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Zulily and Gilt Groupe’s disappointing acquisitions. One Kings Lane’s potential fire sale. Groupon trading at less than $3 a share.
The cold winds of an investor pullback from e-commerce companies are blowing, and they are not being particularly kind to a bucket of companies I’ll label as “gimmick commerce.” By that I mean companies that grow quickly in their early years, often by relying on heavy discounting or convincing customers to sign up for recurring deliveries, but that eventually face big challenges growing the business into a sustainable enterprise.
The high-level industry view
The e-commerce market in the U.S. is dominated by Amazon and, to a lesser degree, by big retailers such as Walmart and Target. By some estimates, Amazon is responsible for 50 percent of all e-commerce growth in the country. That’s a pretty disheartening statistic if you are an entrepreneur in the industry.
As a result, over the last seven or eight years, we’ve seen a proliferation of startups gravitate to a handful of business models to avoid competing directly with Jeff Bezos’s company.
There was flash sales, which, with a few exceptions, are dead as a model that can sustain a huge, profitable standalone business. There was the daily-deal phase, which is also essentially dead as a standalone business, outside of Groupon. The rise and fall of LivingSocial is a good cautionary tale.
And then there is subscription commerce: Products delivered in a box to you on a regular basis. This model has experienced a bit of a renaissance in recent years, with companies like Honest Company, JustFab and Blue Apron landing valuations of $1 billion or more. But there have been flameouts, too, and I think there is the potential for many more.
It’s been fun, but the party could be over
Together, these categories have been responsible for a significant portion of breakout commerce companies during this time. The first two categories are built on the back of impulse-driven purchases, with the help of a time-sensitive offer that seems too good to pass up. In short, when these shopping gimmicks are new, they’re fun.
In the case of subscription commerce, customers get excited for a variety of reasons, depending on the category. For something like diapers, it’s the convenience. For services like BirchBox, it can be the surprise of not knowing what you are going to find in the box. For subscription food services like Blue Apron, the pitch is part convenience and part educational; you are learning to cook, but someone else is shopping for the ingredients and then holding your hand along the way.
But there are significant risks in these models, too. In flash and daily deals, there is an excitement in the early days that captivates customers, but the offering often gets diluted over time, either because quality supply gets harder to acquire for the company (Gilt), or the curation it was once known for is drowned out as the product selection increases rapidly in order to “scale” (Fab and Zulily).
Subscription offerings have different issues. One is the initial hurdle in getting someone to sign up for a recurring subscription, which is much harder than convincing someone to make a one-time purchase. As a result, companies in the space have gotten creative in making an initial hard-to-beat offer with a subscription agreement attached to it — but not always as clearly as some customers would like. JustFab, for example, has faced criticism from customers who claim they weren’t aware they were signing up for a monthly subscription when making their first purchase.
Another issue is “churn,” the percentage of customers who cancel their subscription, which can crush a business. The higher the churn, the more new customers have to be acquired, and the more money has to be spent to attract those new customers. Some subscription companies have also come under fire for making it difficult to cancel a membership by not allowing online cancelations.
Some of the companies in the categories above may thrive, either through diversifying what they sell or how they sell it, or by selling the business to a company with a more traditional retail model. Many will not.
So where’s the promise in e-commerce?
Boring though it may seem, one area of real promise in e-commerce lies in building a brand by making or selling products that customers love enough or need enough to be willing to pay full price. Eyeglasses seller Warby Parker, shaving brand Bevel, and mattress startup Tuft & Needle are all pursuing this approach (and, yes, incorporating brick-and-mortar retail along the way). Men’s clothing seller Trunk Club, which sold to Nordstrom for $350 million, and women’s online clothing seller Stitch Fix have both had success mixing full-price sales with personal styling.
It helps, too, if Amazon doesn’t sell these products. For example, one of the only public e-commerce companies doing well is the online furniture seller Wayfair, which is focused on a category Amazon isn’t known for.
Typically, though, these businesses do not explode in popularity overnight like gimmicky flash sale or daily-deal companies once did. They don’t grow as quickly, either. That means that investors may have to wait a long time to see a return on investment, and even a good return often does not look like the ones that hot software companies generate.
But if you’re determined to build, or invest in, an e-commerce company, a late return is better than “never.” And gimmicks often result in “never.”
This article originally appeared on Recode.net.
