The Great Macroeconomic Fallout
Adii Pienaar
October 16, 2022
I live in South Africa, where 5% - 7% inflation (probably two or three times that when calculated for a middle-class lifestyle) has been the norm since I understood the term. Same thing with higher interest rates.
Against that backdrop, it's been interesting observing the rest of the world's reaction to higher inflation and interest rates in the recent past. This reaction is best seen in the downwards pressure of valuations on the public markets.
Beyond my attempt at highlighting our worldly differences or my novice understanding of public markets, I will segue to this: the current macroeconomic environment has had a major effect on DTC/ecommerce/retail brands.
Venture'esque funding for these brands is suddenly harder to access. Markets are less bullish on outsized outcomes and maybe even the general unit economics of these businesses (DTC darlings Allbirds and Warby Parker share prices are down 80% & 70%, respectively, YTD). And the brands' challenges are compounded by an indifferent consumer spending environment.
The macroeconomic environment means brands are scrutinising where they are spending. And these brands' tech stack does not fall outside of that purview.
Shopify announced new US-centric tax features this week, and Twitter was unhappy. The conversation quickly turned to a comparison of what other players in the stack charge relative to Shopify.
I think that consideration is mostly moot... Shopify is less a SaaS company and more platform. Their revenue is transactional, and the fully loaded cost of Shopify is greater than or at least equal to what most brands pay for other solutions (for email/SMS/support/inventory management/etc).
What is clear, though, is that brands are very cost-conscious at the moment and probably more so than ever before.
This flies in the face of many ecommerce enablement companies that have pushed "up-market" with the tailwinds of the last two or three years.
WooCommerce talks about democratizing ecommerce (a sentiment I'm proud to say has persisted for me from Woo to Conversio to Cogsy). Shopify wants to arm the rebels. Both platforms' positioning will be tested in the next 12/18/24 months (as "recovery" or reverting to a new normal occurs) because achieving those goals should probably include consideration of lower prices.
Beyond the platforms, I expect two things to happen:
- Specific solutions in the ecosystem will have to fight harder to justify what brands spend on their software. Brands will be more ROI-conscious and cut low ROI tools even if it is accretive. In the past, the solutions that lived closest to the revenue thrived. Attribution has always been murky, though (e.g. the amount of revenue your ESP recovered for your abandoned carts), and brands have wisened up. They also have more choices for tools in their tech stack. The solutions that nail value proposition and tight attribution will win more than those that don't.
- Some solutions will adjust pricing and push into a new normal space. When you are paying tens of thousands of dollars a year to each of your ESP, reviews solution, SMS platform and help desk, it's evident that the category leaders have benefited from many tailwinds. Consumer spending increased. Ecommerce's share of that spending increased. And venture capital into the solution companies increased. This is not sustainable at the same clip. Everything that gets out of equilibrium eventually returns to a normal range. I know we're finding a new route to market for Cogsy in this way, and I expect others to come to a similar conclusion.
Maybe this is the longest preface I have ever written. What I want to say is this:
- The best brands have their numbers dialled in. They understand it to the nth degree, and everyone on the team knows exactly what each number means. This is true clarity and alignment compared to merely celebrating top-line revenue growth or improvements in ROAS month-over-month.
- Even though they have had great top-line growth (and great potential), brands that have not had their numbers dialled in until now are struggling (and some are dying). The notion that unit economics will sort themselves out at some sort of (revenue) scale, is not a guaranteed path. In the short-term, brands have been able to fudge that by telling a growth story and getting new capital or debt onto the balance sheet. This has merely plastered over the cracks and it not leaves some brands in a precarious position.
- Brands' need to use tools that are great at reporting/attribution, and delivering a believable ROI will only increase. I believe this means that brands will eliminate tools that share overlap with other tools in their stack, even if it means that they may have 10% more surface area on an initiative. If the tools do not render a positive in their own right and as part of a bigger strategy, they will be heavily scrutinized. Maybe the ideal outcome is also not to cut those tools but to realign their value and to be clear on how the metrics related to them are tracked and used elsewhere in the business. I'll say it again: the best brands have their numbers dialled in, and when a tool helps a brand to do that, they are immediately in a stronger position in the stack.
Brands have historically placed significant trust in the software solutions that help them grow their business. And software vendors have used that trust as part of their growth strategy: publish content that educates and empowers, build a product customers love using, create a close circle of passionate fans around the company and celebrate all of this with great case studies advocating for "best practices". (Rinse and repeat.)
The shift I'm seeing (and one that will accelerate) is that brands will now take a "trust, but verify" approach instead.
And rightly so.
Years ago, we were building Conversio, and we went through a season of churning a bunch of good customers because they had benchmarked our abandoned cart recovery rate to others in the space. We were puzzled because we thought we had at least copied all of the known best practices in the space and baked them into our product. We went down a rabbit hole and subsequently found that all of our competitors were attributing cart recovery based on an email open alone (whereas we were basing it off a combination of an email open and clickthrough from the email). So we changed it to conform. But not our customers nor other email providers were in the loop about what this meant. (It did make all of our attributable revenue seem higher and more favourable, though.)
Brands are more informed today, and I don't think the same thing (or at least to the same extent) can happen again.
This validates the general need to "trust, but verify" versus trusting blindly. And crucially, I believe it will inspire a new discipline for the best brands of really dialling in their numbers across the board.
The macroeconomic environment will accelerate this trend, and hopefully - regardless of how long "recovery" takes - it will create a lasting discipline for brands and a new normal for how software vendors build, price and attribute value to their solutions.
The greater collaboration and alignment between brands and software vendors can only be good for all of us. (Yet again, a rising tide lifts all boats.)
In the world of ecommerce enablement
Interesting bits of company and product news coming from the diverse world of ecommerce enablement.
- ARTA announced a bumper Series A round (especially so, given general market sentiments) to scale their platform that facilitates the sale and fulfilment of collectables or high-value goods. I'm not overly bullish on the concept, but I am curious how niche-focused solutions like this might thrive. I'm a complete "Kevin Kelly, 1000 True Fans" disciple and combining that idea with a high-value space (like collectables) makes sense on the surface. My reservation is rooted in the ability of universal ecommerce enablement tech to mostly accomplish a similar job and probably do so at a much lower cost to the sellers/brands.
- EcoCart, too raised a big Series A round. What is most notable with this raise is that Fifth Wall's Climate Tech Fund led the round. It's also good to see some impact investing happening with the greater ecommerce ecosystem.
- Gift card platform, Govalo, announced a bunch of new features (perfectly timed for the upcoming gifting season, no doubt). From all of those, the updated experience for redeeming a gift (by selecting the product variant) seems smart. What I like most, though, is their new bulk gifting functionality which is a perfect move to tap into a new customer segment. Corporate gifting is a massive market, and enabling DTC brands to make a play for some of those gifting dollars is highly lucrative. Ecommerce enablement solutions that help brands sell in more channels or new ways will become more valuable as the days of "spend on Facebook and grow" end.
- Klaviyo has a nifty new subject line generator. When it comes to something like writing that involves part-science, part-art (IMHO), I'm always skeptical of A.I. being able to do the job. Their examples look nifty though and I'd love for one of my copywriter friends to test this out and tell me what they think.
- Settle - who has been a little quiet on the product front for a while - released the new Settle Inbox, which makes it easier for a team to collaborate on all things payables. This also feels like "moving up-market" to me because as soon as one needs "sequential approval rules", it suggests a bigger-sized team with red tap to navigate.
- Repeat's "Due to reorder" trigger for Klaviyo, along with the dynamic content, is a smart feature but interesting for another reason: It underlines Klaviyo's market-leading status when so many others in the ecosystem are building into your product. Klaviyo might not be the perfect customer data layer, but they're undoubtedly an integral part of the tech stack for many of the best DTC brands in the world.
- Talking about integrations and building into platforms: Alloy recently announced a major upgrade to their Embedded product. Billed as "the fastest way to add ecommerce data and integrations to your platform", it will be interesting to follow how other builders in the space leverage and adopt Alloy as their go-to solution to speed up and increase the number of integrations they can offer their customers.
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