The Evolving Commerce Stack

Background

When I started working in commerce in 2017, there were still a vast number of gaps in the tech stack available for brands. I worked for a brand that had a unique bento box experience for customers and therefore was still not supported in the Shopify ecosystem which was true for many retailers at the time. The difficulties with tooling were only made more difficult as brands like ours looked to expand channels into wholesale and retail. Over my career I have personally been able to work across various teams and departments including finance, data, and marketing, which nearly touched every aspect of the business such as merchandising, customer success, digital product, engineering, logistics and more. Over the past 4 years, I have worked for, advised, consulted for and befriended many brands that have emerged as leaders in the DTC space and have seen the unique challenges they faced. In the previous decade, we saw the fast rise not only of consumer brands, but also the tools used to help those businesses run with efficiency. Brands are constantly looking to create new offerings and expand reach to customers and technology continues to help propel these businesses forward. Despite many advancements in this space, we at Red Sea Ventures believe the commerce technology stack will continue to evolve rapidly over the next decade — and we are excited to invest in the future of commerce infrastructure.

39.8% of online purchases happened on Amazon (as of 2020), underscoring how brands need to provide a seamless user experience, a differentiated product and fast delivery to compete. Enter Shopify, a platform that helped democratize the process of bringing a sophisticated e-commerce site to life, quickly and seamlessly. However, as brands and the solutions servicing brands continue to scale, it’s become apparent that Shopify has drawbacks — site speed, limited customization, and delays in iteration due to the monolithic architecture of the product. As a result, there is an open question as to whether retailers continue to centralize around Shopify as the platform of choice, or whether they will prioritize the flexibility, speed and personalization associated with a headless infrastructure. As Shopify continues to improve their tooling around international expansion and shipping networks, startups building in the e-commerce infrastructure space will need to strongly consider the costs and benefits of being closely aligned to Shopify’s growth, staying platform agnostic or building exclusively for companies served outside of the Shopify ecosystem.

Note: For this initial piece, I will not be focusing on marketing or analytics as it relates to managing a commerce stack.

E-commerce Stack Elements

To run a successful e-commerce business, there are many key components. Often when people think about commerce companies, they start with the core back end that they build their site on. Below are the 3 choices that companies usually choose between as a starting point for the tech stack decision.

1. Hosted e-commerce platforms — such as Shopify and BigCommerce. These options usually have more basic and easy-to-maintain front end interactions and also include a shopping cart and backend functionality using the same platform. These options do not require companies to launch and manage their own hosting and have other benefits including SEO, and ease of integration into key marketing channels.
2. Self hosted e-commerce platforms — such as Magento and WooCommerce. These platforms require you to find either on premises or cloud-based hosting which requires more technical management. Additionally, these platforms usually requires more work to integrate into key tools as well as building out additional site features and functionality.
3. Headless commerce offerings — This can be completely independent or work in conjunction with one of the above 2 options. Proponents of headless commerce believe that there are independent parts of the. e-commerce stack that are done better by individual companies rather than a hosted commerce experience such as Shopify Plus. This allows the flexibility and customization of a self hosted platform with easier API integration. In most cases outside of a hosted e-commerce environment, the CMS, cart and backend are all disconnected. Companies built using headless commerce have the most API flexibility. Companies can select from their vendors of choice rather than what lives within the hosted platforms app stores (Nacelle, Commerce JS, Swell, Fabric). Often customers will start to test the concept of headless commerce with a headless CMS powered by companies such as Nacelle, Builder.io, or Shogun while maintaining Shopify as their primary backend and checkout.

When making a selection, retailers consider a whole host of questions, including price, ease of maintenance and customization abilities to fit the company’s business model. There continues to be a push and pull between ease of store creation vs. customization and site performance.

Once companies have established their core infrastructure, below are the “traditional” key elements of the front and back end that need to be managed.

Front End Customer Experience:

Backend Experiences:

Jordan Gal, founder of Carthook, recently spoke on the Greymatter podcast with Mike Duboe about how the front end experience referenced above still mimics in person retail experiences. The storefront the home page, the product listing pages are the aisles, your cart is your virtual cart and your checkout line is the checkout where you can also pick up last minute item add ons. Innovation in commerce technology will continue to allow the dismantling of the traditional e-commerce front end and allow people to shop in more unique ways, and we are already starting to see that take form.

With the immense growth in the Shopify app store, Shopify has democratized and given rise to the world of “Modular Commerce.” We at Red Sea Ventures, think of the idea of Modular Commerce as using modular pieces of the e-commerce site rather than a monolithic options to give greater performance and personalization, which can include both app store add-ons as well as headless architecture elements. This modular nature affords better, faster and more unique experiences for end consumers. In some cases, such as our investment in Clyde (extended warranties for e-commerce), these offerings mimic in store offerings in a new digital seamless experience. Another example of this would be a company like Try Now that offers a “try before you buy” experience, which continues to parallel the customers in store experience. As “Modular Commerce” continues to rise and new and reimagined types of shopping experiences emerge and we will witness the reshaping of the front end experience for customers.

Below is a market map of some key sub elements that have already emerged in the commerce tech stack. (note: if there are others you believe should be added please list them here)

E-commerce Stack Sub Category Market Map

Source: RSV Internal Analysis

Trends I’m Watching

Despite the fact that many companies exist in the commerce enablement space, I believe there are still rapidly growing new opportunities in the tech stack. Below are the key trends I have been closely tracking:

1. “Frictionless Commerce” bringing the checkout experience closer to the customer
2. Headless commerce and the new types of commerce experiences it can help to enable
3. Cross selling and ease of marketplace creation, including creator economy stores
4. Continued rise of “Modular Commerce” elevating the customer experience online

Bringing Checkout Experience Closer to the Customer (“Frictionless Commerce”): As people compare in-store conversion rates to e-commerce (7.5x higher in store), various e-commerce enablement technologies have emerged to decrease friction to help customers make a purchase. At Red Sea Ventures, we use the term “Frictionless Commerce” to describe technology services working to decrease the number of steps for customers to reach the checkout and help stimulate impulse buying, similar to picking up gum at the CVS checkout counter. With Instagram continuing to roll out in platform purchasing features, we will continue to see an increase in the share of consumer wallet being spent on social platforms, buying from their favorite celebrities on TikTok for example.

There are many ways I’ve seen this executed in early stage startups recognize there can be multiple winners in this category. A few I’ve seen recently are API’s that allow immediate buying on the social platforms (Carted, Canal, Violet) and universal checkouts (Fast, Acquire, Nate) with saved payment tokens. Additionally, we continue to see the rise of text-based quick buying solutions. The two use cases that will most benefit from text buying are (1) brands re-engaging valued customers and (2) enabling more seamless purchasing from creators. As customers engage with their favorite creators and deem them as “credible sources,” customers will be more willing to make impulse purchasing decisions through texting or instant checkout (i.e., Popshop Live, Buywith).

In addition to this, some companies are also trying to augment the in person experience by enabling purchases through NFC or QR codes on physical goods, like Batch. Ultimately, there have been few winners to date who have merged this physical and online shopping experience in a compelling way. With Covid shifting consumer behavior to more digital offerings, I will be interested to see if now is the time that customers are willing to adopt this trend.

Ultimately, we will continue to see the e-commerce shopping experience become more interactive and easier for the customer to make quick “impulse buy” decisions.

Headless Commerce: If you’ve spent time around commerce recently, I’m sure you have heard about headless commerce. People use the term headless commerce to talk about a website in which the front end and back end architecture of the site are decoupled. This is helpful for 3 main reasons: (1) speed, (2) customization, and (3) portability.

I’ve personally spent a lot of time thinking about the future of the Shopify ecosystem and whether companies completely outside of the Shopify ecosystem can still win. As Shopify continues to build out their fulfillment network, I believe that the companies focused on traditional e-commerce retailers with low SKU counts that will be most successful will, at a minimum, be able to work with Shopify for the next 5 years. An example of this Builder.io. By having a solution that enables retailers to build custom front end experiences, Builder.io not only thrives if the market for headless commerce grows, but also thrives in a world where Shopify continues to be the dominant platform for new e-commerce brands. Ultimately with Shopify focusing on payments and logistics, front end customization and load speeds, which are still crucial to their merchants, is, for the time being, more easily handled by other e-commerce infrastructure tools directly focused on this issue.

So where do I think headless commerce is most likely to succeed? I believe that Shopify has improved the e-commerce experience for low SKU count traditional e-commerce brands. This still leaves a lot of opportunity for improved tech enablement for omni-channel retailers, retailers dealing with B2B payments, B2B and B2C marketplaces and other unique experiences including subscriptions and local pickup. B2B marketplace enablement is an area I believe still has a lot of opportunity in terms of tooling that can be enabled through headless commerce. I think solutions will be built around inventory, PO’s, payments, financing and other specialized needs that B2B marketplaces that differ from B2C commerce. I think there will be a continued push toward a “Modern Headless Stack,” reminiscent of a modern data stack to be able to serve some of these commerce types, but I do believe that Shopify will continue to solve some of these use cases by expanding their API’s and continued app store growth. I personally believe that we are still a ways out from a mature modern headless stack that customers will transition to without question, but I think whoever can do this for unique or complex businesses and can identify and target the right type of customers will be able to thrive and serve a customer segment that Shopify is not serving well.

Cross Selling and Ease of Marketplace Creation including Creator Economy Stores: I have continued to see the rise of cross selling and verticalized marketplaces. Some companies that are enabling brands to cross sell more easily include Honeycomb Commerce, Coop Commerce, and Carro. Some of these enable cross selling on site, at the point of checkout, and at post-purchase. As brands have seen increased customer acquisition cost over time, they will continue to look for additional ways to generate larger basket sizes and continue to meet the needs of loyal and valuable customers by offering them other products. Cross selling offers a community for better brand recognition and network effects through more customer data. The other thing that has continued to rise is the creation of marketplaces, both from retailers as well as within the creator economy. I expect to see a rise of more companies enabling creators with easy to curate shops, similar to how Faire has enabled SMB retailers. Whether Faire is able to serve this seller versus a new entrant is yet to be seen. I think we will continue to see opportunities for tools to enable creators to sell more, sell quickly and manage their stores with ease.

Continued Rise of “Modular Commerce” That Elevates the Customer Experience Online:

There are still a lot of areas of commerce that have not yet been enabled. I continue to see the rise of modular pieces of the e-commerce stack that will be able to work within the Shopify App store as well as on other platforms to improve the digital commerce experience. Examples of this include Clyde, Try Now, as well Merchant Candy. Merchant Candy is enabling B2B payments from within Shopify. Traditionally, Shopify retailers had to build completely different workflows for their B2B business lines which add a lot of friction and complexity to opening up wholesale opportunities and quite often deter retailers from trying.

I also believe that as online purchasing continues to rise, there will be unique tools required for different types of verticals. For example, there has already been a proliferation of venture backed companies providing reverse logistics (returns) solutions including Loop, Happy Returns, Narvar, Returnly and more and yet these tools do not handle workflows for returns in categories such as furniture. As more products move online, I believe more tools will help to enable different types of commerce verticals.

Lastly, one area I’ve recently found interesting is within premarket and aftermarket sales by retailers. Retailers historically have not been able to profit from the aftermarket success of a brand on TheRealReal, Goat, or StockX, and continue to be disconnected to their end customers. That coupled with continued growth in customer appetite for sustainability and the circular economy, companies like Archive, Recurate, and Treet, can not only enable brands to build deeper relationships with customer bases but also propel forward a message that is important to the brands and their customers. We have already seen companies like Patagonia launch their own resale site, aligned with the brand’s mission. As e-commerce continues to mature, there will continue to be many opportunities to enable consumers and brands through “Modular Commerce.”

As e-commerce continues to rise as a percent of overall purchasing, and buying behaviors shifts, I am excited about the continued growth in commerce infrastructure to enable different types of businesses and customers experiences. If you’re building technology in the future of commerce infrastructure (B2C and B2B commerce), please reach out to me at taylor@redseaventures.com or on Twitter @TaylorBrandtNYC.