At the end of 2016, we were delighted when DHS Venture Partners was able to take a lead as one of the first investors in Formulate. One year on, I’d like to take the opportunity to explain what excited us then, and why we continue to back this team and be thrilled for the future.
The big picture
Trade promotions — the method of increasing demand for products in retail stores through special pricing, bonuses, and more — represents the biggest marketing line item in the retail industry. In fact, almost half (46%) of total marketing spending in sectors such as consumer packaged goods is allocated towards trade promotions. By comparison, 16% of total marketing spend is allocated to digital marketing, and a similar amount to traditional advertising. The growth of e-commerce has even further stressed the importance of promotions, while at the same time emphasising the need for a faster, smarter, and overall more efficient method of promotions management.
Many retailers suffer from having little or no knowledge about the real effects of their trade promotions. With thousands of products, shifting prices, seasonal effects, and many other complicating factors, it is incredibly difficult to judge the true performance of a particular promotion. Sure, by reducing the price of Coca Cola you can sell more Coke, but what happens to the sales of Pepsi and other competing soft drinks? And what would have happened if you had reduced the price by a little bit more, or activated the product in a different way? How do you account for cannibalisation between goods, for seasonal effects, or for the differing lifetime value of customers attracted by campaigns versus those attracted during ‘normal’ pricing periods? This requires some very specialised mathematics and data science expertise. Instead, many retailers resort to guesswork and leave it to the judgement of individual managers. In fact, 86% of all retailers are not satisfied with their ability to manage and evaluate trade promotions.
Enter Formulate, a team of marketing experts, data scientists and engineers, supported by leading researchers at universities spread around the world. They have built a scalable platform of machine-learning algorithms that helps merchandisers to truly understand the effect of individual promotion campaigns. Insights that enable more efficient promotion management but also improve vendor negotiations. This is achieved by connecting Formulate’s platform to existing business and e-commerce systems using standardised APIs and integrations that can be set up in hours. Once the platform is connected, all analysis runs automatically and starts providing the merchandiser with actionable promotion insights. As a user, you can even predict the outcomes of hypothetical campaigns in order to plan ahead and make decisions for the future. Sounds advanced? Some of the technology “under the hood” is actually derived from missile-seeking technology. So yes, it is rocket science.
What stood out for us
Apart from the significant opportunity of providing obvious value to the entire retail sector, there were a number of factors that really stood out for us and led to an investment.
Team: We were impressed not only by the strength of technical expertise and the clarity of the vision, but also by the founders’ willingness and ability to take new information on board, and to learn as much as possible in order to aid the realisation of the vision. It is a fantastic balance to see that people truly are experts in their field and yet are always hungry to learn or be proved wrong.
Track record: At the time of investment, the company was in some ways pre-product, in that the scalable SaaS solution did not fully exist yet. However, the team had been operating as a consultancy for a number of years, meaning that they had already been effectively solving these problems for customers, albeit not at scale. And with customer-funded product development showing that businesses were willing to put their money towards this team solving their problems and providing them with value, the challenge then was to ‘productify’ and turn proven solutions into a low/no touch SaaS product that scales.
Fit with us: From the outset, we could identify clear ways in which specific individuals within our group, and the group as a whole, could add real value and work closely with the team. With people that have built and scaled companies within SaaS, deep tech, and marketing/insights, as well as experts from retail and pricing strategy, we felt confident that this was a great opportunity that we could fully support.
Timing: When we first met the team they were not in a great rush to close a funding round, so we both had the chance to get to know each other over a period of several months. It has often been said that investors like to ‘invest in lines, not dots’ and it is quite obviously true.
In the months since, they have:
- Developed a generally applicable, no-touch SaaS solution that works for large and small retailers, online and offline
- Started pilots with some of the top e-tailers and retailers in Sweden
- Proven that the solution increases profitability by 3–5%
- Strengthened their kick-ass team to be even kick-assier
We’re excited about the year ahead to see things roll out further and to continue to support the team all the way!