What Will The Next Great Vertical Commerce Brand Look Like?
Key Lessons From Studying Existing V-Commerce Leaders
This is an updated re-post of an article I wrote earlier this year as part of the upcoming launch of a new VCB focused newsletter. Stay tuned for more information!
Since the last time I wrote about Vertical Commerce Brands (V-Commerce or VCBs) two things have become increasingly clear to me:
- There continues to be a growing interest in these companies both from consumers and investors. Though some investors still lump VCBs in with the broader challenged e-commerce space, more and more are changing their tune as the early V-Commerce pioneers attain new heights of success.
- We are still in the very early innings of Vertical Commerce as a model. In fact Warby Parker, the proto-VCB that first lit fire to a new breed of game-changing companies, is itself only six years old. The next decade will bring us even more customer service-obsessed brands selling innovative and highly-differentiated products directly to loyal customers.
It’s an exciting time and thus, I thought it valuable and prudent to arrange as many companies as I could find into some easy to track and generally comparable categories.
Acknowledgements — As with the last post, I built on the great work started by Andy Dunn and also want to thank Michael Coetzee for his inspiring passion for VCBs and for helping to brainstorm, challenge and ultimately refine many of the thoughts you’ll read below. Thanks Mike.
Some Important Notes:
- There were several approaches I contemplated in arranging these names and this is just one layout that makes sense to me.
- Several companies spanned multiple categories or didn’t serve just one gender so I tried to sort them by primary focus and duplicated where it made sense.
- I also left off categories like food and alcohol because I think they deserve their own deep dive. Might expand the landscape above with food later on.
- Lastly, this landscape is by no means complete and I’m sure could be made more accurate — so with more research and continuous help from you, the reader, I plan to update it regularly.
Now that we can visualize the landscape, I think there are a lot of interesting lessons we can take from digging into the subcategories with the “hottest” investments as well as from recognizing the segments that are still under served. And no matter what the category, industry or demographic, I believe an astute entrepreneur will learn from the successes and failures of the fore bearers of vertical commerce above and I am happy to help share the lessons I personally think will be most critical.
So without further ado, here is what I think the next great vertical commerce brand will look like:
1. It Will Be An Essential — But You Only Need One (Brand)
VCBs have to respect the capital intensive nature of building physical goods and it’s a fair assumption that most of these companies will need multiple injections of private capital from VC and PE funds. As a result, the most successful brands above are disrupting large and growing multi-billion dollar categories and justifying massive capital raises by aiming own even a small slice of the market.
However, just being in a large market isn’t enough of a reason to exist. In fact, looking at the sheer number of menswear apparel brands as an example, I found myself wondering why we even need this many brands in the first place. While it is true that apparel is a quarter-trillion dollar industry, I do not believe the next great VCB will come from apparel. I think it’s partly because of how crowded the space already is but also because consumers today don’t own just one or two brands. Clothing is certainly essential, but in today’s world, multiple brands continue to jockey for dominance in your closet which creates a challenging dynamic where one brand may dominate, but no single brand wins 100% market share alone.
However, there are many examples of exciting “You Only Need One (“YONO”) VCBs that have done exactly that:
- You only need one mattress (Casper or Leesa or Helix or Tuft).
- You only need one razor (Harry’s or DSC or Bevel).
- You only need one toothbrush (Quip).
- You only need one bicycle (Brilliant Bicycles or Sole Bicycles)
You only need one.
One reason, the YONO is powerful because it shifts the marketing cost structure from constant customer acquisition to customer retention. If you’re buying from me, I can be confident that you are not buying from my competitor. Instead, I focus on building a deeper customer relationship and spending on customer success channels instead of costly acquisition advertising. Building that bond also enhances my ability to up-sell ancillary products or services to you, which I can feel more comfortable doing when I’m not constantly fighting for top billing in your wallet.
There are certain products for which YONO makes more sense for than others, but to me, the next great VCB will recognize the immense value and defensibility of winning complete customer loyalty in their respective category.
2. It Will Challenge Conventional Wisdom About Consumption
The smartest thing Dollar Shave Club (“DSC”) did wasn’t just their viral video marketing, pricing efficiency or recurring revenue model. It was convincing customers that they didn’t need to stretch out their use of an expensive Gillette razor over 30 days. When you’re getting a new cartridge of four DSC razors every month, you feel much more comfortable throwing the old one away. With the price point as low as it is, DSC has incentivized behavior that only helps add to their retention and moat.
Looking at the VCB categories above, each of them has challenged conventional wisdom about how customers want to purchase products in that given category. Here’s just a few examples:
- Mattress shopping is conventionally done in person because the buyer needs to “try out” the product. So, you send them the mattress directly and give them over three months to try it out. Odds are if it enters the home, it’s likely to stay.
- Tuxedos and dresses are traditionally rented in person because it is important to get the fit just right. So, you have fit experts obsessively assess the best sizes for the customers and offer replacement guarantees to put them at ease and incentivize first purchase.
- Kitchen goods are usually bought in person at a Bed Bath & Beyond or by mixing and matching goods from third-party retailers, causing choice overload stress on the buyer. So you simplify the choice by offering a full array of home goods in only one style. No hassle to mix and match glasses with bowls — everything goes with everything but it all comes from one place.
- Apparel stores have to have massive inventory at each location because people have to walk out with their purchase in hand. So you offer to place orders at asset-lite “guideshops” that serve the purposes of discovery and trial while you mail the products direct to the consumers home — as if they bought it online in the first place.
Each VCB will have its own tactical mix of product, brand and technology that it can leverage to empower new customer behavior. This shift can then be used to incentivize recurring or repeat purchase, to create more meaningful connection with customers to turn them into ambassadors or to gain deeper consumer insight that informs future strategic decision making. In altering consumption behavior, the best VCBs challenge the very conventional wisdom of that has made the incumbents in their space into laggards.
3. It Will View Technological Innovation As Extension Of Its Brand
An interesting observation of the categories above was that the ones where VCBs gained early traction and success were previously dominated by oligopolies — with high concentration of power among 4–6 players or in Warby Parker’s case, a veritable monopoly by Luxottica. Concentration like this in a category often leads to the incumbent pulling up the drawbridge on their moat and focusing on operational efficiency and cost savings. As a result, that concentration of power and unwillingness to innovate invite technology-empowered challengers.
But don’t be mistaken — not all technology is software and I’m not saying that innovation alone will result in the success of a VCB. However, aligning your brand with new technology creates an interesting early value proposition — clear differentiation from incumbents — and ingrains innovation as part of the company brand and culture, even as the business matures.
What I’m broadly calling technology innovation, Founder Collective’s Micah Rosenbloom referred to as Casper’s “Innovation in Logistics” in an example:
Its memory foam design and innovations in packaging allow the mattress to be shipped without the typical hassle of scheduling a delivery, having moving guys traipse through your home and plop a mattress in your bedroom. The mattress is heavily compressed and packaged such that it expands when opened and serves as a compelling brand touchpoint…
Over the past half decade, the tech advancements of VCBs like Casper (Mattress in a Box), Bonobos (Curved Waistband) or Honest Company (Non-Toxic CPGs) have come to define each brand uniquely in the collective mind — each with varying degrees of actual R&D investment required. Newer brands like AllBirds have likewise made their own innovations, using superfine merino wool for their shoes as an immediate identifier of their brand. The way you associate boxed mattresses with Casper, they want wool shoes to be thought of as AllBirds. Accept no substitutes.
Investment in technology will help tear down some of the barriers to entry placed by incumbents while continued focus on innovation ensures that you put distance between you and the “me too” brands in your category. This is why I believe the next great VCB will view technology as an extension of their company’s brand.
4. It will Have Multiple Touch Points With Consumers Each Year
Consider a spectrum with Dollar Shave Club on one end and Casper Mattress on the other — the latter is a single purchase item at ~$1000 with massive margins while the former is a monthly purchase subscription with (pardon the pun) razor thin margins. On a long enough time scale DSC’s per customer profit might match Casper’s but on the surface, single purchase-high margin seems to be the clear way to go when building a new VCB, right?
If only it were that simple.
Unlike Casper, DSC’s monthly model means a revenue generating consumer touch point with every box shipped. That can be an opportunity to test new creative campaigns, push new messaging to the customer or to offer trials to new product lines still in development. With continuous purchase, the VCB has the opportunity to deepen the relationship in a way that discrete purchase categories like Apparel, Furniture and Luxury Brands can’t do.
Even Casper has realized this and is now starting to move from purely focusing on being a mattress company to becoming an all-encompassing sleep brand — with Casper pillows, sheets and even dog-beds.
Along with being essential, innovative and unique, the next great VCB will either be a product with multiple sales in a calendar year or failing that, a single sale product with multiple ancillary ‘upsells’ throughout the year.
- If you’re thinking about starting a vertical commerce brand, I implore you to choose a more inspirational category than apparel.
- In fact, if there is a category on the landscape above with more than four established names, it’s really worth considering if you actually have a better solution.
- Building a vertical consumer businesses is generally very capital intensive. I’d love to find brands that are still able to innovate and scale while finding unique ways to address these continuous cost challenges as they grow.
Actually, what I’ve omitted there is an interesting discussion (perhaps for another post) about the challenges facing VCBs in maintaining low pricepoints and high margin on a long enough timescale and in the face of growing innovation by Amazon, competitive V-Commerce Brands and some existing retailers. Structural advantages to the vertical model aside, keeping more margin cannot be the only or even the main differentiation. In many cases I think the advantage will come from building real affinity for the brand while continuing to deploy capital in ever more efficient ways. Anything less will continue to keep investors at bay or cause heavier dilution for entrepreneurs in later rounds.
On the whole, I think the four points above are a good start in identifying common factors of VCB success but they are just that — a start. As we see vertical commerce evolve as a model, we’ll see more category winners that will teach us the value of exclusivity vs. partnerships or between staying online-only vs. building pop-up retail. The more data points we gather, the more we can chart the winners and hopefully, draw some telling trend lines.
Exciting days ahead.
As always, thank you for reading! Please leave me any thoughts below on how to improve the landscape above or if you agree or disagree with the points above. Would be great if you can like, subscribe and share as well. And ofcourse, if you’re building a VCB that fits the mold discussed above, I’d love to chat and learn more, so don’t hesitate to reach out.