’t think the MR=MC equation ever changes. It’s a constant. How you define the inputs that go into the equation are what’s up for debate.

      2. James Ferguson @kWIQly

        I think that’s more about defensibility. If Digital Goods add value and scale they are interesting obviously. The barriers or moats often revolve around data access and channels for complementary services. The castle is often really not highly defensible in itself unless you are automating expertise from diverse domains, where putting a team together is the huge expense. Perhaps the biggest moat is where a market is opening up territorially or culturally and the incumbents can just hunt on their own turf until the market matures – then comes turf wars (think ice cream vans on the beach !). Where is this most common ? digital, and where digital reaches into the real world – overcoming scale problems. Three guesses where we are trying to position ourselves πŸ™‚

      3. James Ferguson @kWIQly

        Fred – Some Digital goods are produced algorithmically but are based on non-zero cost data sources. These are not MR = 0, but can be highly scalable.Examples might be anything to do with metering services, forecasting weather etc. Where the data is commonly accessible price tends to zero, but where information is added value MR can stay high – Isn’t this almost the model of many market research services?

        1. fredwilson

          Excellent point

      4. ShanaC

        right, but they deserve the explanation.

  11. Scott Barnett

    Don’t advertising revenue and affiliate fees come into play when calculating revenue and net income? And perhaps the most obvious comment of the day – doesn’t it seem that Amazon has dipped a toe in pretty much each of these buckets at this point? I don’t think you can consider them *just* an online retailer. In fact, they seem more like an infrastructure play – providing the plumbing to do online retailing, marketplaces, auctions, and of course AWS…

    1. fredwilson

      All true. But the economics of their business today is still very much dominated by the retailing business

      1. kidmercury

        i think that is one of the big shifts amazon is making. visit their web site and the top 5 links on the left side are all digital goods. within 7 years i think margins will be higher and AWS + digital media/apps + marketplace + infrastructure will constitute the bulk of their earnings. that is the gospel of amzn bulls.

  12. kidmercury

    i love vertical integration. it is my favorite internet buzzword at the moment. i think it is perhaps the most defensible over the long run.marketplaces are obviously great too. retailing is also wonderful, if you’re amazon, or if you’re not amazon but enjoy losing.

    1. fredwilson

      You crack me up Kid!

    2. takingpitches

      in the real world, vertical integration is powerful where you are good across the entire supply chain from building products that people want to mastering the retail aspect like Apple and Ikea, which have ridiculously successful retail outlets.the vertical integration strategy seems to have worked less well if you are more like gateway computer or microsoft and stink at multiple parts of that supply chain.

      1. kidmercury

        that’s certainly true……and a bias towards a horizontal appproach certainly favors distribution/marketing reach. i think it is easier for startups to compete vertically, though; incumbents that are established horizontally, like samsung for instance, have a huge stockpile of cash, the established distribution channels, and are accustomed to low margins — so i think it may be tough for a new entrant to break in. in my opinion with a vertical approach, one can enjoy high margins in a small niche that big players aren’t interested in, and one can more easily also leverage the magic of branding to differentiate accordingly.

        1. awaldstein

          Certainly easier and more efficient to market vertically.

          1. pointsnfigures

            vertical integration can lead to government regulation. The meat industry for example, or liquor industry.

          2. Terence botham

            Point is very much valid. I faced it myself

          3. Mark Essel

            Speaking of verticals Arnold, my wife and I are in a dilemma that you may be able to assist us with. Neither of us drink wine, but one Michelle’s friends is an ideal candidate for a wine gift. My first thought was Retsina (somewhat odd tasting Greek wine) just to freak her out a little, but perhaps the LocalSip can help us find a perfect gift for her friend?

          4. awaldstein

            Morning Mark…When in the city at the office, walk on down to Chambers Street or Frankly Wines on/off Greenwhich Street to have some fun picking an interesting bottle at whatever budget you want.Great shops. Both theLocalSip charter members. Great people. Tell them I sent you.And let me know what you bought.I had this amazing, super reasonable, oh so drinkable, natural Beaujolais with friends last eventng. Lovely bottle.There are some great Greek wines of course. Don’t know them that well.

          5. Mark Essel

            Thanks, Michelle ended up picking out a bottle without me πŸ˜€

        2. takingpitches

          that sounds right to me, Kid. if you are a startup creating something of value, it’s best to find your own mode of distribution, at least initially, than bleeding the value away to a much more powerful distributor like amazon or walmart.

          1. JamesHRH

            Even online, building distribution is hard & expensive, in most cases.That’s what made social such a phenomenon – the distribution power of the network users influence on new users.

          2. takingpitches

            yes, and kickstarter for certain design-oriented products

      2. Dave Pinsen

        It’s worth remembering a huge difference between Gateway and Apple: Apple makes its own software; Gateway retailed Microsoft’s. So even if Gateway were as good at retailing and the rest as Apple has been more recently, it would have still had a more difficult, lower margin business.

        1. takingpitches

          yes, good point. they weren’t as vertically integrated as apple.

        2. JamesHRH

          The problem with Gateway & Dell is that they don’t really make anything – they package / assemble things.Micheal Dell had – from what I have read – a gift for knowing how to spec out PCs so that they would move in volume.That;s different than creating a UI.If gateway has built SW, it would have sucked. If Apple does not fix their cloud offering, they are in large scale trouble.

          1. Dave Pinsen

            Right — as @takingpitches:disqus says nearby, they’re not as vertically integrated as Apple. Maybe it’s not helpful to characterize them as vertically integrated at all.

          2. Mark Essel

            Dropbox would be an interesting acquisition

    3. jason wright

      Geoffrey West tells us that every company dies, that it is inevitable.Amazon rewires the market, a bright young things come along and plug in. Inevitable.

    4. JamesHRH

      You are so right about Amazon Kid.It is so easy to shop Amazon.

    5. ShanaC

      amazon still doesn’t sell my favorite clothing. it is pretty far away from taking over the world. it is like walmart – close, but can’t do it all.

      1. Dan T

        i bet they have your shoes with zappos!

        1. ShanaC

          i’ve bought some shoes with zappos, but actually my favorites shoes historically they don’t carry

      2. Teren Botham

        Just because it won’t sell you line doesn’t mean it is short of greatness in the making. Fred talks about the concept of retailing in general and the market share amazon already has so your comparison doesn’t quite fit here–Terence

        1. ShanaC

          oh, I agree, but still, we should recognize amazon can’t do it all

          1. Teren Botham

            The day is not far when you would be buying what amazon sells.. It already happened to a few people I know. And I bet technology is so pervading these days you wouldn’t even know it is changing you…–Teren

          2. Abdallah Al-Hakim

            I agree about the cloth part and I don’t imagine it is a hot spot for this. On this topic – I recently made my first online purchase for a Canadian startup based in Montreal ‘Frank&Oak’ http://www.frankandoak.com/ which is going after busy men who appreciate quality cloth at lower prices (at least that is their sale pitch). They have clever ways of getting you to visit and become a consistent shopper. I am

          3. ShanaC

            πŸ™‚ how are the shirts? I actually wear men’s shirts on my off days (with leggings).

          4. Abdallah Al-Hakim

            I bought a shirt from my brother in law and it looks great. It is actually better than the screen image and the fabric feels pretty nice. I will purchasing a shirt (and maybe other stuff πŸ™‚ from them in the new year.

    6. Jim Ritchie

      Amazon is awesome if you know what you want. When I looked at ecommerce I first decided to focus on a market that was large ($25B annual US spend growing 15% annually) that was way underserved by ecommerce (< $1B online today) and would not be a good fit for Amazon. In addition, Fred does hit on the key challenges for “traditional” ecommerce, primarily gross margin and inventory.However, there is definitely room for innovation in ecommerce, especially with ability to leverage existing social networks. It is still early days for deliciouskarma.com yet we have:1) gross margins at 38%, spread is from 25% to 50% per product.2) We have a positive net20+ days of cash flow as we don’t pay for any inventory up front. We have instead built a vendor portal and tools for orders to be processed seamlessly using our infrastructure, shipping accounts, etc. so that our vendor partners can get orders processed quickly and so products are delivered to the customer with a common brand/look&feel.3) Almost all our customer acquisition to date has been through customers inviting others to check out the site (viral loop). Our K-factor is well north of 1.I think some “ecommerce 2.0” startups actually have a decent shot at building decent businesses.

      1. Wavelengths

        Exciting days! Good luck to you. And may what you put out to your employees, partners and customers bring good Karma back to you. πŸ™‚

        1. Jim Ritchie

          Thanks!

  13. Tom Labus

    The cost of dealing with the customer and keeping them happy is a huge cost/time/staff factor in the retail model whether it’s your own product or others.

    1. fredwilson

      Huge point that I missed

  14. Jb

    Interesting post. I wonder how you would think about the growing potential for online players to start offering customized/personalized goods. Potential for higher gross margins due to unique value offering. A company like gemvara comes to mind and they don’t have to carry inventory due to real time nature of business model.

    1. fredwilson

      That’s an interesting business. Retail combined with just in time personalized production

      1. AbbeyPost

        That’s a big part of Etsy’s business now. Which I know you know.

    2. laurie kalmanson

      please make me an ____ similar to the ___ you have on your site

  15. pointsnfigures

    would rather invest in the b2b processes around retailing. less risk and more reward.

  16. Scott Silverman

    Any thoughts on multichannel retail commerce models where stores, catalogs or TV channels (e.g. QVC) contribute to awareness, content, immediate gratification (buy online, pick up in store) and reduced friction (easier returns)? Multichannel retailers haven’t yet fully cracked the code on making the whole greater than the sum of the parts. But, there are inherent advantages that could be very powerful if leveraged properly.

  17. jarid

    You certainly can’t try to out-Amazon Amazon. But there are plenty of ways to compete and sell online. Manufacturers can use MAP pricing (minimum advertised price) to avoid the margin compression online retailing naturally leads to. Retailers can form coalitions (e.g. ShopRunner). From a merchandising standpoint, there are online exclusives, pre-orders, bundles, loyalty programs, etc. Lastly, while the usability of Amazon is superior to many sites (e.g one-click checkout), the brand experience is awful. If the Best Buys of the world want to be around in a few years, these are the areas they should focus on.

    1. fredwilson

      Hey JaridNice to see you around these parts

      1. jarid

        Thanks, been a little busy so admittedly haven’t spent much time here lately. But, when I saw the topic on Twitter, I had to chime in since it’s right in my wheelhouse. It’s like seeing your favorite team on TV as you pass by your local watering hole, and feel the need to drop in for a cold one.

        1. fredwilson

          i am going to see my favorite team play against Jeremy Lin and James Harden tonight. i also love those two. should be fun!

    2. awaldstein

      Amazon is great at listing things in categories to be bought from—from books to refrigerators.Amazon is terrible at selling anything that needs to have a market made for it.Fashion to some degree. Wine for certain. From a wine perspective, this might be of interest; http://awe.sm/lBaNV

      1. jarid

        Well said. Amazon is in the business of selling commodities, but some things are not meant to be commodities. These types of items create an emotional connection (e.g. wine & fashion). Why else would you pay $200 for some old crushed grapes or a pair of ripped jeans.

        1. awaldstein

          Wine online is a non starter to date. I’m focusing on and on/offline model in an early stage company now.Curious though…do you have any online examples or pieces of potential of where any products are being ‘sold not bought’ online? Besides Kickstarter that is, which is the best example of selling one to one online that really works.

          1. jarid

            Kickstarter was the one that instantly came to mind. Not quite the same vein, but OpenSky and the BeachMint/StyleMint group of sites are interesting in their uses of celebrity to help sell. And RentTheRunway certainly sells, uh rents, an aspirational lifestyle. Then there are all the subscription companies (BirchBox, Trunk Club, etc.) which cater to the serendipity and discovery elements. All of the various commerce business models could really be a post all unto itself.

          2. awaldstein

            Kickstarter is everyone’s example of something that works!Did some fashion site work a way’s back so know OpenSky and the celebrity sell model. All of them suffered from on the street touch points as i remember and every one of them underestimated the work of leveraging celebs as guides not just endorsers.Maybe different now.Pre social web, we all built catalogue businesses with transactions as something ‘not be be abandoned from’. The sites that really get it today have realized that transactions are a behavior that we want to do if everything else is right.

          3. falicon

            It’s a bit of a different beast, but I consider woot.com as a place where stuff is sold, not bought.

          4. awaldstein

            Need to relook at woot. Been awhile. Deal/price site don’t usually make the cut for me but I’m heading over there now! Thanks.

  18. Richard

    There is something else about retailing that makes it so challenging to make $, there are no good multifactor Β  pricing models that include variables such as product velocity, product size, product correlation, product risk, product storage, product elasticity.Β Thus, there are a lot of single digit margin retailers.

  19. James Ferguson @kWIQly

    Global ecommerce ~ $500BGlobal advertising revenues ~ $465BIf advertising is moving towards online fast (it must be) a lot of advertising doesn’t pay (well we knew that) and a lot of ecommerce value goes to advertising (we knew that too).Maybe the smart money is less about understanding promotional metrics and more about increasing fruitful e-commerce that is not advertising dependent.B2B seems an obvious area.

  20. JFrager

    I live in China so I think the Taobao example is worth noting. They recently crossed 1 trillion rmb in transactions (160billion usd). Last year 60% of the packages in China were delivered for Taobao. Almost every single Chinese person under 30 that i know buys most of their essentials on taobao. Amazon has been completely dominated in this market.Another really interesting commerce segment out here is android app markets. There are at least 40+ markets, completely different from the monolithic situation in the states. Frankly it’s a bit of a pain for app makers, but there are some advantages. Since most Chinese (esp android users) are unwilling to buy apps, the markets are developing paid distribution models. I’ve had good experiences with wandoujia.

    1. pointsnfigures

      I am not sure China is the same. It’s not as if there is free competition there.

  21. laurie kalmanson

    there is commerce as in big businesses with shareholders and partners, and there is commerce as in artisan, craftsman, handmade and there is some room inbetweenetsy makes commerce possible for individuals and small groups — the platform is the storefront, and that creates infinite possibilities for people looking to build small businesses — from pickles to hair bows. they might become big enough to get distribution in local bricks and mortar stores, or they might grow enough to expand on their own — or they might just stay smallmy kid is old enough to want to have more spending money than her allowance, and when i vetoed the lemonade stand idea — (a) flagging down strangers in cars is not a good thing for a child to do (b) sunk costs would be higher than prospective revenues or the cost of goods sold — she came up with selling things on etsy. we looked around and there are a lot of very small and very clever craft repackaging things; someone packaging 5 yards of glittery string, which is all you really need for a project, on a hand lettered cardboard back; a grouping of pretty hair ribbons, etc.making some friendship bracelets and drawings and posting them will be a project over the winter break — even if i have to set up a po box to make purchases and have them shipped there

    1. awaldstein

      Does the model really work for the tiny biz. Since you just did the research, what’s the charge to the vendor? Charges to up market your ‘store’ so you get found.Curious.

      1. laurie kalmanson

        great questions. i haven’t done the research yet; and this is intended to be a wholly subsidized winter break project for a fourth grader. i do know that people have made a living on ebay for a long time; i’ve bought things from people whose stores are as real as owning a shop on a main street in a small town. there are listing fees, transaction fees and credit card fees … which in total still feel like less than paying rent. there are also hobbyists who either make a living, support their hobby or something in between. i had an acquisition thing going for a while with pink glass, and people i bought from ranged from those cleaning out grandma’s estate to real businesses

        1. awaldstein

          Project for a fourth grader..how very cool.

          1. laurie kalmanson

            heh. etsy = kidsy

          2. AbbeyPost

            That’s actually pretty damn awesome as a startup idea. Hat tip to @domainregistry:disqus as well.

          3. laurie kalmanson

            #becauseawesome

        2. ShanaC

          there is a pretty active business resale for computer equiptment on ebay.

    2. LE

      “and when i vetoed the lemonade stand idea”Good for you. To me things like this show such a lack of creativity on the part of the parents. I cringe every time I see a kid with a lemonade stand or the Penn State kids with their tins collecting for cancer.How much creativity does it take to actually provide a product people want when you already have them primed with a good reason (charity) to give you money?How much effort does it take when adults are already primed to give a kid money to be more creative then selling lemonade?making some friendship bracelets and drawings and posting them will be a project over the winter break — even if i have to set up a po box to make purchases and have them shipped thereThere’s an idea for someone there. Operate a drop shipping warehouse strictly to sell products that kids make (along with the website that features the products). One potential problem of course is that the business would have to overcome the free labor on the part of the majority of the parents which not only doesn’t charge for the labor involved in shipping and handling but also the time to manufacture the products. Perhaps making and distributing kid designed products mfg. in China is the solution.

      1. laurie kalmanson

        thank youby setting up the po, i meant making a drop for sending to when i purchase my kid’s things myself, to help her get started on having customers (sneaky i know).

    3. fredwilson

      :)))))))))

    4. ShanaC

      dawwwwwww

  22. Kurt

    Great Post. Especially in terms that having just read another great and related post on a new marketplace concept that I am sure is going to shake things up “As the old saying goes, there is strength in numbers. Recognizing this from a retail standpoint, hotelier Henry Zilberman created Yumani, a site that allows consumers to band together to request the products they desire at reduced prices. The real kicker, the more consumers join together and request a product, the bigger the discount they receive.”http://www.psfk.com/2012/12…

    1. Drew Meyers

      Makes total sense.

  23. arustgi

    So this is interesting.. Comparing your last post about Advertising with this post about Commerce, lets look at the mention of 2 particular phrases.Gross margin or margin: 0 mentions in the Advertising Business Model while 24 mentions in the commerceProfit: 0 mentions in Advertising Revenue Model while 1 mention in the Commerce Business model.It is my understanding, that regardless of the revenue model, those 2 concepts make sense equally. Even if you are selling advertisements, you are in the arbitrage business. You still have COGS (which maybe equal to User Acquisition Cost), and you still have to have a line for Gross Profit in your Income Statement.Granted that in the Amazon world, the unit economics of a commerce business model are not that attractive, but atleast there is a unit economics framework that entrepreneurs can measure themselves against. I wonder how many entrepreneurs actually understand and work through the unit economics of the advertising business.I find that either your post on advertisement is too lenient, or your post on commerce too harsh.Am I being too myopic here?

    1. fredwilson

      Its harder to discuss the economics of the ad business because your product costs vary a lot. I could have drilled into that but I like to keep these posts short

  24. takingpitches

    Interesting to know how the online world of margin compression has affected the offline retail world margins in the aggregate across the economy. I assume if you take out apple, it’s been much like what you would think from seeing amazon’s effect on best buy, amazon’s effect on B&N and Borders, etc. But I wonder if anyone here knows about a more systematic analysis that someone has done…

    1. Josh Blandy

      That type of analysis would be interesting but difficult given that one would need to take the economic cycle into account. Here in Australia there are a lot of corporate bricks and mortar retailers crying poor due to people buying the same or similar products from US / European websites and importing for much less than the retailers can sell for.What will be interesting is the flow on impacts through the retail value chain and how quickly they will occur. For example, retail rents in Australia form a large component of a retailer’s operating costs. At some point in time the economics of investing in retail real estate is likely to be impacted. Although, at the moment, there seems to be no shortage of people thinking that they can provide a differentiated retail experience to buyers of non-differentiated goods…

      1. Wavelengths

        It would be interesting to look at the demographic of people who choose to live in more rural environments, thanks to telecommuting, who have more high-end tastes, who will not be driving the 400 or so miles to shop at Neiman Marcus, or the local Australian equivalent, but who would like to purchase luxury items. Not everyone in the sticks is a hick.Who is the online provider with the unique shopping experience for these buyers?(‘Scuse me. :-))

        1. Josh Blandy

          I’m guessing it is not the online provider with a warehouse or showroom in the local town, but one with a combination of product mix, community and efficient distribution that “sticks based” telecommuters like.

          1. Wavelengths

            Assume that the person who owns the 6400-acre ranch, with several producing oil wells, can go anywhere and buy anything, Or the Hollywood escapee out in Western Colorado with a fantastic view of snow-capped mountains just doesn’t want to go anywhere during the vacation between movie shoots.Actually there is a great deal of money in the pockets of people you would never suspect. When I was in Idaho I learned about the usual net worth of the local dairy farmers. Staggering. Puts the typical TV star to shame.There is also, as anyone with any perception knows, a great market in selling the cheap trinket with the major brand label. Notice that Neiman Marcus is now partnering with Target on some items with added design value. I’ll bet the NM customers also shop Target for incidentals, but with the same eye for design — nobody minds picking up on a deal!

          2. AbbeyPost

            My experience building and managing a luxury ecommerce business from 02-08 (mentioned in more detail in another comment) absolutely seconds your point here. One of my best customers, dropping as much as $30K a pop, lived on the top of a mountain in a rural (not ski) area on a huge ranch. She was very sophisticated, drove a Cayenne Turbo, loved beautiful leathers and cashmeres, but lived in the middle of absolute nowhere.On a separate note: FWIW, I like to think I have great taste (don’t we all!), but the NM-Target collaboration fell flat on its face to me. A great example: I was in Target recently and spotted a gorgeous dress for a toddler. It was part of the NM line. It was a lovely & elegant style, but the fabric was not up to the standard I would expect from Neiman’s (polyester vs. silk), and the price was $100: WAY north of what I would pay at Target. I think this whole thing was a miss-miss instead of win-win. If I’m going to pay $100 for a dress for a 4 year old, I’ll just go to Neiman’s, Janie & Jack, etc.Just because Target is closer to my house doesn’t mean I’ll pay luxe retail prices for a lower quality item.

          3. Wavelengths

            Totally agree on the price issue — polyester? $100? For a 4-y-o who will wear it how many times before outgrowing it?Thanks for your confirmation on my assessment of some rural customers.

        2. ShanaC

          net-a-porter

      2. takingpitches

        interesting re: the arbitrage problem that retailers may face for imported products. thanks

  25. Guest

    test…file upload problem

    1. ShanaC

      happens sometimes

  26. LE

    “There is no “location” on the Internet other than SEO.”In general you are correct. But there are domain names that provide “location” because they are typed in by people and easily remembered.http://www.rchelicopters.comhttp://www.businessphones.comThe above are simply amazon stores setup using free software called “Associate o matic” which essentially displays items for sale by amazon in particular categories.In spite of the fact that it does a totally sucky job, the sites do earn advertising referral fees from amazon (examples attached).Not a cent is spent on getting any of the revenue from these sites. It comes in reliably with no effort at all. (Hosting fees and domain fees are trivial).So you could essentially do the same thing if you wanted to carry some inventory or simply spotlight a nominal skeleton set of products to sell. But then you would need a warehouse or drop shipping arrangement, offices, people to answer inquiries etc.That said by operating this way you are amazon’s bitch (not that you couldn’t switch to another vendor Amazon just makes it easiest). Amazon has already cut the “advertising” fees for sites like this. And I suspect that they will continue to do the same in the future.

    1. awaldstein

      Facebook is indeed a ‘place’ and a ‘location’ on the web and it has nothing to do with SEO. Nor does Twitter.Curious to hear an argument that says that it (they) is/are not.

      1. laurie kalmanson

        this is an interesting discussion about how people find people/places/thingsfacebook starts with people who you know — you look for them — and people who know you — they look for you; then come the brands, which are either a friend found one or you searched for one; then the eventstwitter has tools for search by interest more than by person, as so many people use handles; hashtags are great for topics but not so much for peopleif i wanted to buy string for making friendship bracelets i’d google string and friendship bracelets

        1. awaldstein

          I think it depends…I’d google it, buy it locally probably.Would I under most circumstances starting out build a store on Etsy for that product….unlikely.Would I build a FB page as a ‘place’ to showcase what people made with it. Most certainly.How you find your customers or they you, is the core of most everything business wise.

          1. laurie kalmanson

            made of win: “How you find your customers or they you, is the core of most everything business wise.”

      2. James Ferguson @kWIQly

        @awaldstein:disqusWould you go further and say that any url that someone is prepared to bookmark is a location? So it comes down to a taxonomy?For example is http://www.avc.com somewhere you go to hang-out for a while – It is at least in my crude unmarketingified mind “where” I get mental stimulation from.By contrast search is a tool – I don’t “go” there it’s a signpostTwitter for me is more of a stream – it looks totally different each day depending on what’s floating past – its a real-time signpostengag.io is for me a stream mixup of locations and characters and placesdiscuss is places crossed with ideas streams (not much for people)LinkedIn is a very compartmentalized “where” – more like a research library than a search engine (sure it has indexes like google ) but Im there for answers not to ask questions.Does this make sense or is it the inane burblings of someone who doesnt understand the industry ? : ) (could be both)

        1. awaldstein

          Not being ‘of the industry’ is a huge plus!For me at least it has nothing to do with taxonomy and everything to do with dynamics.Do you go and hang out and cruise Facebook? If you use it you do and your groups are w/o a doubt places.Do I cruise Twitter. Yes. Do I hang out there…nope. Is it a place to me. No.Is avc.com a place. A community. Yup, absolutely.Is Disqus…nope. I want it to me but it’s smart plumbing today, the pipes of the community not community or a place itself.

          1. James Ferguson @kWIQly

            thanx – that makes sense

          2. awaldstein

            The relationship to these ‘places’ and commerce is another topic.Facebook is basically a transactionless environment. No one buys anything there from a consumer or storefront perspective.

      3. kidmercury

        facebook marketing is in a way its own type of SEO, as part of the game is to be able to rank in facebook’s own internal search engine.

        1. awaldstein

          True and interesting…but it’s advertising explicitly based to my knowledge.You assert an interest. You state some demographics. You get targeted by ads.SEO is both implicit and explicit to my mind. Intents are surmised as well as stated.My SEO results over time and my Facebook ad results over time are at different levels. Both useful. SEO much more attributable to transactions overall.Facebook search does indeed suck of course. And if someone could really parse the content of Facebook, which is comment strings within the groups, that would be marketing wise, SEO sort of wise, really useful. And really hard to do.I’m not suggesting that for a third party this is an economic model although it might be, but sure would be interesting to the brand.

    2. fredwilson

      Excellent point and you know that world cold

  27. John

    What do you think of Dutch Auctions like they are doing at http://www.pricefalls.com/ ? Seems to have some of the game elements of eBay auctions, but doesn’t ever leave the person selling in a bad position.

    1. fredwilson

      Interesting but I am not sure its mainstream

  28. LE

    “I have never invested in online retailing. I don’t like the economics of this business even though it is a huge market.”One of the ways people make a living on the internet (and in the physical world) is by doing something they feel comfortable with and understand and can manage that scare others off. There are always obstacles to earning money in any business with something that is to easy of course. Many people make the exact same statement about a host of other businesses out there (once again physical and virtual) that outsiders either don’t understand or can’t get their hands around. That said there are businesses that are traditionally easier to operate and have less risk than others. Those tend to attract many participants and come with their set of problems. (Take the app store as an example).In general in business you make money by either transforming something (taking a crappy piece of real estate and either sitting on it or developing it because you have the skills to do that) or doing something that you can do that is difficult for others to do. (Or by inheriting something, knowing the right people, being in the right place at the right time, or a combination of many things).”There is no “location” on the Internet other than SEO.”There is also advertising to bring traffic to your site. The thing that traditional businesses have been doing for quite some time. My first business had a decent retail location but essentially it would have not gotten anywhere without advertising (and I mean advertising not marketing).

  29. John Revay

    ecommerce – HummmIt has come along way1. Back at the mod to late 1990’s ( web 1.0 – static Web sites) – I worked for a company called PORT – we sold carrying cases for notebook computers ( we had a license deal w IBM and co-branded a line w/ ThinkPad). We had a little call center in our office w/ 800’s – we added our first shop cart – essentially a form that users entered name, rank, serial # along w/ what item they wanted.We manually did sales tax, credit card and sending order to our warehouse – it was a real pain and things dropped through the cracks2. After we got acquired by Targus (our largest competitor) we built a database driven site ( yr 2000 ish) – the shopping cart we outsourced to BUY.com – they had hooks into IngramMicro for pick, pack & ship.They took something like 5% and maintained the cart – it was friction-less.3. Early 2002 built another shopping cart for another company I worked for – essentially built the card from scratch w/ exception of hooks for credit card (authorizenet), FedX, and EDI/xml linking to TechData. Still some manual tasks but a lot better4. Now there seems to have a lot of shopping cart options – open source – or you just work w/ Amazon5. Probably still some issues w/ Credit card and Fraud and collecting or not collecting local and state sales tax.

    1. ShanaC

      how could you do ecommerce with no database?

      1. John Revay

        Early days the web form – generated an email with the details of the order in the txt of the email

        1. AbbeyPost

          @JohnRevay:disqus @ShanaC:disqus This made the old lady in me laugh a little πŸ˜‰

  30. LE

    And they have much better economics. There is no gross margin for the marketplace operator, just a transaction fee. There is no inventory. There are no shipping costs. All of those costs are born by the seller. I have invested in quite a few online marketplaces.But there are also lower barriers to entry. It is much harder to duplicate someone’s physical warehouse and shipping operation (and you can’t do it MVP) then it is to duplicate a marketplace unless the marketplace is one of the rare ones that has achieved what you would call the network effect that keeps out competitors.I operated a business that had machinery and equipment and could easily have operated without that equipment (could have been a broker) and delivered the same product without many of the drawbacks. But then I would have been further removed with (as they say in the computer business) more layers of abstraction and have been beholden to others whims (the people who produced the product).I feel comfortable with machinery and managing it (actually I really like it I consider it fun and I like mechanics) so to me this was the route I took (note my other statement on what people feel at ease with in another comment here).When it came time to sell that business I had something that was also more valuable to an outsider looking to purchase a going concern as well. I know this might be a hard concept for a person who views things from a financial lens, but psychology comes into play when people are buying something from someone else, whether that be a car or a business.

    1. kidmercury

      the barrier to entry is the existing network

      1. LE

        “the barrier to entry is the existing network”Barriers to entry that are true barriers only exist in a handful of large operators “the usual suspects”.My ex wife operated a coupon advertising business in the early mid 90’s pre internet. While it might have seemed as if there was a barrier to entry to duplicating what she had (she had distribution at schools, advertisers, a brand established for many years) I used to think back then that it would have been fairly easy to gain her customers for a new competitor.How? Simply give free ads to the retail stores that were her advertisers for a few books. Problem solved. Instant loss of existing network and customer base. They would jump in a heartbeat.Now I will agree that with a large operation that is not going to happen “the usual suspects”. But for a smaller operation? Definitely possible.

        1. kidmercury

          with online marketplaces you have recurring users and more data constantly being driven into the system (i.e. comments, feedback ratings, transaction history, credit card info, etc) so the lockin effect of a network is much stronger than in an offline business where there is no information gathering system.

  31. John

    There are some great examples of vertical integration that are doing well, such as amazon.com, ebayclassifieds.com, and getmethe.com

  32. RapidCloudSolutions.info

    Good post, Gadgeteer!.You’ve had some “extensive information” posts lately… Mary Meeks, Geoffrey West… Now this one..Great stuff, thx.

  33. Stephen Randall

    Funny to see a sponsored Google Ad for mountain bikes in the middle of your post. Clearly some parts of the on-line retail value-chain have some kinks to iron out πŸ™‚

  34. William Mougayar

    Only issue with vertical integration is that the marketing/branding costs are typically higher because you have to rely on yourself to be known and seen. This is more challenging at the beginning obviously.Also, your supply chain costs/efficiencies are key because that’s a good chunk of your costs and model.

  35. Seymour Sales @Tweetstore

    What happens in five or ten years to platforms like Amazon and eBay when we move from search to social?I read an articleingst month “Goobusinesss plan to kill search by 2020″I don’t believe Amazon or eBay are built for social commerce. They are built for search and I predict Google, Twitter/Tweetstore and Facebook will disrupt both Amazon and eBay. Note: Partial to Tweetstore; Co-founder. Fred, You are spot on, “e-Commerce” is by far far the hardest space to disrupt, if getting early adopters isn’t hard enough, trying to get seller/supply side I’d like pulling teeth from a pit bull.We are in it for the long run, starting with social peer to peer then on to social retail.Definition of Social Commerce is open to interpretation however, we looked into the future for what that definition will be and built our bisuness model accordindly.

    1. kidmercury

      i think amazon is very social. best reviews of any platform i’ve seen. i also expect them to acquire a social network at some point.

      1. Drew Meyers

        Not sure they need to acquire…they have enough content and buying habits to start with. They just need a friend graph tacked on. Maybe they would buy one to shortcut the effort to get that. Actually, now that I think about it, Path seems like it might be a good fit because of their focus on your trusted network. Maybe you’re right after all πŸ™‚

  36. internet_commentator13

    Hey all, I’m new to the avc community and I thought I would join in on the fun as I’ve thought some about where retailing is heading.I believe that there are opportunities in the curation side of retailing (especially the farther away from commodities like widely available bike models you go such as wine or home design). I also believe retailing and inventory/fulfillment will be decoupled. After all, getting the consumer to buy and inventory/fulfillment are very different functions that don’t necessarily need to go together if they can be performed competently and an integrated manner.Retailing creates value for the consumer in two ways: 1) access to product(getting product to the consumer as in inventory and logistics) and 2) curation(function of credibility, branding, customer service, great content to get the consumer excited to buy, special/unique access/guidance to finding the rightproducts among a sea of choices).The smart Flash Sales players are moving from specialized discounting tocuration plays, which is probably challenging as they’ve built their brands ondiscounting. Nevertheless, I find highly editorialized (curated)content/e-commerce plays compelling. While they might not all be $1 billiondollar businesses, I think there are a lot of profitable business models and scale able(to an extent) businesses to be built here that include curation, content, andretailing. In many ways they can serve as the consumer’s filter to themarketplace in fragmented markets like wine or home design products. Obviously, the power of brand, following, and anti-commoditization strategies are very important.Take the wine space and Jon Rimmerman(http://www.nytimes.com/2012…, with his globetrotting e-mail stories of sourcing unique wines, his palatte,and idiosyncrasies, he’s built a nice business at $30M in sales and high grossmargins (30-50% my informed guess as he cuts out some middleman). People lovehis newsletters and selection. Instead of the Wine Spectator they read hise-mails for their wine eduction/entertainment and buy the wines he recommends.Other highly curated retailing businesses like Thrillist and JetSetter fortheir respective sectors/audience bridge content and e-commerce and generateloyal followings and transactions. These plays are much harder to commoditizeand represent what retailing will more and more look like in the future.I also believe that marketplaces will look more and more like the curationcomponent of retailing. For example look at AirBNB, a marketplace. They areusing “Picks” and Wish Lists which are content strategies todelight, curate for, and inspire the customer out of the inventory they have accessto. I think of that as retailing.

    1. ShanaC

      Hey Marcus1) First off – Hi and welcome! :)2) Is there a way for curation to fight loss of trendiness that happens to all businesses as sometime or another?

      1. internet_commentator13

        1)Thanks for the warm welcome!2) I would say so. I think any brand has the potential to stay relevant. Coca Cola (late 1800’s), Apple(1976). People still love shopping at Bloomingdales and that’s been around for decades. Perhaps by spotting trends (cultural, fashion, technological, etc.) and constantly adapting(being paranoid), any curator (which is what to a certain extent Bloomingdales is) can stay on top and keep their brand and service fresh and relevant. I bet someone can write an equivalent of Clayton Christensen Innovator’s Dilemma for the topics of branding, marketing, and retailing…

        1. ShanaC

          1) πŸ™‚ just doing my job2) Actually, I’m surprised by this. I’m curious why there is no Clay Christensen type for marketing.

          1. internet_commentator13

            Shana, I found the innovator’s dilemma equivalent for marketing.Different by Youngme MoonThe experience of reading it is akin to taking first political thought/philosophy class in college and being exposed to fundamentally meaningful different perspectives.Anyways this is a rare gem. Enjoy.

  37. Jim Ritchie

    I think I shared this earlier, but this is our, deliciouskarma.com, template for how to compete with Amazon*1.Selling stuff they don’t. 99% of the products we sell are not on Amazon.2.Better product discovery and browsing. Amazon is a catalog. We are aplace to discover and learn. Amazon is the best place in the world tobuy the stuff you know that you need. We are the place to discoveramazing artisanal foods and learn their stories.3.Create a deeply engaged network of users. Users should want to cometo your site not just to transact, but to discover, learn and share.Sharing includes user generated content that goes beyond basictraditional user generated content such as ratings and reviews.4.Mobile. We’re building towards a world where mobile dominates. No onehas yet solved for that in a meaningful way for ecommerce.5.Social. Food is inherently social. We are just getting started withshopping and sharing with friends.6.Making markets. We are in the early stages of making a market forreal, good foods. We’ve already created a platform that previouslydidn’t exist for artisanal food vendors.7.Gamification. Making it fun and engaging to keep your customerscoming back again and again.8.Building a brand. Brands are emotional experiences not transactions.There are still many great opportunities to build long lastinge-commerce brands.9.Making it fun and emotional. That’s how offline shopping works. Whosays online shopping has to be so drab and transactional? We’recreating entire new experiences.10.Appeal to a higher cause. In our case a healthy food supply isimportant to not only your personal health, but the health of oursociety. We have created a philanthropic mission for our companythrough our “Karma Kauses” and 1-1-1 philanthropy model.*with acknowledgement to Jason Goldberg, CEO Fab.com

    1. awaldstein

      Thanks for this list. A good one.I’m interested and will sign up and take a look.10 great items that do indeed cover all the check boxes.Puzzled that you never use the word community. If you’re not a transaction based marketplace (Kickstarter, Etsy), nor a catalog (Amazon, Fab, Gilt), nor a community, you are in a phrase…?

      1. Jim Ritchie

        We are actually a bit of a blend of all 3. We call ourselves a “social shopping site for real, good food.”

    2. kidmercury

      amazon has many of the elements you note — mobile, social, large network of engaged users, etc — but i agree that the way to compete with all the behemoths is to go niche.

  38. internet_commentator13

    I believe that there are opportunities in rich content curated retailing generated by users and/or editors that creates a audience. I also believe retailing and inventory/fulfillment will be decoupled. After all, getting the consumer to buy and inventory/fulfillment are very different functions that don’t necessarily need to go together if they can be performed competently and in an integrated manner.Retailing creates value for the consumer in two ways: 1) access to product (getting product to the consumer as in inventory and logistics) and 2) curation (function of credibility, branding, customer service, great content to get the consumer excited to buy, special/unique access/guidance to finding the right products among a sea of choices).The smart Flash Sales players are moving from specialized discounting to curation plays, which is probably challenging as they’ve built their brands on discounting. Nevertheless, I find highly editorialized (curated) content/e-commerce plays compelling. While they might not all be $1 billion dollar businesses, I think there are a lot of very profitable and scale able (to an extent) businesses to be built here that include curation, content, and retailing. In many ways they can serve as the consumer’s filter to the marketplace. Obviously, the power of brand, following, and anti-commoditization strategies are very important.Take the wine space and Jon Rimmerman (http://www.nytimes.com/2012… , with his globetrotting e-mail stories of sourcing unique wines, his palatte, and idiosyncrasies, he’s built a nice business at $30M in sales and high gross margins (30-50% my informed guess as he cuts out some middleman). People love his newsletters and selection. Instead of the Wine Spectator they read his e-mails for their wine eduction/entertainment and buy the wines he recommends. Other highly curated retailing businesses like Thrillist and JetSetter for their respective sectors/audience combine magazine quality content and e-commerce and generate loyal followings and transactions. These plays are much harder to commoditize.I also believe that marketplaces will look more and more like the curation component of retailing. For example look at AirBNB, a marketplace. They are using “Picks” and Wish Lists. They are creating content strategies to delight, curate, and inspire the customer out of the inventory they have access to. I think of that as retailing.

    1. AbbeyPost

      Why is no one mentioning Gary Vee and Wine Library??

      1. internet_commentator13

        another great example!

  39. Ashish Sahu

    Some things are not easy to buy online right now like clothes or snowboards. eCommerce has cracked the problem of discovery, delivery & supply chain optimization but not of fit. You still need offline retail stores for that.Another trend is the emergence of 3D printing which can help democratize design to empower small vertically integrated retailers.

  40. David Petersen

    When I was in my early 20s, I ran a business that sold about $10 million/year worth of bathroom fixtures, atvs, and tractor implements via webstores. At surprisingly large markups, no less, or so I thought. Tariffs, ocean freight, customs fees, warehousing, forklifts, forklift operators on drugs running over each other’s feet, stolen inventory, damaged inventory, returned shipments, damaged shipments, chargebacks, salary, adwords, etc. By the time all the money was counted at the end of each year, we were lucky that we even paid ourselves a salary.Running that business turned me into a man, and it gave me what I needed to start the next business. But I would *never* wish that pain on anyone. In fact, I wish I hadn’t even written this comment. I think I’m having a panic attack.

    1. fredwilson

      ha!

  41. Sudarshan

    “vertically integrated retailing” can be a good strategy. But seriously, how feasible is it without the help of search engines? I can’t think of it as an approach that a new player in the market can adopt, unless they are plying in a very fine niche. It is certainly something established brands can leverage.Thanks for posting this and getting a great discussion going; looking forward to other posts.

  42. AbbeyPost

    I can’t wait to hear your in-depth comments on marketplaces! I’m the cofounder of a brand new marketplace (launching our beta this week), and we chose that model specifically for the reasons you outline in this post.What’s interestingly difficult is finding the right percentages, and estimating actual costs of maintaining that marketplace. We’re early yet, so we haven’t made any HUGE mistakes on that front, but I’m sure we will.I’m still reading all the rest of the comments here, but @skirunman:disqus’s are really speaking to me. We’re baking in a lot of the same elements: of course the typical social stuff, along with a real community with blogs, video blogs, forums, and more. We think that in our specific market–a highly underserved yet burgeoning segment–community is a key aspect to what’s been missing for these shoppers.This is one of the few things that I think Amazon could actually do better. Sure, you can tell people you already know “I bought this on Amazon” and so forth via sharing triggers, but there’s no way to go on Amazon’s site and say to a community: “hey, I’m looking for an awesome play kitchen for my kids. Give me suggestions on which one you have, why you love it and what you don’t like about it”. Reading product reviews left by other people is not the same as actively soliciting input on a category of item.This ties in with making the process “fun and emotional” as well. That’s a key ingredient missing in many (most?) ecommerce transactions–they turn into simple exchanges of goods for money. There’s a reason women love to go to the mall; because it’s an immersive experience. We’re looking to build a similarly immersive, emotional experience online for our market segment.

  43. Abdallah Al-Hakim

    E-commerce is pretty much the dominant business model for many startups in developing countries. It is probably the case because of the perceived reduced risk associated with these businesses versus other type of startups. example. Also, it is a business model that investors in emerging markets are more familiar with. Still, this post highlights the challenges in this model from revenue point of view which is very important. This is not to mention the challenges in developing countries of efficient delivery and online payments.

  44. Techman

    Commerce is a great way to make money online indeed. Companies like Amazon is the e-commerce place on the internet. Looking forward to more of these revenue posts Fred, so keep up the good work. Looking forward to your next post this coming Monday.