How to actually cut out the middle man

Early stage Silicon Valley e-commerce startups love “cutting out the middle man.”

It’s a phrase that sums up the once-shining promise of e-commerce to deliver superior value to customers and rich profits to shareholders by “disrupting” traditional commerce. After all, why hand over margin to sales reps, distributors, and stores — so the thinking goes — when a billion customers are only a click away? The thinking also implies cutting out other offline inefficiencies: why spend big bucks on physical stores when you can do it online for a fraction of the cost?

But two decades after Amazon started not making money, we know that taking consumer products online is one tough business. Yes, online commerce obviates many old inefficiencies, but it also creates a host of new, costly challenges that don’t exponentially diminish with scale like entrepreneurs and investors had hoped. As it turns out, even the metrics used to measure performance — acronyms like like CAC and LTV — rely on shaky assumptions.

As Andy Dunn said, Ecommerce is a Bear.

The solutions we see many e-commerce-first brands turning to as they increasingly face the challenges Dunn identified — enter new product categories, open brick & mortar stores — do not address what is glaringly missing from Silicon Valley-backed apparel brands. New product categories and brick and mortar are just one more way of blindly growing the top line as companies bleed more and more cash to meet growth projections.

New product categories and B&M are band-aids on a bullet wound.

The band-aids won’t stop the bleeding. Instead, Silicon Valley needs to expand its definition of middle man from “traditional retail markups” to “all of the costly pieces required to scale sales” — Adwords, inside/outside sales, paid advertising, conversion optimization, retargeting, etc. Those together make up Middle Man 2.0 — and good luck cutting him out while hitting your growth targets.

Yet, there’s something that does pay off exponentially with scale, something that sustainably diminishes Middle Man 2.0 costs. The thing that counters rising customer acquisition costs as you scale beyond your early adopters. The thing that commands fierce customer loyalty. The thing that all good brands have in common: a good brand.

Brand cuts out the middleman.

If brand is good, those metrics all go up. In the short term, you may not be able to calculate the ROI on doing brand right, but brand is what drives sustainable scaling and long-term defensibility.

Silicon Valley apparel brands are chained to Middle Man 2.0 economics because they neither value nor understand brand. They see their products as commodities and inflate the value of being first to market. Good web design and social media do not make a good brand.

Doing brand well is not easy.

Brand does two important things. First, it encodes in shorthand certain information about your product. A Coca Cola bottle conjures thoughts of reliable, extremely refreshing American cola. Without a good brand, you have to repeat words that your consumer is too lazy to think about. It’s a lot easier to reach your customer when your logo says all that stuff for you.

Second, for certain product categories, and particularly apparel, brand represents something about the person wearing or using the product. In the case of products that are not highly differentiated, or as the market becomes more crowded, the second feature of brand becomes much more important. Faced with the choice between two very similar pairs of pants, wouldn’t you choose the brand whose product enables you to communicate something about who you are?

We wear things as much for what they do as for what they represent. Nike pours hundreds of millions of dollars a year into innovations that drive functional improvements that give athletes every possible edge. But they also pour hundreds of millions of dollars into advertisements like this to boost the brand’s representational value. We wear Nike partly because of its functional value, and for most of us, because wearing it has come to represent something meaningful, in no small part that one stands for the notion that determination makes someone great, not simply natural gift.

Branding clothing is an opportunity to make a piece of cloth that another guy is capable of manufacturing say something about the identity of the person wearing it, in a way that the other guy can’t copy. Doing brand well means all aspects of your experience cohere and communicate something about the identity of the people you want to wear your product. For example, wearing Chubbies means you partake in American Bro culture.

Revenue, growth, and a large market is not enough to do it well with apparel. You aren’t protected by IP and there are next to no barriers to entry. If you are in the apparel sector, as soon as you hit success, someone is going to copycat your product and service. If you don’t have a strong brand value proposition, you will soon have to chase new, costly ways of differentiating yourself to fend off competition. More discounts. Free shipping both ways. More marketing spend. Upping OpEx spend to get 1 hour response time on customer service emails. To avoid this race to the bottom, you need to defend yourself with brand. Brand is not replicable.

The mistake many brands make is to compete on technical features that are replicable and prone to quick attack by large incumbents, without focusing on what their brand identity is.

Take Bonobos for example: 8 years, $127 mm in financing, just cracking the $100 mm revenue mark, and struggling to sustain growth in the face of rising customer acquisition costs. For too long, their brand was built around “better-fitting pants” and this stimied their ability to grow into new categories. Compare Bonobos to a brand like Tory Burch, and you’ll wonder if they got a little too big for their better-fitting britches.

In her first 8 years, Tory Burch ramped the business to over $750 mm in revenue. Aside from sound retail practices, the Tory Burch business embodies a good brand. Bright orange doors to her store entrances are intriguing and welcoming. Near the couches in her stores sit iPads preloaded with all the magazines in the world. The brand’s Instagram is equally inviting — a combination of product images, celebrity pictures, and personal shots from the actual Tory Burch’s daily and family life, as well as her travels. Not to mention the product.

Tory Burch does not need to promote her product on technical grounds, because what makes her product compelling is her brand. She runs her brand more like an editor and less like an engineer or MBA.

We believe a brand first approach will displace Middle Man 2.0. Doing brand is an editorial bet about what it will mean for consumers to participate in your company’s offering. It requires someone with a tight creative vision guiding the ship.

Silicon Valley is catching onto the idea that brand matters. Increasingly, we hear investors segmenting opportunities into two camps: brand and software. Like any model, the software vs brand model is reductive. But it is a step forward because it implies investors now appreciate that the market dynamics for brands are often very different from those of software companies they are accustomed to backing.

But to all the VC’s wearing square toe shoes at Cougar Night: please make sure you get what good brands actually look like before you throw too much capital at them.

(by Woody Hines and John Shi)