February 04, 2019

Bifurcation: E-Commerce

I didn't see this coming, but in hindsight I wonder how I missed it this long.

Back in the early 90s, surround sound was a big thing. You could buy a surround sound processor and plug your VCR into the surround sound processor. The processor would matrix the right/left signal and create glorious noise in the speakers you had behind the couch. The movie "The Fugitive" was a great example - you'd hear the horrifying sounds of a train derailing via five different speakers, and you'd think WOW!

You'd want not just the VHS version of The Fugitive ... you'd want all the movies that sounded good. If you had enough cheddar, you'd get a laser disk. If not, you'd join the Movie of the Month Club. For a penny you could pick from twelve titles ... and then each month you'd either be mailed a movie you had absolutely no interest in and you'd return it or you'd be required to buy a movie on your own. After "x" months, you could cancel at NO OBLIGATION.

These were called "Continuity Programs". You'd get locked into the program, and next thing you knew you weren't renting movies from Blockbuster Video.

Continuity Programs were everywhere.

Then e-commerce disrupted direct-to-consumer shopping, and weak companies were replaced by modern e-commerce brands.

One problem.

Modern e-commerce brands had horrible annual repurchase rates. It's common to analyze an e-commerce brand that retains 30% of last year's buyers. When this happens, the e-commerce brand becomes a slave to Google and/or Facebook ... the e-commerce brand has to put a quarter in the Google/Facebook slot machine, pull the lever, and hope to hit the jackpot (a new customer).

Digital gurus had to come up with a solution to this problem.

And they came up with a solution to this problem.

Continuity Programs were rebranded as "subscriptions".

To make subscriptions work, digital gurus had to make sure that you couldn't possibly own the product. Nope. You had to rent the product. And if you did end up owning the product, then for crying out loud you had to rent "something".

Netflix is the "Movie of the Month Club". You pay your streaming fee, and you get "access" to everything even though you own nothing. As long as they keep adding new stuff or you love watching reruns of The Office, you're in business. You pay your fee, they keep ads out of your face (more on this in a moment), and everybody wins ... well, at least Management wins. If Management is on the right side of Bifurcation, Management always wins.

Spotify is the music version of the "Movie of the Month Club". You rent music for one low fee, and you get everything. As long as you are locked in to your playlists and you like new music at high quality, you're not leaving Spotify. They're on the right side of Bifurcation.

Stitch Fix is the apparel version of the "Movie of the Month Club". You aren't renting apparel, that model doesn't work so well, so you have to rent something. What are you renting? You are renting the algorithms and you are renting the humans that curate your box of goodies. In exchange you get to "look cute". And Stitch Fix sidesteps the problem most e-commerce businesses experience ... low annual repurchase rates with few customers who buy multiple times per year.

Once you are buying from Stitch Fix, they don't need to spend money on anything other that algorithms/humans/merchants to keep you buying. Meanwhile the folks at Wayfair are running TV ads and spending money with Google/Facebook to keep the wheels on the bus. That's expensive stuff ... Wayfair is paying a tax to get you back while Stitch Fix is automatically sending a $200 box of stuff you didn't ask for.

Amazon (Prime) is the best example of a subscription-based model ... you pay more than a hundred dollars ahead of time in exchange for the right to have merchandise shipped quickly ... often the same day. On one side of Bifurcation you charge customers for the right to buy stuff from you (Amazon Prime) ... on the other side of Bifurcation you have to offer free shipping and 40% off to beg the customer to buy from you after paying Google/Facebook at tax.

Which side do you want to be on?

This is Bifurcation in e-commerce.
  • On the good side, you'll pay a subscription to keep products rolling into your world, facilitated by mobile convenience.
  • On the other side, you'll pay Google/Facebook a "traffic tax", and those two brands will decide if you get any traffic or not.
The product you offer determines whether a subscription-centric view of the world works. Have you noticed that nobody seems to want a subscription to merchandise from Gymboree? Almost nobody makes pre-paid annual shipping work, largely because the merchandise assortment is too narrow to enable 7x or 24x purchases a year.

In other words, if you want to get on the right side of Bifurcation, you have to do something about your merchandise assortment, so that it is broad enough or requires non-stop attention to keep you in the subscription program.

Make sense?

Tomorrow we go old-school & talk about catalogs.

P.S.: It does make you wonder ... customers are Bifurcating along paying for subscriptions vs. ad-supported models. What happens if capitalism (i.e. customers) prefer subscriptions over ad-supported models? What happens if the customer rejects Google/Facebook (ad-supported) and you can't acquire new customers anymore?

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