The Book Of V-Commerce
Today’s Tadpole Is Tomorrow’s Frog
What is a v-commerce brand, or digitally native vertical brand (DNVB)?
I have spent the last ten years of my life figuring that out. I don’t know everything about it, but here is what I do know.
- It’s primary means of interacting, transacting, and story-telling to consumers is via the web. The v-commerce brand or DNVB is born on the internet. It is aimed squarely at Millennials and digital natives. It doesn’t have to adapt to the future, it is the future. It doesn’t need to get younger customers. It starts with younger customers. When we launched Bonobos in 2007, somebody asked me who had done this before. I said no one. People thought I was an idiot. They were right, but not about this.
- It’s a brand, and that brand is vertical. The name of that brand is on both the physical product and on the website. (It’s on the stores too, but we’ll get to that confusing part later.) The v-commerce brand requires the commercialization of an e-commerce channel, but that channel is an enablement layer — it’s not the core asset. VC’s sometimes think these should be valued like technology companies. Some of the valuations still reflect this misguided notion. These are retailers, not tech companies. They cannot spend 10% on technology and 30% on marketing forever. But at first they need to, and it’s hard to raise money. It’s hard to stomach the dilution, and a lot of well meaning entrepreneurs can’t find the money. Unfair access to capital becomes a gating factor in getting a DNVB off the ground. This isn’t really fair, but the world isn’t fair. Hopefully more investors get in the game. Kirsten Green figured it out before anyone else. People probably thought she was dumb. Now she’s on the cover of stuff. I like that about the world.
- The profit losing nature of these companies deludes most traditional retailers into ignoring us. Then Unilever bought Dollar Shave Club for $1 billion, and smart people woke up. People not paying attention are naive. “We can do this ourselves,” they say. So show me an incubated digitally-native vertical brand that’s doing well? Still waiting for one example. Someone will succeed at this inside a big company one day, but it will be the exception, not the rule. The rule is that entrepreneurs need the fear of corporate death to make the magic. It’s too hard right now to do this on the inside. One day it will happen — just like Mickey Drexler made Old Navy inside GAP. He invented vertical retail in the bricks era, in a lot of ways. Tip of the cap, boss, tip of the cap.
- It’s not e-commerce, it’s v-commerce. The product gross margins are at least double that of e-commerce (e.g. 65% versus 30%). The contribution margins can be 4x higher (e.g. 40% versus 10%). This radically transforms the economics of the v-commerce compared to e-commerce. V-commerce will make money. E-commerce barely does. I have proof. Bonobos is now breakeven. People claim we are losing lots of money. They are wrong. But it took us a decade. I am not proud of that. Turns out it takes ten years to build a brand. Maybe I was slow at it. Pioneers get the arrows, settlers get the gold. Let’s not do that again.
- The digitally-native vertical brand is maniacally focused on the customer experience. There is no precedent for this in most categories, as these are bundles of two businesses that normally standalone. When we started Bonobos, my first angel deck said this is Ralph Lauren x Zappos. I hate when entrepreneurs do these mash-ups, but it’s really self loathing. I did it back then too. People need short cuts to understand stuff. What can I say.
- The digitally-native vertical brand is way more customer intimate than it’s competition. The data is better because every transaction and interaction is captured. You don’t have to combine data across businesses, because it’s all one business. You are not blind to your wholesale business, because you don’t have a big wholesale business. It’s one CRM. It’s one store, where everybody knows your name.
- Here is what most DNVB entrepreneurs get wrong. The world doesn’t care about your DNVB if you aren’t delivering a better product than traditional competition. The world doesn’t need your DNVB.
- (e.g. Bonobos on fit personalization, Warby Parker on price, Dollar Shave Club on subscription), web/mobile experience, and customer service that collectively become the brand in the consumer’s imagination. Deeper data on the consumer drives enables the V-Commerce brand to stay closer to the customer than its brick and mortar driven peers, and the ownership of the brand end-to-end fuels more affinity for a V-Commerce brand than even the best E-Commerce experiences.
- While born digitally, the DNVB need not end up digital-only. This means the brand can extend offline. Usually its offline incarnation is through its own experiential physical retail, or highly selective partnerships. In nearly all cases of partnerships, the brand controls its external distribution versus being controlled by it. Any offline retail is not about warehousing product, it’s about marketing the brand and delivering great one to one customer service. It may be pop-ups. It may be permanent locations. It may be installs at existing retailers.
- You know who figured this out first? Steve Jobs. Certainly not me. The Apple Store is the first experiential retail store that I can think of. Lululemon isn’t bad either.
Too often the DNVB is compared to a typical E-Commerce company. If a typical E-Commerce company is a frog, at birth a V-Commerce brand does look a lot like a tadpole. But it doesn’t end up as a frog. The difference is profound, and it requires an appreciation the role brand plays in inspiring people, speaking to them, shaping their choices, and a sharp understanding of how different the economics and growth trajectories are.
It requires investors to look more closely at the downstream math of a V-Commerce company versus an third-party E-Commerce purveyor. That differences in the unit economics and the contribution margin cohorts are profound — apples to oranges. Cohort analysis is only part of the story. Brand matters. These brands have a soul that is not easy to quantify at first. The E-Commerce stories are flashier at first on the top-line (more brands!), but the long run winning strategy may well V-Commerce (cult brand monotheism). The E-Commerce businesses are often commodities that rise and fall (Fab); the dream for the vertical brands is to be long-standing proprietary assets (Bonobos, Warby Parker).
The E-Commerce company is a channel; the V-Commerce company is a brand. The E-Commerce company has low margins; the DNVB has high margins. The E-Commerce company can grow unbelievably fast; the DNVB can’t grow as fast, but it’s more valuable in the long run because it’s about more than just price.
While third-party E-Commerce requires you to compete against a grizzly bear called Amazon, creating a DNVB gives you an opportunity to combine the growth of being an E-Commerce company with the margins of being a brand, and with proprietary merchandise where you control distribution and your own destiny. When done right, when there is some differentiation in the core physical product itself made possible by the V-Commerce nature of the model, the DNVB can provide a better overall bundle of product and service than the competition. These DNVBs are just getting started; only recently are people beginning to realize how big they might be at scale. Their strategy creates a brand loyalty impossible to create in the commoditized world of channel, and as traditional retail dies a slow death, the V-Commerce brands rise to take their place.
In the history of V-Commerce brands, it’s incredibly early. The net promoter scores are off the charts. There is still a lot to prove still on profitability. We are in the first decade of a century long shift where retail is re-organizing from the automobile (the 20th century) to the smartphone (the 21st century). Vertical brands were a huge part of the brick and mortar driven era of retail (Zara, Ikea, Trader Joe’s), and they now become the driving story in the future of retail.
Next up: the encyclopedia of V-Commerce brands.