First Principle Thinking, Applied to Ecommerce

One of the areas we invest in is in commerce infrastructure and software. A while back I wrote this post, and it seemed like a good move to repost it here.

In a fast-moving ecommerce environment, there are two tendencies that have developed, for the sake of moving quickly and being as efficient as possible. One, we make assumptions: “The more units we sell, the more money we’ll make.” “Consumer demand will continue to go up.” “Digital marketing is not a cost center.”

The other habit we have started to form is to reason by analogy, that is, take a certain approach because it is similar to what others have done or are doing, and we want to get the same results, or see the same level of success.

With first principles, you boil things down to the most fundamental truths, and then reason up from there. Elon Musk certainly didn’t invent first principles — that was Aristotle — but he popularized it as a method of innovation. He breaks down situations or problems into the core pieces (e.g., source materials for rockets) and then puts them back together in a more effective way. Deconstruct, to reconstruct.

In ecommerce, we rarely take the time to question or test our assumptions, let alone take anything apart — it’s too scary. But the danger in that is getting trapped in doing things the way they’ve always been done. And we know what happens to companies that don’t innovate to adapt to changing times — they disappear. Sears didn’t see Walmart coming… and then Walmart didn’t see Amazon coming. (Though they’re doing a great job at playing catchup!)

Below are three ways that first-principle thinking can impact your ecommerce business.

  1. Destroying the myth of the first-mover advantage. Google was not the first search engine; it wasn’t even the first to use web crawling and indexing technology. The iPhone wasn’t the first smartphone, it was just better. Tradeswell isn’t the first company to build tools for brands looking to maximize their digital channels. But there is a luxury in being able to step back to understand what the structural problems are that you see from others who are moving faster into the space and address those in your solution. Once you start growing quickly, it becomes harder to change direction, even if that growth is simply organic market growth and not new value creation.

2. Adapting to major changes in the retail value chain. One significant problem that today’s CPG companies now face due to changing times is how the retail value chain has shifted completely. R&D and manufacturing are still at the beginning, but now retail, marketing and final fulfillment are no longer linear — yet many CPG companies are still producing their product as if it’s going to be shipped in palettes to a retail location. They’re not designed for end-consumer shipment and often face problems in last-mile delivery. CPG companies now must reverse-engineer to make fundamental changes in how they create and package their product to nail the right sizing for direct-to-consumer purchases.

3. Defining the new ecommerce superteam. The way things have always been done, there was clear delineation between functions: You had roles in marketing, finance, supply chain, inventory management, etc. Yet that assumes marketing is done in a broad, open environment like broadcast media, not the closed loop of affiliate, sponsored search and other performance-driven media that are direct levers for demand. A first-principle approach would ask, what are the business goals overall, and then how do we create a team that is all focused on that goal, while still maintaining core competencies and leveraging specialty skills? This might bring about more of a unified ecommerce hub with a leader who is solely responsible for the primary outcome, who then is supported by those other roles.

There are multiple other ways that first-principle thinking will impact your business, particularly as consumer behavior changes around important aspects like discoverability. Ecommerce teams who are stuck with old ways of thinking and mired in assumptions around purchase intent, for instance, may fail to anticipate a shift away from sponsored search results and towards influencers and finding niche markets at scale, globally.

Don’t fall into the bag-manufacturer trap. For hundreds of years, “innovators” made iterations on the same product, keeping the form of the bag the same, but adding zippers (1938), new materials like nylon (1967) or adapting them for school, hiking and travel. It wasn’t until 1970 that the first rolling suitcase was invented, when someone thought to improve upon the function of a bag, rather than improve upon the existing form. Consider the “function” of your ecommerce business first and find new ways to meet that outcome instead of making small tweaks to “forms” you may have picked up along the way.

Co-Founder & CEO Tradeswell, Managing Partner Grit Capital Partners